DSK: A Theory

Since everyone is offering their interpretation of the Dominique Strass-Kahn accusations, here's ours, taking the NYPD version of events at face value.  It wasn't about the sex.  It was about the anger -- the anger that the lowly hotel maid had disturbed him in his US$3000/night suite.  The assault was the expression of anger, not yet another manifestation of supposed Gallic lust.

This could yet be the fiasco that might have been averted through use of a Do Not Disturb sign, although the underlying psychological issues were probably going to explode eventually.

Argentina without the wine

Wall Street Journal opinion piece by Marian Tupy --

Now, in grabbing for retirees' savings, Irish leaders are attacking the very notion of private property. Dublin's new tax is intended to fund the government's "job creation" program while still shrinking its deficits. But even those who have confidence in the ability of governments to create productive employment should be concerned about the ethical dimension of expropriation, which is on par with Argentinian President Cristina Kirchner's decision to nationalize private pensions in 2008, when her government faced bankruptcy.


Now it's true that there's an element of lunacy to the policies forced by the European Union's still unresolved debt crisis, but a 0.6 percent temporary tax on private pension fund assets -- whose contributions earned tax deductions -- doesn't seem on a par with expropriation.  Especially when the National Pension Reserve Fund, which was set aside to meet public pension obligations has already been fully raided to meet the black holes in the banking sector. 

Tupy correctly focuses on the eurozone as an elite-driven project.  But Ireland's problem isn't the single currency per se, but the insane banking sector policies that come with it.

What not to do

Wall Street Journal --

Yet Spanish officials are anxious to avoid a situation in which they take over a bank, or purchase banks' bad assets, as Ireland has done. Ireland's National Asset Management Agency bought commercial-real-estate assets at severe discounts, forcing steep markdowns across the sector and creating further capital holes that had to be filled largely with taxpayer money.

Gradually people are realizing that Ireland wrote the book on the worst possible way of handling a banking crisis.

UPDATE 17 MAY: 2nd news article --

"I think, very rightly, the government [of Spain] has no intention of creating a bad bank," said Luis Arenzana, managing partner of Shelter Island Capital Management in Madrid. "The case of Ireland proves it's a terrible idea."

The conspiracy-theorist in chief

The Daily Beast features "the 6 wackiest Osama bin Laden conspiracy theories."  And it's wacky stuff.  Kate and Wills were tipped off.  He's not dead.  He was a CIA plant etc etc.

But one problem -- there's one truly wacky conspiracy theory not on the list.  That Osama and Saddam Hussein worked together, up to and including 9/11.  And instead of tabloids and crazy Internet users, that theory was held by George Bush and Dick Cheney.

The actual destruction that resulted isn't so wacky.

Method to their madness

Prof. Richard Portes, London Business School

Of course, the Emerald Isle could evade responsibility altogether by simply waiting for Greece to restructure its debt first, at which point there will be general confusion and markets will shun Ireland anyway. If that is the tacit strategy, there may not be long to wait.


Wall Street Journal

German Finance Minister Wolfgang Schaeuble, in a question and answer interview with the Die Welt newspaper, held out the possibility that a June audit might show that Greece won't be able to overcome its debt load without relief. Mr. Schaeuble said "other steps" might need to be taken, without suggesting directly that Greece might need to restructure its debt.


"I am awaiting a detailed analysis of Greece's debt sustainability [in June]," Mr. Schaeuble was quoted as saying, referring to a report that also will go to the European Commission and the European Central Bank.

It's not just us

What's the worst that can happen when a state defaults on its debt?  Ireland should be looking through the history books.  When Pennsylvania defaulted in the mid-19th century, a truly bad thing happened.  William Wordsworth, whose family held Pennsylvania bonds, wrote a poem --

Days undefiled by luxury or sloth,
Firm self-denial, manners grave and staid,
Rights equal, laws with cheerfulness obeyed,
Words that require no sanction from an oath,
And simple honesty a common growth--
This high repute, with bounteous Nature's aid,
Won confidence, now ruthlessly betrayed
At will, your power the measure of your troth!--
All who revere the memory of Penn
Grieve for the land on whose wild woods his name
Was fondly grafted with a virtuous aim,
Renounced, abandoned by degenerate Men
For state-dishonour black as ever came
To upper air from Mammon's loathsome den.

