The price of everything

A low dishonest decade marches on

“The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.”

 

-       Simon Johnson in ‘The Atlantic’ magazine.

 

 

Stephen Armstrong, writing about cult US police drama ‘The Wire’ in yesterday’s Sunday Times, sums up ‘the problem’ as follows:

 

“this whole show feels like a relentless and completely amoral battlefield in a decaying city where everyone is corrupt, incompetent, unpleasant or downright criminal, and anyone who tries for redemption is brutally killed.”

 

He might as well have been writing about the financial markets circa 2009. W.H. Auden also captured the current mood in ‘September 1, 1939’ which contains the following lines:

 

“I sit in one of the dives

On Fifty-second street

Uncertain and afraid

As the clever hopes expire

Of a low dishonest decade..

Lest we should see where we are,

Lost in a haunted wood,

Children afraid of the night,

Who have never been happy or good..”

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Studying bottoms

“We, uh, needed to keep these highly expert people in their seats.”

 

-       AIG spokeswoman Christina Pretto to Matt Taibi of ‘Rolling Stone’.

 

 

Politicians must be hugely grateful that the electorate and the media can be so easily manipulated. Which figure, for example, is the bigger, and more worthy of investigation: the $165 million (now known, like all their other figures, to be a lie) given in bonuses to staff at AIG, or the $173 billion that has been given to the firm as a bailout by taxpayers ? Both figures illustrate why governments shouldn’t run financial companies. The witch-hunt is all very enjoyable as a spectator sport*, but it is grossly distracting from the weightier issues of the day. But then governments in deficit are financial companies, essentially, of the worst sort, and the supposed cure to the current economic malaise – government spending, and lots of it – may end up being worse than the disease.

 

Sovereign entities, goes the conventional thinking that led to the then worst US financial crisis in history in the early 1980s, don’t default. The table below, courtesy of Bedlam Asset Management, would suggest otherwise:

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Japanese lessons

“The [Japanese] central bank’s implementation of quantitative easing at a time of zero interest rates was similar to a shopkeeper who, unable to sell more than 100 apples a day at Y100 each, tries stocking his shelves with 1,000 apples, and when that has no effect, adds another 1,000. As long as the price remains the same, there is no reason consumer behaviour should change – sales will remain stuck about 100 even if the shopkeeper puts 3,000 apples on display. This is essentially the story of quantitative easing, which not only failed to bring about economic recovery, but also failed to stop asset prices from falling well into 2003.”

 

-       Richard Koo, ‘The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession’ (John Wiley 2008).

 

 

President Harry S Truman famously called for a one-handed economist, given the propensity of his economic advisors to blather “on the one hand.. and on the other..” Those who like their economics comparably definitive should warm to Richard Koo, Chief Economist of Nomura Research Institute, whose book on the Japanese recession amounts to one of the clearest explanations of the mess we’re now in. The Centre for Strategic & International Studies carries a presentation from Richard Koo which summarizes his book. Seekers after truth would be well advised to turn off Bubblevision and Pestovision and quietly contemplate Mr. Koo’s considered presentation for the hour or so that it lasts.

 

There is a particularly interesting anecdote about 31 minutes into the presentation. Mr. Koo refers to the Latin American debt crisis of the early 1980s – which at the time amounted to the worst banking crisis in US history. Nassim Taleb pointed out in ‘The Black Swan’ that

 

“In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking – everything.”

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Not any more

[After Clouseau accidentally reduces a piano to a pile of rubble]

 

Mrs. Leverlilly:            “You’ve ruined that piano.. But that’s a priceless Steinway !”

 

Clouseau:                    “Not any more !”

 

-       From ‘The Pink Panther Strikes Again’ (screenplay by Blake Edwards and Frank Waldman)

 

 

“It is now clear,” wrote the late Hyman Minsky in ‘Stabilizing an Unstable Economy’ (1986, Yale University Press) in his preface to the book,

 

“that output, employment, and prices in advanced capitalist economies with complicated and evolving financial structures are liable to fluctuate. It is also clear that the instability natural to our type of economy has been stabilized since World War II. In particular, even though there have been enormous stresses and strains in the economic and financial system, a collapse of asset values, an uncontrolled epidemic of bankruptcies, and a deep and long-lasting depression have been avoided.”

 

Well, not any more. The latest development in the rolling financial crisis was last week’s shock deterioration in the health of UK life assurers, with shares in the UK’s biggest insurer, Aviva, falling by a third after the company announced a pre-tax loss of over £11 billion. Legal & General shares fell by 29% and those of Prudential by a fifth. Is there any part of the financial services sector that is still uninfected ?

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