It Gets No Better Than This

No better than this . . .

From the Ubuntu Front

My first impression of Jaunty Jackalope -- it rocks.

If you want to turn your dowdy old P4 or Athlon into a perfectly usable, up to date box, this is the route. My old AMD 2600 runs as fast as my brand new dual core laptop (take that Vista). Installation was incident free and all the peripherals worked right out of the box.

The only sour note is that the netbook version will not run on my now slightly dated 7" eee. Over the next few weeks I plan to install dual boot partitions on my two Vista boxes. But the bottom line for now is that Ubuntu is getting very close to an outright replacement for Windows.

The Peoples Republic of Walmart

I am as guilty as anyone -- I love a bargain. And so when I read that "Made in China" label, I generally ignore (suppress) what I know: that China's capacity to send us cheap goods is, when all is said, built on an unimaginably brutal system of suppression.

One facet of this that has captured world attention is Tibet. People care, this despite the fact that their governments have looked the other way for more than half a century. And perhaps this issue, more than any other, is a way for the rich west to come to grips with what they are supporting when they get that cheap pair of brand-name sneakers.

Vaclav Havel has written an evocative essay on what passes for justice in Chinese controlled Tibet. He calls for a China that wants to be a trading partner of the west to adapt standards of justice that reflect western values. But this won't happen until we put our money where our mouth is -- until we refuse to do business with this or any other regime that behaves in an unconscionable way.

Authoritarian repression is not a necessary feature of emerging economies. India and Brazil, however imperfectly, are struggling toward both dynamic growth and genuine democracy. We can do our part by giving preferential treatment to those engaging in this struggle.

More Auto Sector Pensions

The New York Times has further news this morning on the fate of auto sector pensions as first Chrysler and then possibly GM head into bankruptcy protection. Key quote . . .

For hundreds of thousands of retired auto workers, a federal pension takeover would mean sharply reduced benefits. For the federal agency that insures pensions, it would mean a logistical nightmare in the short term — and most likely a slow demise eventually as fewer and fewer small plans remain in the system and pay premiums.

So far, the prospect of a grueling grind through bankruptcy court has been a major deterrent to companies that might want to rid themselves of pension obligations. But retirement and labor specialists are watching closely to see whether the administration’s auto task force will give either of the auto companies an easier way to shed their huge pension funds, blazing a simplified trail for others to follow.

With or without a bankruptcy filing, the government is quietly making the preparations that would be needed to take over Chrysler’s pension plan, with its 255,000 participants, according to government officials.

Even if Chrysler manages to strike a deal to sell many of its assets to Fiat, perhaps in conjunction with a bankruptcy filing, experts doubt Fiat will agree to take on its pension plan without extraordinary assistance.

It is difficult to imagine the Canadian operation of Chrysler facing a different fate. And if the backing of Chrysler pensions falls to government, how will the responsibilities be apportioned between feds and the province. The McGuinty government's easy assurances are starting to ring ever more hollow.

Faith and Torture

I have been reluctant to comment on the torture debates, primarily because I do not want to be another Canadian voice tut-tutting the United States. However, the aspect of this that I find most disturbing is the defense of torturers, if not torture itself, by people of faith.

The latest example of this is Jon Meacham. Editor at Newsweek, Meacham is a Pulitzer Prize winner and best-selling author who comments regularly on matters of faith and holds himself out publicly to be a person of faith. We expect unrepentant thugs like Cheney or pitiful buffoons like Bush the younger to rationalize criminal behavior. But it is especially painful when Meacham uses his soapbox to do the same.

It would be difficult to imagine an interpretation of Christ's message that would rationalize torture. Twisted apologetics that attempt this always end up placing the Church at the service of the state. Gregory Boyd, for one, has sharply criticized this fusion of faith and politics. He reminds us that the Church is the presence of Christ in the world. And so it is to look and act like Jesus. Here is a sample of his argument:

The Demise of the Chicago School

This morning's Salon has a blistering essay on the demise of the Chicago School as the dominant economic player on the planet. The Economics department at the university of Chicago currently has five Nobel laureates on faculty, and more important, its ideas have dominated not only the profession but public policy more generally, for thirty years. It is concrete proof that ideas matter, especially when they achieve a status of common sense assumptions.

Indeed Friedman's Capitalism and Freedom, published in 1962, can be seen as a starting point in the retreat from post-war Keynesianism, and arguably the beginning of a pattern of recurring financial crises, the latest and most severe of which we are living through now (see Minsky's Stabilizing an Unstable Economy).

My own graduate work in public policy coincided with the ascendency of these ideas, and indeed in the mid-1980s, the only real opposition to the monetarist juggernaut seemed to come from a group of completely marginalized neo-marxist survivors from the 1960s and the very rare usually shell-shocked defender of the post-war concensus. Yet in so many ways, we can now see clearly where these ideas have brought us. As the Salon article notes:

I'm not going to cut it too fine: I think you can very well blame the Chicago school for the fiasco of growing income inequality in the U.S. Nice triumph for deregulated capitalism, boys! Ronald Reagan listened closely to Milton Friedman and the Chicago school godfather's disciples have been rife in the Republican administrations that have dominated the White House ever since the Californian swept into Washington and started blaming government for our problems. Well guess what? It didn't work so well. The rich got richer and then screwed the pooch.

The larger lesson here is that ideas matter. Common sense is all too often nonsecical, and needs to be challanged.

Morning Humor

Monty Python's Holy Grail -- the Terrifying Tale of the Black Knight. Enjoy!

Gearing Up for New Pecora Hearings?

Simon Johnson, former chief economist for the IMF, has a brief comment on the Washington Post's The Hearing this morning on the overwhelming U.S. Senate vote to hold hearings into the current economic crisis. He also refers to his appearance yesterday on Bill Moyer's Journal in which he and Michael Perino discussed the 1933 Pecora Hearings in which an upstart New York prosecutor, acting as counsel for Senate hearings, almost singlehandedly turned public anger massively against the titans of Wall Street, on whom they placed blame for the horror of the Great Depression. Here is a preview:



Simon Johnson also has an essay in this month's Atlantic. In it he makes the provocative argument that the crisis in the U.S. is much like earlier crises in developing economies brought about by the disproportionate power of financial elites on government. Johnson makes a compelling argument that the economic prescriptions are relatively unimportant. What is crucial for him is removing the hands of the financial elite -- Wall Street -- from the levers of power.

It seems increasingly clear that the American public at least is losing patience with explanations for this debacle that focus on either outside influences or inadequate regulation. As in 1933, they seem increasingly hungry for an opportunity to bring those they see as responsible to account. Whether or not this is a good thing, it is an opportunity for the Obama administration to stop bowing to the needs of these elites, something particularly painful to watch with Timothy Geitner, and to begin taking the bold, decisive steps that Roosevelt for one was able to in the shadow of the Pecora hearings.

