we r de best

After so many humiliations: as in Brazil 1988 (the fake Plano Cruzad0 that made disasters, although for politicians’ fault – but NOBODY knew), 20 years later economists have been banned WORLDWIDE  from élite clubs, from the Culture where they had not yet entered.

BUT: there’s a compensation. At least in a restricted, less cultivated biznezz and operative area, economists have won an audience they didn’t in Campus.
Read the wsj today

The New Stars of the Blogosphere 


Americans trying to understand the nail-biting financial trauma of the past several months are flocking by the millions to a surprisingly lively source of enlightenment: blogs written by economists.

Such blogs are thriving in this recession, driven by intense interest from policymakers, investors, academics and people like Zina Poletz, a Minneapolis public-relations executive who says she had little interest in economics before the financial crisis intensified last fall. “I never thought I’d be sitting up late at night reading what [Federal Reserve chairman] Ben Bernanke thinks, but now I do,” she says. (..)

“My [economics] professors were always saying, ‘This is the most relevant class you could ever be in,’” says Christa Avampato, a product developer in New York City with an M.B.A. from the University of Virginia’s Darden School of Business. “But I think until the last 18 months I never really believed them.”

The result is a watershed moment for economics bloggers, ranging from academics to armchair economists, who are all too happy to help readers fill in the blanks—or find a place to vent their frustrations. Traffic to the top sites, such as Marginal Revolution, Freakonomics and the blogs from academics such as Paul Krugman, Greg Mankiw and Brad DeLong, surged anywhere from 80% to 250% from July to September 2008 as the financial crisis intensified, according to Compete.com, a Web site that measures Internet traffic. The most popular blogs can attract as many as 50,000 to 100,000 page views a day. (..)

Selling Books

Blogging, in return, helps academics raise their profile and connects them to a wider audience. “I make no money from my blog, but I do make money selling books,” says Mr. Mankiw, a Harvard University economics professor who served as chairman of President Bush’s Council of Economic Advisers earlier this decade. Mr. Mankiw is also the author of several textbooks on economics. His eponymous blog has received some 10.9 million visits since he started it as an extension of his academic work in March 2006. (..)

The financial crisis has helped crystallize the ideological split between the liberal economists who favor government action and intervention in the economy and the conservatives who prefer a more hands-off approach. The result often pits Mr. Mankiw and other conservatives—such as Arnold Kling, an economist and scholar with the Cato Institute who writes for EconLog, or Megan McArdle, a self-described libertarian who blogs for the Atlantic—against Mr. Krugman or Mr. DeLong in fast-paced, high-profile arguments over health care, budget deficits and stimulus packages. MORE



and its 110 pages .pdf basic document, on how the worst ever crisis of Capitalisms is interpreted from a variety of points of view, only in part related to ideologies: much more to alternative scientific paradigms in Political Economy.  






Navigators on The Nation liberal flag-site, thenation.com:

a) voted during the last 2 weeks: i.e., after

March 14 milestone = Bear Stearns bailout; death of  neo-conservatism officially declared by Wolf on the Financial Times; neo-con marketing itself as neo-liberalism, under false Adam Smith’s flags (follow our page regular updates, here on the 2nd column: access page 2 all-the-subprime-science).

b) They believe: 5/8 it’ll be depression, 3/8 just recession. A balanced and fair synthesis of state-of-the-art financial meltdown, real economy  stagflation, sincere evaluations, and feelings by experts and field operators.

c) There are still (but not for ever) wide degrees of freedom – in de(e)pre(ce)ssion evolution – as far as “il Politico” and its autonomy (Mario Tronti) are concerned, appropriate-systemic social, institutional and economic policies, both nationally and internationally. We discuss them in 2 blog sections and their next updates:

– access page to (almost) all-the-subprime-science

– SPECIAL REPORT obamanewdeal_080215.pdf 

In the recent page “Arcapedia: which are the Prozac …” we propose an original definition of DEPRESSION.


POLL | posted March 25, 2008 (web only)


What’s ahead

for the US economy?

A recession: Inflation will rise and many will lose

their jobs and homes, but it will be of relatively

short duration. 

