Credit default swaps

The New York Times printed this piece on credit default swaps, which have been in the news quite a bit recently. The basic idea is fairly simple, but the ramifications give me a headache. You can have one too.

Arcane Market Is Next to Face Big Credit Test

Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances. Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated. But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.

Existing home sales 2005-present

This chart is not seasonally adjusted, so it’s hard (impossible) to see month-to-month trends. But the annual trend is certainly dramatic. The crash starts in April 2006 and never looks back.

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Calculated Risk via Barry Ritholtz

Update: here’s a companion graph (on a much longer time scale) of real housing prices from Matthew Yglesias. Not surprisingly, the price crash starts just about when the volume starts to drop.

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Kick top management in the teeth

Thus Dean Baker.

Leonhardt is Wrong, Limiting CEO Pay is Not a Sideshow to This Bailout

In his weekly NYT column, David Leonhardt argues that limits on executive compensation are a sideshow to the bank bailout. Actually, they are an essential part of the story.

A key issue in the bailout is addressing moral hazard. The message to Wall Street should not be to get rich on fees from stupid loans and then run to the big government to save your rear when the loans go bad. We give this message to the shareholders by saying that we are going to own much or all of your bank if you come to us for help.

It is necessary to give a similar lesson to the CEOs. A major problem in corporate America is that top executives have been able to pillage their corporations at the expense of shareholders. This problem is nowhere worse than on Wall Street, where high level executives (not just CEOs) routinely earn tens of millions annually in compensation, and sometimes hundreds of millions.

It is therefore crucial that the CEOs also be forced to take big hits in this sort of bailout. Otherwise, their incentive is to rip off their shareholders in the good times with irresponsible lending policies (thereby getting huge fees) and then have the government kick the shareholders in the teeth in the bad times, but they themselves can escape unscathed.

In short, kicking the top management in the teeth as part of the bailout is both a necessary part of the bailout and good policy for stemming the growth in inequality over the last three decades.

—Dean Baker

John Taylor’s Chronophage

A diversion, but an appropriate one, maybe.
The BBC:

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“Conventional clocks with hands are boring,” he said. “I wanted to make timekeeping interesting.

“I also wanted to depict that time is a destroyer – once a minute is gone you can’t get it back.

“That’s why my grasshopper is not a Disney character. He is a ferocious beast that over the seconds has his tongue lolling out, his jaws opening, then on the 59th second he gulps down time.”

The Chronophage in action:

via /.

Update: The Love of my Life, whose wish is my command, requests a picture of the grasshopper itself.

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Barry Ritholtz: We’re all (Groucho) Marxists now

The “New” New Deal

I am having a hard time keeping up with all of the bailouts and special facilities created for dealing with this crisis.  Am I missing any?

  • Bear Stearns
  • Economic Stimulus progam
  • Housing Bailout Program
  • Fannie & Freddie
  • AIG
  • No Short selling rules
  • Fed liquidity programs (Term Lending facility, Term Auction facility)
  • Money Market fund insurance program
  • New RTC type program

If you are a fan of irony, consider this: The conservative movement has utterly hated FDR, and his New Deal programs like Medicaid, Social Security, FDIC, Fannie Mae (1938), and the SEC for nearly 80 years. And for the past 8 years, a conservative was in the White House, with a very conservative agenda. For something like 16 of the past 18 years, the conservative dominated GOP has controlled Congress.

Those are the facts.

We now see that the grand experiment of deregulation has ended, and ended badly. The deregulation movement is now an historical footnote, just another interest group, and once in power they turned into socialists. Indeed, judging by the actions of the conservatives in power, and not the empty rhetoric that comes out of think tanks, the conservative movement has effectively turned the United States into a massive Socialist state, an appendage of Communist Russia, China and Venezuela.

To paraphrase Floyd Norris, we have become Marxists, but of the Groucho, not Karl, variety…

John Cole is pissed off

You Have To Be Shitting Me:

This is unbelievable:

The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said.

In other words, folks spent years making billions upon billions of dollars on risky transactions, more money on the stock of companies that was artificially high based on those transactions, more money bundling all those transactions into more transactions, and made a killing, and when it turns out the whole thing is a big pile of shit, you and I get the god damned bill.