John Steinbeck on the 1930s

Brad DeLong posted this excerpt from a Steinbeck retrospective on the 1930s, published in 1960, quoted in full:

Sure I remember the Nineteen Thirties, the terrible, troubled, triumphant, surging Thirties. ... I remember '29 very well ... the drugged and happy faces of people who built paper fortunes on stocks they couldn't possibly have paid for. ... In our little town bank presidents and track workers rushed to pay phones to call brokers. Everyone was a broker, more or less. At lunch hour, store clerks and stenographers munched sandwiches while they watched stock boards and calculated their pyramiding fortunes. Their eyes had the look you see around a roulette wheel ...

Then the bottom dropped out ... I remember how the Big Boys, the men in the know, were interviewed and re-interviewed. Some of them bought space to reassure the crumbling millionaires... "Don't be afraid - buy - keep on buying" Meanwhile the Big Boys sold and the market fell on its face...

The came panic, and panic changed to dull shock. ... People walked about looking as if they'd been slugged. ... Then people remembered their little bank balances, the only certainties in a treacherous world. They rushed to draw the money out. There were fights and riots and lines of policemen. Some banks failed; rumors began to fly...

What happened in the seats of power? It looked then and it still looks as though the Government got scared. The White House, roped off and surrounded by troops, was taken to indicate that the President was afraid of his own people. ... I speak of this phase at length because it was symptomatic of many positions of leadership. Business leaders panicked, banks panicked. Workers demanded factories stay open... Voices shrill with terror continued to tell people what was happening couldn't happen...

We didn't have to steal much... All over the country the WPA was working... [I]t was the fixation of businessmen that the WPA did nothing but lean on shovels. I had an uncle who was particularly irritated at shovel-leaning, When he pooh-poohed my contention that shovel-leaning was necessary, I bet him five dollars, which I didn't have, that he couldn't shovel sand for fifteen timed minutes without stopping. He ... grabbed [a] shovel. At the end of three minutes his face was red, at six he was staggering and before eight minutes were up his wife stopped him to save him from apoplexy. And he never mentioned shovel leaning again. I've always been amused at the contention that brain work is harder than manual labor. I never knew a man to leave a desk for a muck-stick if he could avoid it. ...

[I]n the Thirties when Hitler was successful, when Mussolini made the trains run on time, a spate of would-be Czars began to rise. Gerald L.K. Smith, Father Coughlin, Huey Long, Townsend - each one with plans to use the unrest and confusion and hatred as the material for personal power.

The Klan became powerful, in numbers at least... The Communists were active, forming united fronts with everyone... Except for the field of organizers of strikes, who were plenty tough ... and devoted, most of the so-called Communists I met were middle-class, middle-aged people playing a game of dreams. I remember a woman in easy circumstances saying to another even more affluent: "After the revolution we will have more, won't we dear?" ...

One night we got Madison Square Garden [on the radio], a Nazi meeting echoing with shrill hatred and the drilled litany of the brown-shirted audience. Then a dissenters voice broke through and we could hear the crunch of fists on flesh as he was beaten to the floor and flung from the stage. America First came through our speaker and it sounded to us very much like the Nazi approach. ...

Prosperity had returned, leaving behind the warm and friendly associations of the dark days. Fierce strikes and retaliations raged in Detroit, race riots in Chicago: tear gas and night sticks and jeering picket lines and overturned automobiles. The ferocity showed how frightened both sides were, for men are invariable cruel when they are scared...

The strange parade of the Thirties was drawing to its close and time seemed to speed up. Imperceptibly the American nation and its people had changed, and undergone a real revolution, and we were only partly aware of it as it was happening...

A few weeks ago, I called on a friend ... in midtown New York. On our way out to lunch, he said, "I want to show you something." And he led me into a broker's office. One whole wall was a stock exchange trading board. .. Behind an oaken rail was a tight-packed, standing audience, clerks, stenographers, small businessmen. Most of them munched sandwiches as they spent their lunch hour watching the trading. ... And their eyes had the rapt, glazed look one sees around the roulette table...

Is this what proponents of reaction would like to return us to?

Not So Fast on Those Street Cars

It turns out that it is not quite a deal on those street cars for the TTC. In fact, it turns out that in what looks more like a game of chicken with Queen's Park and Ottawa, the TTC has made a deal contingent on financing that neither other level of government is committed to.

Moreover, the Globe and Mail is reporting this morning that the deal is far larger than I indicated yesterday. Indeed there are options in the deal for an additional 400 vehicles that will be required on the new lines in addition to the 204 replacement vehicles.

So far from being a done deal, this appears to be the opening round of another endless dust-up between various levels of government.

Spacey New Street Cars for the TTC

The Toronto Transit Commission (TTC) announced plans yesterday to replace its fleet of more than two hundred street cars by 2018. The award went to Canadian manufacturer Bombardier, and was for about $1.2 billion over the life of the contract.

Though the cars lack the nostalgic visual appeal of the existing "red rocket" they are larger, more accessible and air-conditioned. And they will not only be used on existing lines, but on the extensive new lines to be built north of the downtown over the next several years. As someone who lives on an existing line (the 506 car), I will miss the familiar sights and sounds, but I look forward to easier access, extended use of the proof of payment system and the ease of access these new vehicles will represent.

Jaunty Jackalope is Here!

The new Ubuntu 9.04 Jaunty Jackalope is here. I am currently upgrading my current Ubuntu box (an old and creaky AMD 2600). But I also want to switch my Asus eee and add a dual boot to my Vista (boo!) laptop.

Reviews, so far, are very positive, with CNET positively gushing. I will post a review as soon as I have had a look, and will post on my experience with the other two machines.

Chrysler Walks the Plank -- Do its Pensioners?

The New York Times leaked a story yesterday afternoon that Chrysler is set to seek court protection in the U.S. next week. The story suggests that the terms of the agreement have already been set and that part of the agreement will be the the U.S. government will assume pension liabilities.

Just yesterday, our beloved premier spoke to demonstrating G.M. and Chrysler retirees and assured them all is well. Yet neither his nor the Harper government have been forthcoming with plans should one or both companies (as seems likely) seek court protection.

Capital T Truth

On his NYT blog this afternoon, Paul Krugman has an addendum to his NYT column this morning on telling ourselves the truth, in this case about torture, but also in all other areas of public (and private) life.

I am convinced that the two most virulent evils to emerge in public discourse over the past half century are first the notion that truth in any fundamental sense is unknowable and that therefore all actions are simply expressions of power and second, and seemingly opposite, that truth is knowable, that my group or party knows it and therefore anything we do in imposing this truth is morally permissible.

These are, I believe, two sides of the same coin. This is seen most clearly in those that claim that while they have ascertained truth, their opponents are merely expressing feelings or opionion. But, as Alasdair McIntyre suggested in After Virtue, it is equally problematic when all believe that truth is a myth and that only power matters.

More importantly, I think, a life of faith rejects both of these possibilities. It accepts that truth exists -- it is the very essence and expression of God. But it also embraces humility. We cannot with certainty know it. We are called, as Stanley Hauerwas for one argues, as a community and individually, to live truth and to speak truth but never to impose truth. And such an approach would preclude both the thuggery and the moral cowardice in the face of this thuggery that have coloured our society.