  (829) 36%


The Big One: We’re on the verge of economic

disaster on par with the Great Depression 

  (1417) 63%

Published in: on April 9, 2008 at 9:39 am  Leave a Comment  
Tags: , , , ,

Bear Stearns, Bear markets domino effects


posted by efa 080319, 10.00 am GMT.  Breakfast time letter, 6.00 am GMT by info@rgemonitor.com Good morning! What a difference a few days make.  Starting with the rescue of Bear Stearns over the weekend to the creation of a new discount window-like lending facility for primary dealers, the Federal Reserve has been engaged in a historical effort to fend off every real fear of a financial system meltdown.  Better than expected Q1 earnings reports by peer banks, Lehman Brothers and Goldman Sachs on Tuesday took a lot of the pressure off the markets for the day, while the 75bps Fed fund rate cut to 2.25% (2.50% discount rate) was fully priced in.  See our related coverage: “JPMorgan Agrees To Buy Bear Stearns: The Beginning of a Japan-Style ‘Convoy’ System?” and “Overview of Fed’s New Lending Facilities: Needs More to Be Done?” (…) At this point, the distinction between liquidity and solvency is important.  While nearly unlimited access to central bank liquidity helps roll over existing liabilities and pay off existing debt, it does nothing to prevent house prices from declining further, borrowers from defaulting on their mortgages and leveraged loans, and it cannot prevent the asset quality deterioration within the collateral pools of CDOs, CLOs, and credit card debt.  Eventually, looming writedowns will have to be marked against equity capital.  If the equity cushion is insufficient then the financial institution is insolvent. In order to get a sense of the magnitudes: in Q3 the top 5 broker dealers combined equity capital was $144bn, whereas the ratio of illiquid Level 3 financial assets over equity ranged 0.7x – 2.5x. Roudini & C site keeps the lead across the decades, and challenges the Schumpeterian hypothesis on innovation as a temporary window of opportunity.  If economics on the web is a Tour de France, Prof. Roudini is Lance Armstrong. When this longrun crisis, more or less the same as today (you know by now we have an Aglietta- Chesnais- Marx- Perez paradigm here at deeprecession), was located in Asia, Paul Krugman recommended rgemonitor.com father site at stern.nyu.edu,  with this nice wording:  Nouriel Roubini maintains this amazing site. Follow not just the events but the big intellectual debates more or less in real time.  Opposite to Roudini  and  to yesterday, today’s sentiment in the media and Wall Street (a messy coupling), not in Main Street,  is that we had luck and escaped the much feared Bear Stearns domino effect. With no evident candidate to play JP Morgan Chase role next time. Although the latter has won a super deal, even bought separately and unconditionally the nicer HQs, Madison Avenue building for $1.1 bn (see March 15 here). We cannot imagine anything more fragile than today’s sentiment.

FT today: paper

p.1: Fed cuts rates to 2,25%. Goldman Sachs ad Lehman lift gloom.  “I think we feel better about our liquidity than we ever have” said Erin Callan, Lehman’s CFO. She added that the banks had not seen any erosion in confidence on the part of  lenders or trading counterparties. “The past two days gave us a great chance to test those relationships”, she said. Apple considers iTunes shake-up to deliver music access for free. Apple talks with record groups, for a radical change in the business model. p.9, Cracked foundations? A financial crisis spreads slowly into the real economy (Chris Giles).  The page focus (Gillian Tett, Krishna Guha) is academic Ben Bernanke’s financial accelerator notion. Two uncertainties: 1) fresh equity filling banks capital holes (Comment: it happened, M. Eastern and Asian SF came to rescue, but this just accelerates the US decline, geopolitical trends laying behind the crisis: it is part of the same over-accumulation → shifting unbalances → bubbles-and-crises  process; not a solution); 2) which borrowers will be hit harder: it will not end up only within the financial world, Main Street real-economy borrowers will pay too, as Bernanke’s accelerator takes off.  OUR FAQs: “If est. subprime losses of $200bn (Goldman Sachs minimalism) would give rise to a $2,300bn overall credit crunch, will then a still moderate est. of $1,000bn losses (Roudini’s realism) reduce lending by $11,500bn? Or even more, once a downward spiral is engendered (Ken Rogoff, Harvard: from credit crunch to credit collapse)?  The bottom line?” p.11, Martin Wolf  (reading too much Roudini, but even other Bearish academics): Why today’s hedge fund industry may not survive. OUR ABSTRACT and comments. Dean Foster (Wharton) and Peyton Young (Oxford)  model an unregulated financial system: Hedge Fund Wizard and  The Hedge Fund Game. Incentive systems fail to align managers and investors aims. The lemons theorem says that such markets with asymmetrical  information, attracting the unscrupulous and the unskilled, are likely to disappear (our academic comment – not exactly so; see among others: Kreps, Microeconomics, for a good introduction to lemons. But Wolf’s implicit conclusion holds: you need an agency, a certification, a third party: that is a regulated financial system). Managerial herds behaviour generates cumulative disequilibria, when a low prob. disaster occurs – such as Northern Rock and Bear Stearns (Comment. This argument is really good; it introduces and needs another brand of economic, Santa Fe or econophysics modeling, developed in Italy at Sant’Anna-Normale di Pisa by Giovanni Dosi & C: herd behaviour simulation in financial markets. Their most likely policy implications are again pro-regulation, but with a completely different set of arguments and suggested policies, compared to information asymmetry models. The focus shifts, here, from a simple market failure that can be easily repaired by an “agency”, to a complex financial systems dynamics, far away from both equilibrium and social optimum. With no straightaway agency solution: you have to change, redesign the entire system, together with contracts and incentive schemes. Until now we just spoke microeconomics. Add the macro: along Keynes- Kalecki – Minsky lines, e.g., you approach systematically the issue of the health of the financial system that greases the wheels of capitalism – a quote from NYT yesterday, reporting from Wall St.: even operators and rentiers know and feel it on their skin: the time is out of joint, to quote Shakespeare, and Derrida on Marx).