And, er, that's it.   But we're supposed to be scared.

A bomb is a bomb

National Review's Andrew McCarthy, in a Peter King-like rush to distinguish the IRA from Islamic terrorist groups --

[US] Administration officials wishfully see Hezbollah as analogous to Sinn Fein, the socialist “political wing” of the Irish Republican Army. But the IRA is (sic) a terrorist organization of comparatively modest, parochial ambitions (and far more modest capabilities). It has a single real enemy, Britain, and it wasn’t trying to destroy Britain — just eject it from Ireland.

Above, Maggie Thatcher's bathroom at the Grand Hotel in Brighton in 1984 following the IRA bomb attack on the hotel, in which most of the British Cabinet were staying.

Asteroid destroys Earth

GDP growth unaffected.

As long as people don't panic.

Japan nuclear crisis coverage explained

It was the terorrists wot done it

Washington Times --

Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.



The unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman, a copy of which was obtained by The Washington Times, states that “a three-phased attack was planned and is in the process against the United States economy.”   ...

Suspects include financial enemies in Middle Eastern states, Islamic terrorists, hostile members of the Chinese military, or government and organized crime groups in Russia, Venezuela or Iran. Chinese military officials publicly have suggested using economic warfare against the U.S.

It's strange the extent to which people will go not to believe in bubbles, even after we've been through a complete cycle of them.

Community organizers

AP news report --

Having successfully toppled their own autocratic rulers, Egyptian and Tunisians are rushing to the aid of their Libyan neighbors with hastily organized blood drives, field hospitals and convoys of food and medicine.


While European countries and the USA focus on getting their own nationals out. 
 
There are war crimes happening in Libya as Eurocrats busy themselves with draft communiques. 

If they're not near the mosques, we should be fine

Wall Street Journal editorial --

But oil traders are already beginning to discount for the risks if the demand for more political freedom also spreads to the Kingdom [Saudi Arabia], which produces 10% of the world's oil. Karen Elliott House's recent piece on these pages explained in persuasive detail why that is not a far-fetched scenario. We hope the Obama Administration is making contingency military plans to protect those oil fields if it comes to that.

It's rarely set out so clearly. If the Saudi people mount a struggle for more political freedom, the US should invade and seize the oil fields.

Clown of the day

Italian Foreign Minister Franco Frattini --

I am extremely concerned about the self-proclamation of the so-called Islamic Emirate of Benghazi. Would you imagine to have an Islamic emirate on the borders of Europe? This would be a really serious threat.

He delivered the quote in English at a meeting of EU Foreign Ministers.  The above video is a similar quote in Italian on the way into the meeting.

The possibilities here are that Italy gets its Libyan analysis from Saif al-Islam Gaddafi and/or that the minister is an extremely gullible and excitable person.

But he's the person in the room making the decisions.  Seen in this light, Ireland's mess -- or at least the component of it due to EU decisions -- becomes easier to understand.

Godsend

The government of Iran should be under the same popular pressure as governments in the Arab states.  But all they have to do, it's increasingly clear, is to hang on long enough for it to become apparent that the guns in Bahrain will keep firing until the Shia stop complaining, and they'll have their geopolitical issue.  When we find, as seems likely, that the Bahrain operation is being pushed by Saudi Arabia, they'll be home free.   It's not inconceivable that we'll be discussing how to draw the line between an "invitation" for foreign help and an invasion.

Sarkozy's reading list

The French President arriving today at the European Union summit brought some reading material along with him.  One book is clearly John Steinbeck's The Grapes of Wrath (in French of course), an apt choice for our modern Great Depression.  But we can't tell what the other one is, despite the striking and presumably distinctive picture on the front.

Photo Credit: The Council of the European Union.

They never learn

Neocon Catholic pundit George Weigel --

While the current upheaval in Egypt cannot be traced to recent assaults on the Copts there, the safety of this ancient Christian community, which played a major role in the country’s cultural life centuries before Islam (and almost two millennia before Mohammad el-Baradei), would be one important test of whether post-Mubarak Egypt has moved beyond one of the little-remarked but nonetheless odious aspects of Mubarak’s rule: namely, his appeasement of those Muslims who insist that there is no room in their country’s culture or public life for Coptic Christianity or indeed any other form of Christianity.