Quantitative Easing is not News

Canada's very own Committee on Monetary and Economic Reform (COMER -- their acronym, not mine) apparently has champagne corks popping over signals from the Bank of Canada via C.D. Howe and the Harper government that, now that interest rates are zero, they are moving to a strategy of "quantitative easing" (read printing money).

What these guys don't seem to realize (or realize and don't care) is that said new money is to be shoveled into the coffers of the banks and not directed toward vast new infrastructure projects.
Of course, the rationale for such projects is strong -- fiscal stimulus is one of two key tools government can employ in the face of a crisis such as this. But given that the interest rate for government is effectively zero, it doesn't much matter where the financing comes from.

Indeed the reason for quantitative easing is simple -- governments (now Canada's too) are up against a zero interest boundary, so traditional monetary policy is no longer a possibility. Krugman, among others have been writing about this for months -- and in the case of studies of the Japanese economy, for more than a decade. To go back even further, our situation now is that of a classic Keynesian liquidity trap that has been well understood for more than half a century.

Blame Obama

In a sure sign that things are far worse in Canada than we had been led to believe, Finance Minister Jim Flaherty and his apparently less than independent Bank of Canada Governor Mark Carney are blaming the Obama Administration for being somewhat slow off the mark in showering banks with obscene amounts of money while requiring no meaningful reforms.

Canada has of course done much better, funneling up to $200 billion to the banks through the EFF, with no oversight by Parliament or opposition parties. Not surprisingly, for this and other nefarious reasons, our banks are in far better shape.

Yet our economy is not, as the energy sector is in free-fall and our auto industry is heading into bankruptcy protection. GDP is declining at almost 8% per year -- near depression rates. And unlike Obama, who faces real, if delusional, opposition, the Harper government faces an opposition far more concerned with political manuevering than with holding this government to account at a crucial time in our history.

More on Minsky

On Wednesday, I noted that I am revisiting some of Minsky's work, and that I will comment on his work from time to time.

One of Minsky's key arguments in Stabilizing an Unstable Economy is that what he calls "Big Government" plays two roles in alleviating the recurrent crises that plague capitalism in its current guise. First, there is fiscal action both deliberate and automatic as stabilizers kick in. Second, is the role of central banks as lenders of last resort.

And one of the results of the second role is that an implicit floor is placed on prices of financial assets. This, for Minsky, is critical, as it means that as balance sheets deteriorate during a financial crisis, financial institutions are not forced to sell assets at distressed prices. Commentators have referred to this as the Greenspan or Geithner "put", but it is clear from Minsky that this has been a feature of central banking for at least a century.

What strikes me is that if this is the case, then perhaps (it pains me to say this) the changes to fair value accounting rules might make some sense. And they might make some sense because, given this implicit asset price floor, they closer reflect reality. As Minksy notes, in every financial crisis since the late 60s, central banks have intervened to prop up asset prices. If this too is an (almost) automatic stabilizer, then asset prices at a time of crisis should reflect this.

Krugman -- the Reality Challenged

Published in the past hour by this year's nobel winner:

So the accounting rules say that a decline in the market value of a bank’s debt thanks to increased credit default swap spreads — that is, because investors think you’re more likely to fail — counts as a a profit. On the other hand, if your bank looks stronger, the spreads fall, and you book a loss.

FT Alphaville has the story. Citigroup reported

A net $2.5 billion positive CVA on derivative positions, excluding monolines, mainly due to the widening of Citi’s CDS spreads

while Morgan Stanley reported

Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads - which is a significant positive development, but had a near-term negative impact on our revenues.

So Citigroup is profitable because investors think it’s failing, while Morgan Stanley is losing money because investors think it will survive. I am not making this up.

Would life be more comfortable if I had just taken the blue pill?

Further on Economists

John Kay, commenting in yesterday's financial times and channeling Keynes, on the practice of economics:

Max Planck, the physicist, said he had eschewed economics because it was too difficult. Planck, Keynes observed, could have mastered the corpus of mathematical economics in a few days – it might now have taken him a few weeks. Keynes went on to explain that economic understanding required an amalgam of logic and intuition and a wide knowledge of facts, most of which are not precise: “a requirement overwhelmingly difficult for those whose gift mainly consists in the power to imagine and pursue to their furthest points the implications and prior conditions of comparatively simple facts which are known with a high degree of precision”.

Can't argue with that.

Minksy and Rent-Seeking

As I noted earlier, I have recently been posting much less as I am trying to catch up on what I think is some very crucial reading. One of the books that I am carefully revisiting is Hyman Minsky's Stabilizing an Unstable Economy. First published in 1986, it has become widely regarded as the go-to reference work on the current crisis. As recently as last year, before the release of the current edition, used copies were fetching prices in the hundreds of dollars.

An idea of Minsky's that I have found particularly intriguing is that while government certainly has a fiscal role to play in the increasingly tumultuous crises that have beset western economies over the past four decades, a much larger part of that effort should be as an employer of last resort.

And among Minsky's reasons for this policy prescription (others including dampening of inflation and the empowerment of workers) is that many if not most of social services programs directed at workers are captured by the professionals who deliver them, through a variety of successful rent-seeking behaviors. Thus increased money for education is captured by increased salaries and reduced workloads for teachers or by reduced teaching loads and increased research funding for academics. Doctors and pharmacuetical companies capture most increases in health care spending.

This, of course, is a standard argument of public choice theorists -- one that was applied to great effect in the reversal of the role of the state a generation ago. But here it is applied in a way that is much more in tune with a progressive agenda. Minsky does not suggest that workers be left to the tender mercies of the market, far from it. What he argues, however, is that they should be helped in ways that benefit them and not their erstwhile benefactors. This, of course, is in accord with John McKnight's work, as found in The Careless Society and in much of his development work, which I have found so helpful of the years.

OLG -- Games of Chance?

The CBC is reporting this hour that the Ontario Lottery and Gaming Corporation (OLG) is in the spotlight again for a foul-up in lottery ticket sales.

Perhaps we should be thankful for this. After all, in a well-run lottery, nothing is left to chance and the provider always wins. Incompetence, however, has introduced a real element of random chance.

Hooray for the OLG!

The Press and the Crisis

Lionel Barber of the Financial Times commented at length yesterday on the role of the financial press in allowing the present crisis to sneak up on us last year, arguing that

[i]n the final resort, there can be little debate that the financial media could have done a better job. In this spirit of self-criticism, I identify four weaknesses in the coverage.

First, financial journalists failed to grasp the significance of the failure to regulate over-the-counter derivatives that formed the bulk of counterparty risk in the explosion of credit following the dotcom bubble. Alan Greenspan was opposed to such regulation, but how many commentators took the former Fed chairman to task and warned of the risks? For the most part, journalists were too enamoured with the prevailing tide of deregulation.

Second, journalists, with a few notable exceptions, failed to understand the risks posed by the implicit state guarantees enjoyed by Fannie Mae and Freddie Mac, the mortgage finance giants. Here, we should tip our hats to the now much-maligned Mr Greenspan. He raised alarms early about the risks. Of course, it was hard for journalists to attack the ideal of broader home ownership in America, but that is no excuse.