Ups and downs in financial global markets: Bernanke’s hyper-activism adds chaos to turmoil. Paul Krugman said a few days ago: Greenspan is the one teaching ex cathedra how to close the door, when stables are already empty, and the flock is gone. Bernanke makes the difference:  he got Speedy Gonzales and  succeeded – in a couple of months – to convince 75% Americans that Roudini as well as radical pessimists have sound bases. Lehman Brothers opened yesterday  at -15%, and closed only at -19%. See Slate‘s syntheses of US newspapers, and sing: “You just better start sniffin’ your own  rank subjugation jack ’cause it’s just you  against your tattered libido, the bank and the mortician, forever man and it wouldn’t be luck if you could get out of life alive”

 Knock-knock-knockin’ on heaven’s door (4 times)


Knocking on Lehman’s Door

 By Daniel Politi Posted Tuesday, March 18, 2008, at 6:12 AM ET  Financial news continues to get top billing as all the papers try to digest the latest news from the Federal Reserve and the markets to figure out how far the current crisis will spread. The New York Times‘ lead story notes that although the stock market didn’t plunge as was widely expected, there were several ups and downs as uncertainty ruled the day on Wall Street. By the end of the day, the Dow Jones Industrial Average closed the day with a 0.2 percent increase, largely due to the strength of J.P. Morgan, which rose due to the widely held belief that it was able to acquire Bear Stearns at a veritable bargain. The Washington Post leads locally, but off-leads news that shares of many of the largest banks and investment firms plummeted yesterday.The Los Angeles Times leads with a look at how many are wondering whether the Fed is taking on too much risk and for how long it can keep pumping money into the economy in its attempt to save the country from a deep recession without hurting the nation’s overall finances. Over the past few days, many economists have said that the key question now is not whether the country will enter into a recession, but rather how long it will last. Ordinary Americans seem to agree. USA Today leads with a poll that shows 76 percent of Americans think the country is in a recession. In addition, 79 percent said they’re worried about the possibility of a depression that could last several years.  [our red&bold]De(e)pre(ce)ssion  so popular, so soon? we didn’t  hope so much!


WASHINGTON — More than three in four Americans think the country is in a recession, a USA TODAY/Gallup Poll over the weekend shows, reflecting a crisis of confidence that economists say could make the economy worse.(…)

 Seventy-six percent of those polled said the economy is in recession, compared with 22% who said it’s not. Not since September 1992, two months before President George H.W. Bush lost re-election, have so many said the economy was in such bad shape. (…)

Asked whether the nation could slip into a depression lasting several years, 59% said it was likely, and 79% said they were worried about it. A recession is an economic downturn that usually lasts at least six months; a depression is longer, deeper and more broadly dispersed. (…)

Democratic presidential candidates Barack Obama and Hillary Rodham Clinton urged greater action. Obama, campaigning in Pennsylvania, said the economy “is heading toward recession. We probably already are in one.” He said, “We must focus on what we can do to restore the public’s confidence in the market.”