I do not ever want to hear another damned word about the free market. I don’t want to hear another thing about letting the market regulate itself. I don’t want to hear about the free flow of capital. I don’t want to hear about government getting out of our lives.

None of it. From superfunds to super-bailouts, I am tired of other people getting rich being irresponsible and then being told I have to pay to clean it up. I didn’t read one punitive aspect of this new plan. Not one punishment for the people who did this.

Why did Ike get so large?

Jeff Masters at Weather Underground:

Why did Ike get so large?

Hurricane Ike grew unusually large, eventually filling up the entire Gulf of Mexico and becoming larger than Katrina. How did it get so big? Well, one theory is that the storm’s passage over Cuba helped it to grow in size. During the day and half the eye of Ike traversed Cuba, the thunderstorm activity near the center was suppressed by land. However, a large portion of the storm was over the exceptionally warm waters of the Loop Current on either side of Cuba. Since the storm couldn’t put any energy into intensifying and maintaining its core, the energy pulled out of the Loop Current went into expanding and intensifying the outer portions of the storm that were over water. When Ike finally emerged into the Gulf of Mexico, its scale had been reset to this new larger size, and the storm was able to maintain the new scale. A similar transition to a new larger scale also occurred to Hurricanes Katrina and Andrew after they passed over South Florida.

(Via )

Constitution Day

Wednesday is Constitution Day; here’s Sandy Levinson (Our Undemocratic Constitution).

Faux Originalism and “Constitution Day”

Many originalists claim to feel bound not only by the text of the Constitution (which would make them only textualists, but also by the values, aims, and aspirations of the Founders). But surely one of the central values of the Founders is that no one like Sarah Palin would ever be a candidate for the presidency (and not only because she is a woman, a piece of bigotry that would also, of course, extend for other reasons to Barack Obama). Rather, she is basically uneducated, inexperienced, and incurious about the world at large. She is no Abligail Adams or Mercy Warren, let alone James Madison or John Adams.

I have many times over the past two years, since publishing my book Our Undemocratic Constitution, been reminded, sometimes with a tone of withering condescension that ours is a “republic” and not a “democracy,” and we should keep it that way. There is, of course, some truth to that, especially if by “republican” one means a concern for public values instead of partisan interests, deemed “factions” in the 10th Federalist. Madison obviously saw no way to get read of factions, but he did believe, naively, that one might tame them through a system of representative government that would try to assure “virtuous” leaders.

Madison’s vision, of course, collapsed very quickly. Some would say 1800, though this depends on whether one shares Hamilton’s view that Burr was out-and-out unfit to be president. Others would say 1828, with the election of Andrew Jackson. I’d be more tempted to go with 1840, when William Henry Harrison, who ran under the famous slogan, Tippacanoe and Tyler too, picked the egregious John Tyler for no other reason than supplying “electoral balance,” even though he had no apparent qualifications for the presidency (unlike every earlier VP, including, one might well argue, Burr) and was a disaster as President. What is striking is that we no longer even both to lament the decline of “republican” values; instead, too many of us have become little Karl Roves and Lee Atwaters, luxuriating in the “cleverness” of political operatives who indeed care only about partisan political success and nothing else.

In any event, there is something passing strange about (some) contemporary “originalists” clutching the Founders to their bosom at the same time they celebrate John McCain’s ostensible “sagacity” in choosing the patently unqualified Sarah Palin because it might provide him an electoral boost. This is not to deny the accuracy of the analysis; it is only to say that no member of the Founding Generation would recognize such a motive (and character) as being the reason they gave for establishing a new Constitution dedicated to maintaining a “Republican Form of Government.”

Benjamin Franklin famously said that we were given a republic and the question was whether we could “keep it.” The answer is clear. Not only do we not have anything we should be willing to call a 21st century democracy; we also don’t have anything we should be willing to call a “republic.” Something to think about as we prepare to “celebrate” Constitution Day on Wednesday….. Whatever it is that (some of us) celebrate, it has almost nothing to do with 1787-88, for good (the substantial overcoming of sexism and racism) and for ill (fill in the blank with one’s favorite critique).