Third, journalists failed to grasp the significance of the growth in off-balance sheet financing by the banks, its relationship with the pro-cyclical Basle II rules on capital ratios, and the overall concept of leverage. How many news organisations reported on the crucial Securities and Exchange Commission decision in 2004 to loosen its regulations on leverage? The explosive growth of structured investment vehicles at the height of the credit boom was also woefully under-reported.

Fourth, financial journalists were too slow to grasp that a crash in the banking system would have a profoundly damaging impact on the real economy. The same applies to regulators and economists. For too long, too many experts treated the financial sector and the wider economy as parallel universes. This was fundamentally wrong.

He also did not shy away from the idea that journalists were knowingly complicit -- that they often did understand what was happening, but remained silent for a variety of self-interested reasons.

I am convinced that this is all the more true in Canada, where there is really no competition in the business press; the Globe's ROB is really the only game in town, and its pages often seem more like an infomercial than bare-knuckles reporting.

There was a quip made recently that perhaps the Canadian Labor Congress should purchase the National Post (and thus the Financial Post) from the hapless Aspers. Here is the reason this just might be a solid idea. If nothing else, it would at least keep things more honest.

the "Mark to Market" song

I've been catching up on reading and other work for the past few days and so haven't been doing much posting, but I couldn't resist this:



(ht Calculated Risk)

A Little Sunday Fun

Prague's Franz Kafka International, the world's most oppressive airport. From The Onion. Enjoy!


Prague's Franz Kafka International Named World's Most Alienating Airport

Doing it Right -- Michael McCain

Michael McCain, CEO of Maple Leaf Foods, is again in the news, calling for much tighter regulation of the food processing industry. As today's Globe and Mail notes

Mr. McCain became a household name, and face, last summer when listeria contamination in a Maple Leaf plant in Toronto was identified as the source of a widespread outbreak of illness and death.

In the face of a potential public relations disaster, Mr. McCain won praise for his quick public apology in ads on television and on YouTube, his willingness to shoulder blame, and rapid action to pull the offending meat off the shelves.

The hallmark of the Maple Leaf strategy became clear then: Accept responsibility, exceed expectations, and keep ahead of public opinion on regulatory action. That approach was evident again yesterday in what appeared to be a dress rehearsal for the hearings that begin next week.

Would that financial institutions could see their way clear to understand that this is the only way to transcend and overcome errors that are an inevitable part of life.

For those tusiness students who want to see how this is done, watch this


Michael McCain does not hold an MBA.

Meanwhile in Canada . . .

CBC's The Current this morning interviewed Stanley Hartt, the chair of the Advisory Committee on Financing. Finance Minister Flaherty describes the role of the committee this way:

Specifically, the ACF will provide expert advice to the Government on financing conditions and on the design, scope and scale of initiatives under the Extraordinary Financing Framework (EFF) and advise the Minister of Finance on their implementation and effectiveness. The EFF consists of up to $200 billion in existing and new measures to support the extension of financing to Canadian businesses and consumers during these exceptional times.

In the interview, Hartt, a former deputy minister of finance, indicated that what for him are very important questions remain to be answered, includng:

• how much of the $200 billion has been rolled out;
• what gaps does this leave (presumably in bank capitalization);
• and how and through what institutional mechanisms is it to be rolled out.

In other words, there appears to be little or no accountability on the part of the Federal government for this vast sum. And it appears to be making up implementation as it goes along.

If our banks are in such wonderful shape, why do they even need this.

And where is the opposition on this. In February, I spoke to the NDP Finance critics office about EFF and they appeared to have little interest in this. And the Liberals have been silent. This amount represents a seventh of our GDP. We deserve so much better than this.

Building a Big Giant Enron

Option ARMageddon is claiming that a large portion of Wells Fargo's celebrated earnings report last week is due to accounting changes (ht Naked Capitalism). In other words, there has been no change in the underlying profitability of the firm.

And over at Goldman Sachs, who, praise be, have also returned to profitability. NYT blogger Floyd Norris suggests how they have done this

Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.

How did it do that? One way was to hide a lot of losses in not-so-plain sight.

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?

This, of course, was Enron's scam -- to use accounting sleight of hand to turn losses into profits. And now the U.S. is doing it for their whole economy. And there is a good possibility that with changes to accounting rules in Canada, we are doing it to.

Recovery? Not Quite Yet.

From Naked Capitalism, a guest post by Edward Harrison of Credit Writedowns entitled "The Fake Recovery" -- to my mind as good a summary of our present predicament as I have seen.

I include it in its entirety.

I last posted on "Credt Writedowns" on Thursday before the Easter Holidays in two posts very much at odds with one another. The overall thrust of the first post was that the financial services industry in the United States was due to gain from some very advantageous circumstances in 2009. Meanwhile, the later re-post pointed out the continued fragility of the U.S. economy and banking system and focused on liquidity and solvency as unresolved issues. I would like to bring these two posts together here because I believe the concept behind the dichotomy is best described as the Fake Recovery.

Why 'Fake'? This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless.

The real situation
In truth, the U.S. banking system as a whole is probably insolvent. By that I mean the likely future losses of loans and assets already on balance sheets at U.S. financial institutions, if incurred today, would reveal the system as a whole to lack the necessary regulatory capital to continue functioning under current guidelines. In fact, some prognosticators believe these losses far exceed the entire capital of the U.S. financial system. Witness a recent post by Nouriel Roubini:

The RGE Monitor new estimate in January 2009 of peak credit losses (available in a paper for our RGE clients) suggested that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding would be at their peak about $3.6 trillion ($1.6 trillion for loans and $2 trillion for securities). The U.S. banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad. The capital backing the banks’ assets was last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private sector recapitalization of such banks and after banks’ provisioning for losses. Thus, another $1.4 trillion would be needed to bring back the capital of banks to the level they had before the crisis; and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector.

Now, obviously, if we were to face up to this situation, there would be no chance of recovery as the capital required to recapitalize the banking system would mean a long and deep downturn well into 2010 and perhaps beyond. This is not politically acceptable as 2010 is an election year. Nor is the nationalization of large financial institutions acceptable to the Obama Administration. Moreover, bailing out banks to the tune of trillions of dollars while the economy is in depression is equally unacceptable to the American electorate. The Obama Administration is keenly aware of this fact.

These constraints, some artificial and others very real, leave the Administration with limited options.

Engineer recovery
With the preceding constraints in mind, we should remember that the first priority of elected officials in Washington is not necessarily to make the best long-term choices for the American people, but rather to get re-elected in order to have the opportunity to make those choices. It should be patently obvious that a downturn which began in December 2007 would be fatal to many politicians if allowed to continue well into 2010. This is why recovery of some sort must take place before that time - irrespective of whether it is sustainable.

How to engineer recovery is another question altogether. Here again there are a set of political constraints which make things more challenging. First, there are large swathes of the population that are uncomfortable with the huge debt load and deficit spending that a stimulus-induced recovery creates. Moreover, a government-sponsored nationalisation or recapitalisation plan would only increase this deficit spending and these debts.