Clinton was more cautious. Calling it a time of “stress and uncertainty,” she said there was “urgency” to continue monetary policies like those taken Sunday. “We are in the soup, and we better get ourselves out of it before the consequences get drastic,” Clinton said in Washington.

Presumptive Republican presidential nominee John McCain was in Iraq Monday. His top economic adviser, Douglas Holtz-Eakin, said McCain has confidence in the Federal Reserve’s action to shore up the nation’s financial system. Although that action may have been necessary, he said, it’s imperative to “ensure that Main Street America does not bail out financial speculators.” 

The Fed Goes Deep

By Daniel Politi

Posted Monday, March 17, 2008, at 7:06 AM ET

The New York Times, Washington Post, Los Angeles Times, and USA Today all lead with, while the Wall Street Journal devotes much of its Page One to, the Federal Reserve announcing a series of moves to try to bring some stability to the increasingly shaky financial markets. Lest these be confused as just one more of the series of measures the Fed has taken in recent months, the papers make clear that this latest action is “dramatic” (WP), “extraordinary” (LAT), and “apparently unprecedented” (NYT). The Fed opened up its lending practices to make more money available to the biggest investment firms on Wall Street, and cut a key interest rate (the so-called discount window) for financial institutions by a quarter of a percentage point. The central bank also announced it would extend a $30 billion credit line to help J.P. Morgan Chase complete the purchase of Bear Stearns for what the WSJ calls “the fire-sale price” of $2 a share.

The NYT catches Wall Street sentiments:

Specialists say their biggest worry now is not whether the economy is already or will soon be in a recession. Far more fundamental and troubling is the health of the financial system that greases the wheels of capitalism.

“Recessions come and go — that is something investors can deal with,” said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. “The bigger issue is, Can our financial system be restored to a sense of normalcy? In recent weeks we have been moving away from that, which is potentially very serious.” 

Lex: Queasy Street

(Investors’  calm)…  is unlikely to last long. After all, at a price of about $2 a share, the deal has wiped out Bear shareholders almost completely.

And the Federal Reserve, which initially supported Bear on Friday, is having to pledge $30bn to fund Bear’

s less liquid assets to allow the deal to happen at all.If another broker loses the confidence of investors and counterparties, the Fed will be on the hook again. But, if there is a next time, it is not obvious which of the big banks would ride to the rescue. Their balance sheets are already seriously constrained, and Bear was the smallest of the leading Wall Street firms. MY NOTE: “20bn of exposure are covered through (Fed’s) non-recourse, and only 13bn remained as net exposure to JP Morgan” (JP Morgan)posted by efa, 080818 at 11 pm GMT 

March 17, 2008

How the Fed avoided the Northern Rock trap

The case against the Fed doing so was put by Gretchen Morgenson in the Sunday New York Times:

Regulators must do whatever they can to keep the markets open and operating, and much of that relies upon the confidence of investors. But by offering to backstop firms like Bear, who were the very architects of their own — and the market’s —

current problems, overseers like the Fed undermine a little bit more of that confidence.

Meanwhile, my fellow FT blogger Willem Buiter put it thus:

While the bail-out of Bear Stearns is still a very young, thus far at any rate I have heard not a single convincing argument for why this financial business should be assisted by the Fed, rather than the ball bearings company in Cleveland, Ohio.

The economists, including Prof Buiter and Nouriel Roubini, generally favour the view that the Fed ought not to have intervened to prop up a non-bank institution and, if it was not able to hold back, should have proceeded straight to nationalisation. Prof Roubini argued this last month and restated it on Friday:

First fully wipe out those shareholders, then fire all the senior management and have the government take over such a bankrupt institution before a penny of public money is wasted in bailing it out.

But I think the different outcomes in the cases of Northern Rock and Bear Stearns at least help to justify the Fed action.  

posted by efa, 080318, 11.00 pm GMT 


Acting quickly to prevent a bank run on major global financial firms, the Federal Reserve cut its discount rate by a quarter percentage point to 3.25% and offered to lend money to a longer list of firms than ever before. 