Who’s Élite now, Bullwinkle?

George Saunders in The New Yorker.

My Gal

In summary: Because my candidate, unlike your winking/blinking Vice-Presidential candidate, who, though, yes, he did run as the running mate when the one asking him to run did ask him to run, which that I admire, one thing he did not do, with his bare hands or otherwise, is, did he ever kill a moose? No, but ours did. And I would. Please bring a moose to me, over by me, and down that moose will go, and, if I had a kid, I would take a picture of me showing my kid that dead moose, going, like, Uh, sweetie, no, he is not resting, he is dead, due to I shot him, and now I am going to eat him, and so are you, oh yes you are, which is responsible, as God put this moose here for us to shoot and eat and take a photo of, although I did not, at that time, know why God did, but in years to come, God’s will was revealed, which is: Hey, that is a cool photo for hunters about to vote to see, plus what an honor for that moose, to be on the Internet.

How does the moose feel about it? Who knows? Probably not great. But do you know what the difference is between a dead moose with lipstick on and a dead moose without lipstick?

Lipstick.

Think about it.

Moose are, truth be told, Élites. They are big and fast and sort of rule the forest. Sarah took that one down a notch. Who’s Élite now, Bullwinkle?

Not Sarah.

She’s just Regular as heck.

Pilling the cat

I’ve jammed a lot of pills down the throats of a lot of cats over the years, and have gotten reasonably proficient at it. Still, my reject rate is higher than I’d like, and I keep a precautionary tube of Neosporin handy.

Until now. When our local vet prescribed Prednisone, two pills a day, for our Orange Marmalade, they also lent us a nifty device for administering said pills.

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It works like a charm, both for me and for Marmie, and it’s available through Amazon.com as the “Pet Piller Single For Small Pets“. At $2.99, even with another $4 for shipping, it’s a bargain, though you might want to check your local pet supply first.

Presumably it’d work fine for dogs as well.

BBC: Why the Queen had 2,000 pints of lager delivered to her doorstep

Royal mix-up over lager delivery

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Twelve barrels of lager destined for a pub called The Windsor Castle were delivered to the Queen’s Berkshire residence by mistake.

A lorry carrying 2,000 pints, ready for England’s football match with Croatia, turned up at the real Windsor Castle.

George Smiley coming to BBC Radio 4

BBC Radio 4 will dramatize—sorry, will dramatise—John le Carré’s Smiley novels. Some of the BBC’s radio dramatizations have been excellent, some not so much, and I’m never quite sure whether it’s le Carré or Alec Guinness that I’m a fan of. Regardless, I hope to be able to give it a try.

[Mark Damazer, head of BBC Radio 4] announced that Radio 4 is to dramatise all eight of John le Carré’s Smiley novels.

The part of George Smiley, one of the most famous characters in spy fiction, was immortalised by Sir Alec Guinness in two BBC television adaptations.

No one has yet been chosen to play the role in the radio version, which will be broadcast next May, but Mr Damazer did not rule out the Shakespearean British actor Simon Russell Beale.

“I have always thought that the quality of Le Carré’s writing hasn’t been appreciated as much as it might,” he said. “He is a huge and considerable figure in late 20th and early 21’s century fiction. This will celebrate a great, great British writer who may not have won a Nobel but whose writing I think takes him way beyond genre fiction.”

via Jorn Barger

Accidents will happen

Economist.com’s Daily chart yesterday is an odd mix of the obvious and a few head-scratchers. Is poisoning really a more common cause of death than car accidents? Apparently.

Some causes depend, one supposes, on exposure and vulnerability; the risk of bee stings to the allergic is presumably higher than indicated, and to the rest of us lower. I take showers, mostly, so am relatively immune to drowning in a bathtub. And being the cautious sort, I refuse to wear pajamas.

What are the odds of dying in an accident?