As a result, the Obama Administration has crafted a plan to circumvent these obstacles.

1. Moderate fiscal stimulus. The Obama Administration decided not to seek massive stimulus earlier this year because they deemed it non-viable politically.This clears the first obstacle: deficit hawks. Most economists understand that the output gap that has opened up in the American economy is $2 trillion or more whereas the Obama stimulus package was only $800 billion. That leaves a massive hole in output in the U.S. Moreover, the immediate effective stimulus is less. Much of this 'stimulus' will be saved or will not come into play until months from now. Obviously, this is not going to meet the grade (See my comments on this from February).


2. Quasi-fiscal role for the Fed. Having partially assuaged deficit hawks, Obama still needed to close the output gap. Enter the Federal Reserve. You will have noticed that the Federal Reserve has added legacy assets as eligible for the TALF program. In effect, this allows banks to slip tens or even hundreds of billions of dollars in so-called toxic assets off their balance sheets. Mind you, these are assets already on the books impairing banks' ability to loan money. Under normal circumstances, one would expect the Federal Government to take these assets out of the system (bad bank, good bank, nationalization) after being given legislative approval to do so. However, as I have previously stated this approval is not going to be forthcoming. This is why the Federal Reserve is taking these assets on. In so doing, the Federal Reserve is taking on a quasi-fiscal role that re-capitalizes the banking system in order to stimulate the economy by increasing credit availability.


3. Quasi-fiscal role for the FDIC. The new PPIP is a similar end-run around Congress. After all, the role of the FDIC is that it "maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships." Meanwhile, the PPIP has the FDIC guaranteeing dodgy assets in a massive transfer of wealth from taxpayers to banks and select investors. (See my previous comments on this issue).


4. End of mark-to-market as we knew it. You should have noticed that most of the assets written down in the past two years have been marked-to-market. Securities traded in the open market are marked to market. Loans held to maturity are not. This is one reason that large international institutions which participate in the securitisation markets have taken the lion's share of writedowns, despite the low percentage that marked-to-market assets represent on bank balance sheets. But, this should end because of new guidelines in marked-to-market accounting. However, the new guidelines do have two major implications. First,there are still many distressed loans on the books of U.S. banks that if marked to market would reveal devastating losses. Second, there will also now be many distressed securities on bank balance sheets that if marked-to-market would reveal yet more losses. In essence, the new guidelines are helpful only to the degree that it prevents assets being marked down due to temporary impairment. If much of the impairment is real, as I believe it is, we are storing up problems for later.


5. Interest rate reductions. One reason often given for a large increase in writedowns at financial institutions had been the coming reset of Alt-A adjustable-rate mortgages in 2009. With the subprime writedowns mostly accounted for, a souring of the much larger pool of Alt-A and Prime residential mortgage loans is the real Armageddon scenario. Well, part of this problem has been temporarily relieved because the Federal Reserve has reduced short-term interest rates to near zero and has begun trying to manipulate long-term interest rates lower by buying long-dated treasury securities.


6. Bank margin increases. Key to the whole program is banks' ability to earn massive amounts of money and re-capitalize themselves through retained earnings as opposed to shedding assets or receiving additional paid-in capital (see post from last April on these three methods of recapitalizing). The market for bank assets is distressed and few banks can get enough capital from private sources or investors. Therefore, Obama's plan hinges on the ability to allow these banks to earn shed loads of money as quickly as possible. If the banks cannot do this, we are going to have a big problem very quickly (Of course, I think the can).

The stimulus to come from these measures is still in the pipeline and, by the end of this year, will probably add a big kick to the economy. You should note that only the fiscal stimulus required legislative approval. All of the other 'stimulus' has been done without Congressional approval and largely without Congressional oversight. These activities have been specifically designed to be opaque. The government's claims of wanting to increase transparency ring hollow (see my post on Bloomberg's suit against the Fed as an example of what is really happening).

I should also mention that the Federal Reserve has been a large factor here. It is acting in concert with the executive branch in a non-arms length fashion which I believe will have consequences regarding Fed independence down the line.


Other positive economic factors

There are a number of so-called green shoots (a phrase coined by Norman Lamont) of note.

• Jobless claims have plateaued and comparisons to last year are actually declining (see post).


• The U.S. trade deficit is declining significantly as U.S. import demand has fallen off a cliff.


• Inventory liquidation will put U.S. manufacturers in a better position by Q4 and help make quarterly and yearly comparisons favourable.

I linked to the first two bullets of these other factors. And I wanted to spend a little time on factor number three because I think it is important. Niels Jensen of Absolute Capital Partners has a very solid write-up on this in his most recent newsletter: (do sign up for his free newsletter because it is quite informative. Click here to see the newsletters and sign up.)

Turning my attention to the global economy, after a rather muted beginning, manufacturers around the world have now begun to react aggressively to the economic downturn and inventories are falling aggressively. Chart 5 below depicts US manufacturing inventories as published recently by the Census Bureau. Inventory changes can have a meaningful impact on GDP. There is one example from the 1981-82 recession where the inventory correction subtracted 5% (annualised) from GDP in just one quarter. The current inventory correction is very negative for GDP in Q1 and possibly also in Q2, but it is very difficult to quantify the effect it is going to have. We will have to wait and see.

However, as we must remind ourselves, the stock market is not trading on what is going to happen in Q1 and Q2 of this year. Projecting at least 6-9 months ahead, the stock market is probably already looking ahead to Q4 and possibly even Q1 of next year. And the inventory adjustment currently underway is very bullish for GDP growth later this year and into next. The reason is simple. Manufacturers always overreact. Come Q3 or Q4, they will suddenly sit up and realise that inventories have fallen too much and that they need to produce more. There is no reason to believe that this recession will be any different.

Obviously, this means that U.S. Q1 and perhaps even Q2 GDP will be very low due to the subtraction of inventories now being purged. However, when we get to Q3 and Q4, this effect will be gone and quarterly and yearly comparisons will look favourable. So the inventory purge may mean a huge upside surprise to GDP in the second half of the year and early 2010 - potentially enough to see positive GDP numbers.

A brief reminder of what lurks beneath
Despite the positives from the previous section, there are significant headwinds which may even preclude a positive GDP number. They include:

• Rising joblessness


• Increased savings as households rebuild balance sheets


• Spending cuts by local and state governments


• Decreased capital spending by companies


• A calamitous GM bankruptcy

Moreover, credit availability --and hence GDP will be constrained by numerous factors including the following:

• Declining home values


• Increasing foreclosures


• Commercial property writedowns


• Credit card-related writeoffs


• Junk bond defaults

All of this means that a cyclical rebound is not a foregone conclusion at all.

Tying the threads together
You should be under no illusion that the coming rebound is permanent. Much of it is not. What we are seeing is the makings of a cyclical recovery that might begin as early as Q4 2009 or Q1 2010. How long or robust that recovery is remains to be seen. Moreover, it is still questionable whether we will get any meaningful recovery at all in spite of the 'green shoots' because the banking system in the United States is severely undercapitalised and more asset writedowns are coming due. This is a fake recovery underneath which many problems remain.