The extraordinary weekend moves came as J.P. Morgan Chase (JPM) sealed a deal to buy Bear Stearns Cos. (BSCfor just $2 a share backed by up to $30 billion borrowed from the Fed. The Fed board gave its approval to that unique funding arrangement, which guarantees JP Morgan against losses from buying Bear.

Posted efa March 16, 11:30 pm GT


 PAY ATTENTION! Very important “old news” here.

Not only  finance experts-managers subscribing to Finch: any RGE (no. 1 macroeconomics site) cautious reader already knew, by end of July 2007, that 2 of the big 5 US investment banks were virtually bankrupt: their toxical “residual balances” from securitisation equalled more than half their tangible equity. According to our analysis of Finch-through-RGE data (see  our “Banks go bankrupt” page and enclosed data pdf for details)  this abnormal ratio toxic interests = 1/2 tangible equity:a)  holds  for Bear Stearns at least as early as 2004;b) Lehman Brothers joined the risky league in 2006. Bearn Stearns is dead,  now is it Lehman Brothers’ turn?  Today’s breaking alert opening of rge-monitor main page (red bold added):

WSJ: Lehman’s liqudity position stronger than BS was but weaker than other peers. Lehman learned lesson from 1998 liquidity crunch: less reliance on short-term funding.

Cumberland: Main difference to BS: Lehman generated over 60% of their revenues outside the U.S. in Q4 2007.

Bloomberg: March 14: Lehman Brothers, largest mortgage underwriter in U.S., obtained a $2 billion, unsecured, three-year credit line from 40 banks. “The unsecured facility replaces an existing credit line”; JPMorgan and Citigroup led the effort.

Reuters: CDS spreads spiked to 465bp after Bear announcement, most among investment banks.

Fitch (via RGE): At the beginning of the turmoil Bear Stearns had the highest toxic waste (“residual balance”) exposure as percent of adjusted equity on balance sheet: BSC = 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%.

Fahey (Fitch): Lehman Brothers reported Level 3 assets-to-equity of 1.68x in 3Q07 (BSC 1.56; GS 1.84; MER 0.70; MS 2.74: gross notional Level 3 asset value, not netted with derivatives hedges in Level 1 or 2 as reported by other banks)

Hedges on Level 3 assets (i.e. “short their own instruments”) produced book gains of $750m at Lehman (largest amount among 5 brokers) but Fitch decided that gains from credit spread widening will not be considered in evaluating operating performanceLehman Brothers Obtains $2 Billion Bank Credit Line (Update2)

By Andrew Frye

March 14 (Bloomberg) — Lehman Brothers Holdings Inc. obtained a $2 billion credit line as the investment bank tried to blunt the stock’s worst drop in almost eight years and assure investors the firm isn’t short on cash.

The unsecured, three-year facility from 40 banks replaces an existing credit line, New York-based Lehman said today in a statement. JPMorgan Chase & Co. and Citigroup Inc., also based in New York, led the effort, the firm said. (…)

Last Updated: March 14, 2008 16:50 EDT

Before the turmoil (RGE from Finch, July 31, 2007)

Finch on “residual balances”, i.e. toxical waste from securitization, on subprime crisis verge, in the magnificent 5: Bear Stearns (BSC), Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER), Morgan Stanley (MS).

The investment banks retain interests in select senior, subordinated, and/or residual tranches of securities issued by Variable Interest Entities (VIEs) which they have underwritten. All of the investment banks reported higher residual interests at 1H07 versus fiscal year end 2006 (see table)

As a percent of adjusted equity, these residual balances are as follows: BSC = 54.5%; LEH = 53.3%; GS = 21%; MER = 17.8%; MS = 8.3%. (…) Not surprisingly, the percentages are most significant for Bear Stearns and Lehman Brothers.

Bear Stearns Saturday Update

Charlie Gasparino at CNBC reports: Bear Stearns Weekend Talks Reveal 2 Key Contenders (hat tip risk capital)


… potential bidders for Bear have been narrowed to … J.C. Flowers and JPMorgan Chase


… bankers have now come to the conclusion that a deal must be done by Monday …


If there’s no deal Bear Stearns will have to file for bankruptcy, executives said.


Posted by CalculatedRisk at 6:13 PM


It’s fun for the weekend, a bit like looking at an ancient Rome, or Verona Arena show:

This is how CNBC continues, on CapitalisMafia Cannibalism

… it is not clear what JPMorgan CEO Jamie Dimon will do if his company JPMorgan Chase & Co buys Bear; he hates the bank and doesn’t need traders. The likely scenario, sources say, it that he gets rid of most everything except prime brokerage and clearing operations. He also apparently likes the Bear building which is around the corner from the less elegant Chase headquarters.