George Weigel in 2006 --

The Holy See’s opposition to the use of force in Iraq in March 2003 is well known. Perhaps less well known is the widespread conviction in the Vatican today that a precipitous American withdrawal from Iraq would be the worst possible option from every point of view, including that of morality. Senior officials of the Holy See with whom I discussed the issue in May share the view of American analysts who are convinced that a premature American disengagement from Iraq would lead to genocidal violence, Iraq’s collapse into a failed state, chaos throughout the Middle East, and a new haven for international terrorists. That all of this would make life intolerable for Iraq’s remaining Christians is pluperfectly obvious.

Note: Weigel was a strident advocate of the Iraq invasion, from a moral perspective, in 2002-03.

How's that approach of getting rid of the undesirable Arab strongman first and worrying about the Christians later working out in Iraq?

Bonus observation: Wall Street Journal news story ($) --
Coptic Christians Worry About Future Without Mubarak.

Free money and more free money

Karl Whelan at Irish Economy -- On Monday, January 31st, Anglo Irish Bank are going to pay out on a maturing bond worth €750 million. (For reference, the total cut in this year’s welfare budget will be €873 million.) The investors who purchased this bond invested their money with Anglo on the 17th of January 2006. The bond is senior unsecured debt and is not covered by a state guarantee.

With some tedious trawling through German financial information websites (apparently reflecting that many holders of this bond are German), we've gotten a price chart for the bond. It appears that even quite recently, and at various times over the life of this bond, holders expected sizable losses on it (in the range of 10-15 percent of principal).

As Karl indicates, it's a tad insane to be paying out on bonds in an insolvent bank. And so its an additional level of puzzlement to pay out in full on such a bond when even the beloved "markets" don't expect that.

Financial crisis: was the cure the disease?

The US Financial Crisis Inquiry Commission has released its report.  In a sign of how politicized economic analysis is in the USA, there are two Republican dissents from the main report -- it appears that in good Brendan Behan style, once the Republican commissioners had decided to split away from the main report, they then fell out among themselves.

Anyway, three of them -- Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas -- have published their dissent.  It proceeds with a variety of non-controversial findings and at times makes it appear as if the differences with the main report are mainly a matter of emphasis on different aspects of those findings.  But at the end, it's clear that isn't simply a difference about the "causes" of the crisis.  It's a difference about what was the crisis.

To preview a longer story, the HEAT dissent (as it will hereafter be called, geddit?) essentially says the actual crisis was one month long -- September 2008 -- and everything else is either "foreshocks" or after-effects.  This focus on September is part and parcel of their somewhat strange application of "contagion", a concept that any reasonable crisis analysis would need to have in there somewhere.  So --
 
If financial firm X is a large counterparty to other firms, X’s sudden and disorderly bankruptcy might weaken the finances of those other firms and cause them to fail. We call this the risk of contagion, when, because of a direct financial link between firms, the failure of one causes the failure of another. Financial firm X is too big to fail if policymakers fear contagion so much that they are unwilling to allow it to go bankrupt in a sudden and disorderly fashion [bold font in original].

So far, so good.  But now things get weird.  After laying out some too big to fail examples, they say --

The risk of contagion was an essential cause of the crisis. In some cases the financial system was vulnerable because policymakers were afraid of a large firm’s sudden and disorderly failure triggering balance-sheet losses in its counterparties

Notice the subtle but radical substitution: contagion didn't cause the crisis. "Risk of contagion" leading to interventions was the cause of the crisis.   The only non-intervention that appears on their list of contagion events is Lehman.  And to that, they add --

The focus on Lehman’s failure is too narrow. The events of September 2008 were a chain of one firm failure after another

followed by a long list of policy interventions including the TARP, and concluding

The financial panic was triggered and then amplified by the close succession of these events, and not just by Lehman’s failure.

The problem is that "these events" were the just the manifestations of a fragility that had been building up for years and had metastasized in the summer of 2007, one of those "foreshocks" that receive almost no attention in the report.  September 2008 was when the shakeout peaked, but the crisis had already been in full flow for a year by that point.  There was indeed a strange summer 2008 reprieve (which, incidentally, appears to have suckered governments in Ireland and Iceland into a false sense of security as well), but to pick out one month when the financial accident and emergency room was especially busy isn't going to tell you a lot about how the crisis started.