Nevertheless, banks are going to earn a lot of money and that is bullish for their shares - at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.

Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.

Steve Jobs and Executive Income

Steve Jobs remains one of the highest paid executives in the world. But his annual salary remains just $1. Far more important, according to Portfolio Magazine, he contributes more than $33 billion dollars annually to the world economy, including an estimated $16.5 billion for Apple.

I remain very uneasy about $100 million plus incomes, but if Apple doesn't perform, Steve only gets his dollar. And if the global financial industry had operated on this principle, we wouldn't be in this mess now.

Christ is Present Here

In the midst of the whole stupid, pointless debate around issues like gay marriage, creationism/intelligent design and the culture wars, a reminder of where Christ is present, and what we as a Church are really called to: a day in the life of the La Chureca trash dump community in Managua, Nicaragua, with all of its despair and hope.
(ht Andrew Sullivan)


Day of Light from Love Light & Melody on Vimeo.

Continuing Pressure on the Drug War Front

How much longer can the insane war on drugs continue? . This morning's Financial Times asks and answers the question this way

How much misery can a policy cause before it is acknowledged as a failure and reversed? The US “war on drugs” suggests there is no upper limit. The country’s implacable blend of prohibition and punitive criminal justice is wrong-headed in every way: immoral in principle, since it prosecutes victimless crimes, and in practice a disaster of remarkable proportions. Yet for a US politician to suggest wholesale reform of this brainless regime is still seen as an act of reckless self-harm.

Even a casual observer can see that much of the damage done in the US by illegal drugs is a result of the fact that they are illegal, not the fact that they are drugs. Vastly more lives are blighted by the brutality of prohibition, and by the enormous criminal networks it has created, than by the substances themselves. This is true of cocaine and heroin as well as of soft drugs such as marijuana. But the assault on consumption of marijuana sets the standard for the policy’s stupidity.

Nearly half of all Americans say they have tried marijuana. That makes them criminals in the eyes of the law. Luckily, not all of them have been found out – but when one is grateful that most law-breakers go undetected, there is something wrong with the law.

Recently many commentators have noted that Portugal has shown a way out of this mess. It has decriminalized the entire range of street drugs for personal use. Not surprisingly, criminality and violence have decline. But so to has drug use. Go figure.

Canada has a role to play here. It is clear that the U.S. is too stuck on this "war" to ever change on its own. We, however, suffer disproportionately from spillovers from American policy. Though the hapless Harper government is behind the curve on this and so many other issues, it would be good to hear some encouraging words from the Liberal government in waiting.

GM and Manufacturing in Ontario

From Calculated Risk this morning, it is looking more and more like GM is headed for court protection in the U.S. by June 1. It cites the NYT which says that

The Treasury Department is directing General Motors to lay the groundwork for a bankruptcy filing by a June 1 deadline, despite G.M.’s public contention that it could still reorganize outside court, people with knowledge of the plans said during the weekend. ...

The goal is to prepare for a fast “surgical” bankruptcy, the people who had been briefed on the plans said. G.M., which has been granted $13.4 billion in federal aid, insists that a quick restructuring is necessary so its image and sales are not damaged permanently.

The preparations are aimed at assuring a G.M. bankruptcy filing is ready should the company be unable to reach agreement with bondholders to exchange roughly $28 billion in debt into equity in G.M. and with the United Automobile Workers union, which has balked at granting concessions without sacrifices from bondholders.

Meanwhile, in Ontario, both GM workers and pensioners and parts manufacturers face potentially devastating losses if bankruptcy proceeds. No one has stepped up to guarantee pensions, parts manufacturers have staggering receivables exposures and there is little sense of how court procedures in Canada and the U.S. would mesh.

In other words, we hit the wall in seven weeks, and very few in Canada seem to be turning their minds to what this might mean and what the policy response might be. Rather, in true Canadian fashion we seem to be turning this into another opportunity for a federal-provincial showdown.

Nanoblogging -- the Next Level

ht Andrew Sullivan -- some more holiday fun

Its Only Paranoia if you're Wrong

A little treat for the Holiday

Annoy Charlie Smith Inc. -- Trailer #1


Annoy Charlie Smith Inc- Trailer from Seaton Smith on Vimeo.

. . . and Trailer #2


Annoy Charlie Smith Inc trailer 2 from Seaton Smith on Vimeo.

Enjoy!

Eisenhower and Peace

From the 100 Days blog at the NYT, some thoughts on what we might learn from Eisenhower's approach to Korea.

Before his nomination he visited Korea, and while he had campaigned on victory and unification, he returned convinced that peace negotiations were the only realistic approach. As Jean Edward Smith tells it

Ike spent three days in Korea. He conferred with his old friends, Gen. Mark Clark and Gen. James Van Fleet, talked to division and regimental commanders, and ate C-rations at the front with G.I.’s from the 15th Infantry — Eisenhower’s old regiment. Most significantly, he flew along the battle line, roughly the 38th Parallel, in an artillery observation plane (the military equivalent of a Piper Cub) for a good look at the terrain . . .[and] he returned to the United States determined to make peace.

It is particularly telling the Ike pursued peace over the heads of his most senior advisors as well as leaders in congress. In a speach where he made his intentions public, he declared

Every gun that is fired, every warship launched, every rocket fired signifies a theft from those who hunger and are not fed, those who are cold and are notclothed….A world that begins to witness the rebirth of trust among nations can find its way to a peace that is neither partial nor punitive…. The first great step along this way must be the conclusion of an honorable armistice in Korea.

A particularly poignant sentiment for Easter Sunday. Because he had experienced the true horrors of war, Eisenhower was able to understand the precious value of peace and pursued it tenaciously despite opposition. When peace was achieved, quite quickly as it turned out,

Eisenhower ignored the criticism. “The war is over,” he told press secretary James Hagerty. “I hope my son is going to come home soon.”

Would that our Canadian generals' bellicose statements in the lead up to the Afghan mission have been tempered by the same understanding and compassion.

The End of the Culture Wars?

So James Dobson, of Focus on the Family fame, has conceded defeat in the culture wars. And the principle reason for this? A President who has been out of power for more than eight years.

This is surely wonderful news for Christians and the Church. Freed of Constantinian theocratic pretensions, we are much freer to be what we were always meant to be: the presence of Christ in the world -- not the United States at prayer and not a wing of the Republican Party and not neo-pharisees.

Dobson's strategy in the so-called culture wars has always seemed to me to be one of judgment and hatred couched in Orwellian newspeak. It seemed diametrically opposed to the love and acceptance preached and lived by Jesus in his life, death and resurrection and by the early Church. Christ did not judge sinners, but rather those who judged sinners themselves. The Pharisees, the most righteous of people, were his principle target. One wonders how kindly He would judge Dr. Dobson.

Dobson believes that the Church and Christians must fight on. But perhaps God's message here is that we have been fundamentally misguided and that we need to radically redirect our efforts.

Anyways, here it is from the horse's mouth, so to speak

The Rt. Hon. Tub of Lard?

Paul Krugman gets nasty!