One big problem is that whoever buys Bear will want to retain some of the talent. However, they are already being offered jobs elsewhere.

In the meantime, the Bear debacle is a huge blow to New York City and its Metro-area economy where most of Bear’s workforce lives. Many will be out of work. Bankers and other execs have lost fortunes since many were paid in Bear stearns stock.

Voyeurist? Watch Wall Street through keyholes! U might find the two highest US and world economic policy authorities, where u wouldn’t have imagined …

Wall Street Journal’s spying eye, captured by Calculated Risk’s monitoring eye: The story discusses how Bear Stearns, JPMorgan and the Fed regulators worked around the clock Thursday night to put together the bailout.

At about 5 a.m. Friday, regulators including New York Fed Chief Timothy Geithner, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and the Treasury under secretary domestic finance, Robert Steel, convened by conference call. At the end of the call at 7 a.m., the Fed had decided it would offer the loan.


A fascinating story.


And a bitter, sharp comment by (competing? cooperating?) FT-Alphaville blog: at Calculated Risk they missed to anticipate the bankruptcy, so now they try hard to struggle against the irreversibility of the time arrow .., and give you any hints ex post.

Such a nasty, really nasty comment, suggests to me a Methodological Note on economic blogs webs.

Even economic blogs are economic agents, or (better) agencies, of a new sort; therefore they compose, make and unmake beautiful, complex, efficient, redundant and Pandora’s box social webs of cooperation-and-competition across them:

– not just a mere replica of social webs amongst the agents behind such agencies; this too, but even more. E.g., Prof. Roudini’s scenarios are diffusing in early 2008, not without resistance, counter-arguments and replies, across blogs.

– I would not be surprised if sometimes cannibalism had to re-emerge, by the law that if you keep watching Wall street tribal cannibalists at work, unwillingly you absorb something.

They’re so complex and multi-faced, the cross-blog flow components of Web2 social networking, that no econophysics’ web rough graph (so nice to look at) can capture their true, full-senses flavours, and crossed regards of the 2nd, 3rd .. Nth order. Much more sophisticated econometric and sociometrics tools, human and social in-depth analysis are required.

You are now watching me, watching C Risk, watching WSJ, watching Bernanke and Paulson (!!!) at unusual early morning job, watching Bear Stearns empty safe: it makes a 5th order – that is, a much longer chain, compared to what Experimental Economics evidence tells us about 2nd-3rd order expectations widely adopted as conventions in financial markets !!! Students and scholars know well that reinforced Nash equilibrium notions, often assume very high-order expectations on other people’s expectations, but in reality we rarely base our strategies going beyond the 4th or 5th order. As common in the current state-of-the-art, cognitivism, experimental economics and psychology come here to help, by correcting unrealistic assumptions emebedded into Games Theory maths.

But are perhaps social networking practices violating these “natural” limits of our social behaviour?

In just one step I cross the 6 or 12 steps separating me from another mind at work? Or do I just complicate simple systems: by reading WSJ in paper I would have avoided unnecessary, redundant steps?

And what about serendipity? it happens on Fondamenta della Misericordia, Cannaregio (today to me, Dario and François Chesnais), or in virtual Misericordiae as well. In such a case, random & redundant walks are creative & productive, namely if one meets Adamo and ends up at La Rivetta.

Posted efa. March 16, 12:00 GMT. 


A lovely chart, from Alea, catches Bear shares in agony: it’s pure art, à la Kandinsky. Just two days: and Fed’s over   $200 bn injection in overnight evaporates. Now, at last!, all commentators agree: the underlying problem IS NOT ILLIQUIDITY – IT’S INSOLVENCY. The “cure”, if there is any, should follow from this dialectics.

Prof. Roudini has made this point clear the first, widely influencing macroeconomists’ views of the crisis. At the bullish extreme of the spectrum, WSJ keeps trying hard to put the head under the sand.

De(e)pre(ce)ssion view

There are many prospective insolvencies, that will shift and spread over 2008: Bear Sterns is no.1 of a series. A huge amount of losses are hidden on purpose and strategically, in the global finance system including banking, finance, and the “shadow financial system” (as defined in the Roudini’s quotation to follow).