AMERICA is regarded by some as a wild and dangerous place. But violent inner cities and beasts roaming the great outdoors are just some of the potentially fatal situations that the average American faces. The National Safety Council has compiled a list of the odds of perishing in a variety of accidents which makes for sobering reading. Among the perils that could claim a life, poisoning is surprisingly likely. But don’t imagine that bees, flammable nightwear or fireworks are without their (admittedly more remote) dangers too.

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Georgia and the Balance of Power

George Friedman in the New York Review of Books. Certainly the clearest exposition of recent events in Georgia that I’ve come across.

Georgia and the Balance of Power

The Russian invasion of Georgia has not changed the balance of power in Eurasia. It has simply announced that the balance of power had already shifted. The United States has been absorbed in its wars in Iraq and Afghanistan, as well as potential conflict with Iran and a destabilizing situation in Pakistan. It has no strategic ground forces in reserve and is in no position to intervene on the Russian periphery. This has opened an opportunity for the Russians to reassert their influence in the former Soviet sphere. Moscow did not have to concern itself with the potential response of the United States or Europe; hence, the balance of power had already shifted, and it was up to the Russians when to make this public. They did that on August 8.

Let’s begin simply by reviewing recent events. On the night of Thursday, August 7, forces of the Republic of Georgia moved across the border of South Ossetia, a secessionist region of Georgia that has functioned as an independent entity since the fall of the Soviet Union (see map).

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They drove on to the capital, Tskhinvali, which is close to the border. Georgian forces got bogged down while trying to take the city. In spite of heavy fighting, they never fully secured it, nor the rest of South Ossetia.

…

By invading Georgia as Russia did (competently if not brilliantly), Putin reestablished the credibility of the Russian army. (It was no surprise that its operations would render thousands of people homeless and cause civilian casualties.) But far more importantly, Putin’s invasion revealed an open secret. While the United States is tied down in the Middle East, American guarantees have no value. This lesson is not for American consumption. It is something that, from the Russian point of view, the Ukrainians, the Balts, and the Central Asians need to digest. Indeed, it is a lesson Putin wants to transmit to Poland and the Czech Republic as well. In July, the Czech government signed an agreement with the United States to set up a ballistic missile defense installation in the Czech Republic, and in August, days after the conflict in Georgia began, the Polish government announced that it has agreed to allow the Americans to build an anti-missile base in Poland. The US–Polish agreement was hurriedly signed as a gesture of defiance to the Russians. The Russians responded with threats that Condoleezza Rice dismissed as “bizarre.”

The Russians knew that the United States would denounce their attack. This actually plays into Russian hands. The more vocal senior US leaders are, the greater the contrast with their inaction, and the Russians wanted to drive home the idea that American guarantees are empty talk. The Russians also know something else that is of vital importance. For the United States, the Middle East is far more important than the Caucasus, and Iran is particularly important. The United States wants the Russians to participate in sanctions against Iran. Even more importantly, it does not want the Russians to sell weapons to Iran, particularly the highly effective S-300 air defense system. Georgia is a marginal issue to the United States; Iran is a central issue. The Russians are in a position to pose serious problems for the United States not only in Iran, but also with weapons sales to other countries, like Syria.

(via Hullabaloo)

John Wells’s phonetic blog

Via Language Log, we have John Wells’s phonetic blog. Here’s a sample.

More mysterious epenthesis

Next question: why is someone from St Kitts in the Caribbean known as a Kittitian kɪˈtɪʃn?

Answer: I don’t know, and I suspect the OED doesn’t really know either, though it suggests that Kittitian is modelled on Haitian. (But Kitts : Kittitian is not really like Haiti : Haitian.)

And why are purveyors of tobacco known as tobacconists? Or for that matter people from Toronto as Torontonians? While members of LASSO, the Linguistic Association of the Southwest (US), according to Ryan Denzer-King, are addressed as Lassovians, and, as Nigel Greenwood points out, old boys of Stowe (public school) are simply known as Stoics.

Nigel Greenwood suggests that Shanghainese, from Shanghai, is presumably by analogy with Chinese (although I have to point out that the base form China contains an n, whereas Shanghai doesn’t, or at least not in the right place). In the east Asia area there are also Java – Javanese, Sunda – Sundanese, and Bali – Balinese, all with an n of no obvious origin unless indeed China – Chinese is somehow responsible.