Last hour on his blog, Krugman posted regrets that he did not get to meet with Rick Warren this morning on This Week. Or as he put it

So I was all ready to talk about Rick Warren on today’s panel, only to learn that he had cancelled out at the last minute. The show replaced him with pirates, plus an extended roundtable. But I think they should have done what the British show Have I Got News For You did when a guest failed to show: they replaced him with a tub of lard, addressed throughout the show as the Rt. Hon. Tub of Lard.

Way to go, Prof. Krugman!

And what is making Krugman so fiesty? Perhaps it is just that this doesn't appear to be a routine cancellation. Politico reports that

Pastor Rick Warren, after making apparently contradictory statements about his stance on a gay-marriage measure, canceled an Easter Sunday appearance on ABC’s “This Week” just “moments before the scheduled interview,” host George Stephanopoulos told viewers.

Stephanopoulos said Warren’s representatives said the best-selling evangelical author was “sick with exhaustion.” The host told viewers that he wished the pastor a speedy recovery.

Warren’s appearance would have given him the chance to clear up his claim last week on CNN’s “Larry King Live” that he “never once … gave an endorsement” to California’s Proposition 8, a successful November ballot measure that banned gay marriage in the nation’s largest state.

Here is the clip



No equivocation here. So no edorsement? Here it is



Happy Easter Pastor Rick!

Henry Mintzberg on Managing Our Way into Crisis

As I write this, CBC's Sunday Edition is airing an interview with Henry Mintzberg. Mintzberg, Canada's leading management academic, is arguing that our current crisis is one of management and not economics, and that in particular it is a product of the failure of business schools to adequately equip the current management cadre with the tools for effective leadership.

(In its usual elitist fashion, the host, Michael Enright, has posted no links to or references for Mintzberg's work. Nor is there a podcast. What can we expect for a paltry multibillion dollar budget.)

Much of the thrust of Mintzberg's argument can be found in a recent Globe & Mail opionion piece entitled America's Monumental Failure of Management. He summarizes his argument as follows:

We call this a financial crisis or an economic one, but, at the core, it is a crisis of management. To understand this, consider the mortgage debacle.

How could these mortgages have come to exist in the first place and, worse, how could they have spread to so many of the bluest of blue-chip financial institutions? The answers seem readily apparent. Those who promoted these mortgages were intent on driving up sales as quickly as possible for the benefit of their own bonuses, the ultimate consequences be damned. In fact, they sold off these mortgages as quickly possible.

But how could any serious financial institution have bought this junk - or, more to the point, tolerated a culture of people too lazy or disinterested to realize it was junk? That, too, is simple: These companies were not being managed. They were being "led" - heroically, no doubt - for short-term spectacular performance. The executives didn't know, and the employees didn't care.

What we have here is a monumental failure of management. American management is still revered across much of the globe for what it used to be. Now, a great deal of it is just plain rotten - detached and hubristic. Instead of rolling up their sleeves and getting engaged, too many CEOs sit in their offices and deem: They pronounce targets for others to meet, or else get fired.

And he follows this by laying the blame for management failure squarely at the feet of managment schools, particularly the elite schools:

Management is a practice, learned in context. No manager, let alone leader, has ever been created in a classroom. Programs that claim to do so promote hubris instead. And that has been carried from the business schools into corporate America on a massive scale.

Harvard Business School, according to its MBA website, is "focused on one purpose - developing leaders." At Harvard, you become such a leader by reading hundreds of brief case studies, each the day before you or your colleagues are called on to pronounce on what that company should do. Yesterday, you knew nothing about Acme Inc.; today, you're pretending to decide its future. What kind of leader does that create?

Harvard prides itself on how many of its graduates make it to the executive suites. Learning how to present arguments in a classroom certainly helps. But how do these people perform once they get to those suites? Harvard does not ask. So we took a look.

Joseph Lampel and I found a list of Harvard Business School superstars, published in a 1990 book by a long-term insider. We tracked the performance of the 19 corporate chief executives on that list, many of them famous, across more than a decade. Ten were outright failures (the company went bankrupt, the CEO was fired, a major merger backfired etc.); another four had questionable records at best. Five out of the 19 seemed to do fine. These figures, limited as they were, sounded pretty damning. (When we published our results, there was nary a peep. No one really cared.)

In other words, as Mintzberg demonstrates in this video, the leadership function of management is not, and cannot be something that is effectively taught out of context in business schools. And to the extent that we draw elites from these schools they will not only be fallibe but both hubristic and excessively error prone.

Piracy as Insurgency

Robert Kaplan has an interesting piece on Piracy in today's NYT. For him, this anarchy at sea is a direct result of anarchy on land. And Somalia, along whose coast this is occuring, is the ultimate failed anarchic state.

Piracy, of course, has the potential to disrupt major trade routes and hence trade at the same time that global trade is under assault from protectionist reactions to the economic crisis. Kaplan suggests, however, that the assymetric nature of piracy represents a greater threat -- its potential use as a terrorist weapon:

The big danger in our day is that piracy can potentially serve as a platform for terrorists. Using pirate techniques, vessels can be hijacked and blown up in the middle of a crowded strait, or a cruise ship seized and the passengers of certain nationalities thrown overboard. You can see how Al Qaeda would be studying this latest episode at sea, in which Somali pirates attacked a Maersk Line container ship and were fought off by the American crew, even as they have managed to take the captain hostage in one of the lifeboats.

The obvious response to this is military (in this case, naval) interdiction. Yet as Kaplan notes, this presents the usual problems of a massively powerful response to asymmetric attacks:

So we end up with the spectacle of an American destroyer, the Bainbridge, with enough Tomahawk missiles and other weaponry to destroy a small city, facing off against a handful of Somali pirates in a tiny lifeboat. This is not an efficient use of American resources. It indicates how pirates, like terrorists, can attack us asymmetrically. The challenge ahead for the United States is not only dealing with the rise of Chinese naval power, but also in handling more unconventional risks that will require a more scrappy, street-fighting Navy.

Sadly, however, this overlooks a half century of lessons on asymmetric warfare. As both the recent groundbreaking work of the U.S. Army in the Counterinsurgency Field Manual (pdf file) and in the widely influential work by John Nagl, Learning to Eat Soup with a Knife, counterinsurgency is a multifaceted task of which military response is only one (usually relatively small) part. This is the lesson ignored in Viet Nam, learned in Iraq and currently being relearned (and learned for the first time by Canada) in Afghanistan.

Let's hope we don't forget it in the Indian Ocean

Taking a Step Back

I haven't commented much on the debate swirling around the vast increase in the profitability of the financial sector, and the contribution to this sector to the greater public good. Though I am still searching for comparable Canadian figures, in the U.S., at the onset of the current crisis, financial sector profits had risen from 20% to 40% of all profits in just a few years. It seems likely that Canadian figures are not all that different.

Why, then, do we allocate so much to this sector? The baseline function of any financial sector is to aggregate resources and efficiently allocate these. But more and more, the corporate sector raises its own resources. Or perhaps it is to develop innovative investment vehicles, but we all know how that has turned out.