Cynical addendum: the dissenting report is fixed on quarterly GDP as a measure of crisis severity, an indicator that is negative (and therefore looks bad in some vague sense) for just 9 months, 6 of them being especially awkward for George W. Bush and John McCain.  Is the message that except for one month of costly meddling, things would have been fine? 

The test of time

The American Enterprise Institute has a new working paper by Andrew Biggs, Kevin  Hassett, and Matthew Jensen which looks for patterns in successful budget deficit reductions (associated WSJ op-ed).  Specifically patterns in terms of whether sustainable cuts in the deficit relied on tax increases or spending cuts.  The conclusion is that successful deficit reduction programs relied on spending cuts.  One of the successful cases identified by their approach is Ireland in the year 2000. 

And so the puzzle-solving must begin.  Ireland 2000, with Charlie "When I have it, I spend it" McCreevy as finance minister?  We've collected together the relevant economic indicators based on IMF data, along incidentally with the same indicators for the Netherlands and Sweden.  Why those two?  Because they have boringly effective economic policies without any of the splashy initiatives that draw more media attention, and they're good to have handy when Irish politicians trot out the "it wasn't just us" excuse when things went wrong. 

Anyway, that's incidental to the main point.  Here's the then European Commissioner for economic and monetary affairs Pedro Solbes speaking about the Irish economy in 2000 --

In this regard, the experience of Ireland is a striking case-study. The growth rate in the Irish economy in 1999 was four times the euro-area average, while the inflation rate is currently twice the average. The small weight of Ireland limits the implications of this growth and inflation divergence for the euro-area economy and for the conduct of ECB monetary policy in particular. 

However, it poses a major dilemma at the national level. The Irish economy is clearly overheating as the supply-side of the economy is increasingly constrained. The Government has responded by proceeding with their well-established tax cutting agenda in the hope of easing supply constraints - particularly in the labour market. Whatever the merits of this approach may be in a medium-term perspective, the short-term risks cannot be ignored. Inflation rates are accelerating - especially in the sheltered sectors of the economy, for instance the housing market. The decision to pre-commit tax reductions in the next three years - as a supplement to an already generous wage agreement - risks to exacerbate the short-term problem of overheating by further stoking demand. 

In other words, this was an overheating economy and the obsession with tax cuts was making things worse, not boosting supply side potential.  By the following year, the Commission was sounding the alarm bells about Ireland's tax-cut driven boom.  

So what looks in the statistics like a successful deficit reduction effort was in fact the stoking of the fire.  Unfortunately for the Commission -- and for Ireland -- its prescient warnings about a housing and spending boom were 7 years too early, their credibility undercut as a result.

But we have the benefit of hindsight.  Do we still want to go back and declare Ireland in the year 2000 as an example of good fiscal policy?

Political restructuring

DUBLIN, 1 December 2010

The world of Irish politics was rocked to its foundations today when the long-standing but distressed financial institution Fianna Fáil announced that it would undergo self-resolution to deal with a mounting (vote) deficit situation.  Under the resolution scheme, the performing parts of the institution would be moved into a new "Recovery Party" while the legacy debts would remain under the existing "Fianna Fáil" umbrella.  Previously unseen party documents referred to the legacy instition as "B&B" which had been thought as a reference to the similarly restructured UK building society Bradford and Bingley, but sources explain that it is in fact a reference to "Brian and Brian." 

It is understood that the legacy Fianna Fáil will fully recognize all losses in a forthcoming election, at which point the unencumbered assets will move to the new institution.  Generous compensation will be paid to senior officials facing separation under the scheme, and this compensation will not be subject to claims by future creditors of the legacy unit.  Mid-level officials in the current unified structure are optimistic that they will not be tarnished by the legacy debts, and are reported to believe that now disillusioned customers will be ready to deal with the Recovery Party on the previous favourable terms, since the legacy debts may also pose problems for competitor institutions.  Resolution is facilitated because most creditors of the legacy institution (the Irish voters) are unguaranteed and unsecured.

ENDS