The OED speculates that tobacconist, with -n- inserted between tobacco and -ist, is “perh. suggested by such words as Platonist, with etymological n”. For Torontonian it merely says “f. Toronto, capital of the province of Ontario in Canada + -n- + -IAN”.

Yeah, right.*

*(the phrase that proves that two positives make a rather negative evaluation)

Saving the People’s Bank of China

Daniel Gross:

The bailout of Fannie Mae and Freddie Mac will be sold and marketed as an effort to shore up the U.S. housing market. Maybe so. But it is mostly meant to shore up our damaged international financial standing, preserving leadership and making sure the U.S. Treasury Secretary doesn’t get tarred and feathered at the next G-8 meeting.

Along those lines, we see international stock markets cheer at the news; US housing prices not so much, I predict.

Freddie/Fannie: too little too late?

In the wake of the Freddie Mac/Fannie Mae bailout, Paul Krugman is pessimistic.

The current U.S. financial crisis bears a strong resemblance to the crisis that hit Japan at the end of the 1980s, and led to a decade-long slump that worried many American economists, including both Mr. Bernanke and yours truly. We wondered whether the same thing could take place here — and economists at the Fed devised strategies that were supposed to prevent that from happening. Above all, the response to a Japan-type financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus, designed to prevent the crisis from spilling over into a major slump in the real economy.

When the current crisis hit, Mr. Bernanke was indeed very aggressive about cutting interest rates and pushing funds into the private sector. But despite his cuts, credit became tighter, not easier. And the fiscal stimulus was both too small and poorly targeted, largely because the Bush administration refused to consider any measure that couldn’t be labeled a tax cut.

As a result, as I suggested, the effort to contain the financial crisis seems to be failing. Asset prices are still falling, losses are still mounting, and the unemployment rate has just hit a five-year high. With each passing month, America is looking more and more Japanese.

So yes, the Fannie-Freddie rescue was a good thing. But it takes place in the context of a broader economic struggle — a struggle we seem to be losing.

The myth of double taxation

As a rule I’m content to trust that my small band of readers will follow the excellent Dean Baker on their own (he’s the Beat the Press link on my Links list). But from time to time, I can’t resist reposting. This post recapitulates one of Baker’s themes, that the notion that corporate dividends are “double taxed” is fundamentally mistaken—or worse.

There is an old myth developed by rich people at some point in the distant past that paying taxes on dividends amounts to “double-taxation.” The argument is that profits are already taxed at the corporate level, so taxing money when it is paid out as dividends to shareholders is taxing the same profit a second time. Gregory Mankiw, a Harvard University professor and former top economist in the Bush administration, pushes this line in a column in the NYT.

The trick in this argument is that it ignores the enormous benefits that the government is granting by allowing a corporation to exist as a free standing legal entity. The most important of these advantages is limited liability. If a corporation produces dangerous products or emits dangerous substances that result in thousands of deaths, shareholders in the corporation cannot be held personally responsible for the damage. The corporation can go bankrupt, but beyond that point, all the shareholders are off the hook, the victims of the damage are just out of luck.

By granting corporate status, the government has allowed investors to shift risk to society as a whole. In exchange for this and other privileges of corporate status, the corporation must pay income tax on its earnings. We know that investors consider the benefits of corporate status to be worth the price in the form of the corporate income tax, because they voluntarily choose to form corporations. If investors did not consider the benefits of corporate status to outweigh the cost of the income tax, then they are free to form partnerships which are not subject to corporate income tax. In this way, the corporate income tax is a completely voluntary tax. Anyone can avoid the tax by investing in a partnership, or alternatively, any corporation can be restructured as a partnership.

The complaint about double taxation is an effort to get the benefits of corporate status for free. It is understandable that rich people would want to get benefits from the government at no cost, just like most of us would prefer not to pay our mortgage or electric bill. But, there is no reason for government to be handing out something of great value (corporate status) for free. If rich people don’t like the corporate income tax, they have a very simple way to avoid it — don’t invest in corporations. The problem is that the rich are just a bunch of whiners.

–Dean Baker