I think Yglesias hits the nail on the head

Could it really be the case that so many people were naive enough to trust their monies to institutions that were only claiming to have brilliant investment models? Well, it seems to me that it could. And that this would explain why it might make sense for a firm financial firm to pay Larry Summers $5 million a year for a one-day-a-week job. When your company’s underlying product isn’t necessarily sound, it’s important to invest a lot in marketing. Summers is like a celebrity endorsement. This is also a reason, I think, why having gone to a fancy college seems to have been very helpful for getting a job in finance. The firms’ business models very much depend on putt (ing a certain image of themselves forward.

In other words, as I commented earlier, trust in elite MBAs, buttressed by relentless image building and a unified message (invest for the long haul, don't lock in your losses) have led investors to naively trust financial advisors and to stay with them through a devastating downturn. Our lack of financial superstars in Canada is more than offset by our deference to authority -- even incompetent authority.

The Inescapable Story of Easter

Via Ross Douthat (again) a John Updike poem on Easter -- here is a sample:

Let us not mock God with metaphor,
Analogy, sidestepping, transcendence,
Making of the event a parable, a sign painted in the faded
Credulity of earlier ages:
Let us walk through the door.

The stone is rolled back, not papier-mache,
Not a stone in a story,
But the vast rock of materiality that in the slow grinding of
Time will eclipse for each of us
The wide light of day.

I remember hearing a Mennonite pastor telling the story of his dying mother, a simple Russian immigrant approaching death seeing Jesus at the foot of her bed. He took this to be a hallucination symbolic of her deep faith -- and nothing else. As Updike reminds us, this not only misses the point, it "mocks God."

A Guru We Can Believe In?

Via Paul Krugman and Justin Lahart of the WSJ -- a thirty year old reminder of the vacuousness of economic punditry in this springtime of "green shoots" and other mindless optimism. Enjoy.

Bill Blakey, the Social Gospel and the Justice Tradition

As I write, CBC's The House is discussing the role of faith in politics. The first interview, however, is by far the more interesting. Bill Blakey talks about his faith grounded in the social gospel that was the foundation of the early CCF and NDP. The rest of the show looks at the role of a more evangelical faith in politics. The contrast could not be more stark.

Have a listen.

Those Pesky Accounting Standards -- Now Europe

The Economist reports today that the IASB, the body that regulates accounting standards in Europe is under political pressure to loosen fair-value accounting standards, particularly those known as "mark to market". We have, of course, already seen this in Canada and the U.S.. As the Economist describes it

On April 2nd, after a bruising encounter with Congress, America’s Financial Accounting Standards Board (FASB) rushed through rule changes. These gave banks more freedom to use models to value illiquid assets and more flexibility in recognising losses on long-term assets in their income statements. Bob Herz, the FASB’s chairman, decried those who “impugn our motives”. Yet bank shares rose and the changes enhance what one lobbying group politely calls “

European ministers instantly demanded that the International Accounting Standards Board (IASB) do likewise. The IASB says it does not want to be “piecemeal”, but the pressure to fold when it completes its overhaul of rules later this year is strong. On April 1st Charlie McCreevy, a European commissioner, warned the IASB that it did “not live in a political vacuum” but “in the real world” and that Europe could yet develop different rules.

So the rules change, and as this weeks experience shows, banks achieve instant profitability and are suddenly able to fully participate in credit markets. Isn't accounting fun! A stroke of the pen moves them from insolvency to darling of the market! (Warning: don't try this at home.)

Banks worldwide have suggested fair-value proponents are on the wrong planet. However, the Economist throws its considerable weight behind the argument that

[i]t was banks that were on the wrong planet, with accounts that vastly overvalued assets. Today they argue that market prices overstate losses, because they largely reflect the temporary illiquidity of markets, not the likely extent of bad debts. The truth will not be known for years. But banks’ shares trade below their book value, suggesting that investors are sceptical. And dead markets partly reflect the paralysis of banks which will not sell assets for fear of booking losses, yet are reluctant to buy all those supposed bargains.

More From Douthat

For Good Friday, and uncompromising and provocative understanding of the Gospel message by Terry Eagleton in Reason, Faith and Revolution. I have ordered the book!

... for Christian teaching, God's love and forgiveness are ruthlessly unforgiving powers which break violently into our protective, self-rationalizing little sphere, smashing our sentimental illusions and turning our world brutally upside down. In Jesus, the law is revealed to be the law of love and mercy, and God not some Blakean Nobodaddy but a helpless, vulnerable animal. It is the flayed and bloody scapegoat of Calvary that is now the true signifier of the law

... Here, then, is your pie in the sky or opium of the people, your soft-eyed consolation and pale-cheeked piety. Here is the fantasy and escapism that the hard-headed secularist pragmatist finds so distasteful. Freud saw religion as the mitigation of the harshness of the human condition; but it would surely be at least as plausible to claim that what we call reality is a mitigation of the Gospel's ruthless demands, which include such agreeable acts of escapism as being ready to lay down your life for a total stranger. Imitating Jesus means imitating his death as well as his life, since the two are not finally distinguishable. The death is the consummation of the life, the place where the ultimate meaning of Jesus's self-giving is revealed.

... What is at stake here is not a prudently reformist project of pouring new wine into old bottles, but an avant-gardist epiphany of the absolutely new - of a regime so revolutionary as to surpass all image and utterance, a reign of justice and fellowship which for the Gospel writers is even now striking into this bankrupt, dépassé, washed-up world ... The coming of the kingdom involves not a change of government, but a turbulent passage through death, nothingness, madness, loss and futility ... signified among other things by Christ's descent into hell after his death. There is no possiblity of a smooth evolution here. Given the twisted state of the world, self-fulfillment can ultimately come about only through self-divestment.

This view, that the institutional church has perverted the Gospel message, can also be found in Jacques Ellul's The Subversion of Christianity and in Ivan Illich and David Cayley's The Rivers North of the Future. A large collection of Ellul's writings can be found in the theology section of the Jesus Radicals site.

No Limits to Medicine Here!

Mark Frauenfelder on BoingBoing asks what medical procedure is being applied by this medic.

My question is whether it is covered by the NHS.

Those Amazing, Magic Bank Profits -- II

From Floyd Norris of the NYT. Barclays Bank has discovered another route to instant profitability -- make a loan to yourself! Oh those clever banks.

As Norris describes it:

Barclays, the large British institution, announced a $3.1 billion loan today. And it also promised to keep the loan on its own balance sheet for a year, rather than sell off parts of it to other banks. Even after the year is up, it promises to keep most of the loan.

And who will get the cash from that loan? Barclays itself. It will also be able to report a large profit, of $2.2 billion, which is something every bank needs these days. And Robert E. Diamond, Barclays’ president, stands to take home $6.9 million of the money.

Barclays is selling its iShares business, which puts together exchange-traded funds, to a private equity firm for $4.4 billion, and financing the deal itself. So the cash stays right where it is, but a profit is posted. Mr. Diamond owns a stake in the business, so he gets to share in the bounty. (The bank says he was not involved in the negotiations.)

As with their American cousins, shares leaped on this news. One begins to feel less and less sorry for bank shareholders.