And there is highly asymmetric uncertainty about how such a trillion $ loss is allocated, with unavoidable, necessary and systemic consequences on trust, inter-bank relations, and the M&C available to the whole economy.

This is how and why, due to their hedge fund clients, Bear’s liquidity evaporated all of a sudden, yesterday.

As financial global markets sink in a deflationary turmoil, instability is now spreading everywhere, from currencies to commodities first, with obvious inflationary effects making part of the recession-deepening process itself:

There are other significant shoes that are in the process of dropping on us, and that’s why I think you’re going to see further increases in the commodities across the board, because it’s the safe haven, it’s the inflation haven, the safe haven, the hard asset haven that investors are just running to right now just because they’re scared.”

John Kilduff, MF Global Energy Analyst

Finally, at the end of the money K chain, i.e., in the commodity K circulation and value creation domains: a M&C and financial impact is accelerating now (and presumably along all the year 2008, at least) the current global recession – which

(a) started in november-december 2007: as output, trade and bulk transport prices show (see updates in our static page: deep recession\depression data “telonio”

); and:

(b) is deeply rooted in the 1987-2007 “Minsky’s age” (versus the over-optimist, ever-forgetting theory of just a short run “Minsky’s momentum” or window) of over-accumulation and continuous financial turmoil – see Chesnais 2008, Fin d’un cycle. Carrè rouge- La brèche, no.1; and the recent Aglietta’s works commented and quoted there.

A deep “real economy” recession would in any case roll-on and spread by now, by tracing back I-O, cross-market and cross-country commercial relations and systemic links – even without this acute M&C crisis, but in that case much less deeply and more slowly.

(c) We will go deeper, as far as we can, in understanding the deep recession unravelling, by supplying all the best analytical references and tools we know, in an imminent new static page of this blog: perhaps to be called A DIARY OF THE 2007+ WORLD CRISIS.

Bear Sterns

Bear Stearns brokers (lenders to hedge funds and 5th largest Wall Street investment bank) shares go down today -53%, as soon as it is known that hedge funds and financial clients flew out, JP Morgan tried hard to save them last night until 7am, and the Fed is backing JP Morgan (more than this: Fed is outsourcing JP Morgan). Bear Stearns liquidation is imminent. Most share markets decline (particularly in the credit industry). See our static page “BBC Global 30” today: BBC Global 30 -1.26%, Dow Jones – 1.63, Nasdaq – 2.26, London FTSE – 1.05, Tokyo Nikkei -1.54, Hong Kong – 0.29, Johannesburg + 1.13, Bovespa-SP + 0.17.

BBC: “Bear Stearns has been severely affected by the loss of confidence in credit markets. The company had invested heavily in sub-prime mortgage instruments and other securities which are now seen as highly risky, and which have fallen sharply in value. And it had less capital than its rivals, such as Citigroup and Merrill Lynch, who were also heavily exposed, to plug the gap.”

Paul Murhpy provides a practical, useful overview of selected blogs on Bear’s crisis.

Roudini comments, with good reasons reported below: I told you 40 days ago (it is an answer to Bulls saying he is Bearish, e.g. Yves Smith, Naked Capitalism: Martin Wolf Reads Too Much Roubini).


Step 9 of the Financial Meltdown: “one or two large and systemically important broker dealers” will “go belly up”

Nouriel Roubini | Mar 14, 2008

In my February 5th piece on 12 Steps to a Financial Disaster I predicted – as Step 9 of the meltdown – that “one or two large and systemically important broker dealers” will “go belly up” and that other members of the “shadow financial system” – i.e. non-bank financial institutions that look like banks in terms of liquidity/rollover risk – will also go bankrupt. As I put it then:

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems – cannot be directly rescued by the central banks in the way that banks can. [bold added]

And today the first one of these large broker dealers – Bear Stearns – in on the verge of bankruptcy. Let us be clear: given its massive exposure to toxic MBS and ABS product Bear Stearns is insolvent; the decision by the NY Fed to try to bail out Bear Stearns would make sense if this firm was only illiquid; the trouble that it is insolvent and thus such attempted bailout is altogether inappropriate. It is true that Bear is a large broker dealer; but its systemic importance is much smaller than that of much larger institutions. The world and financial market can survive if Bear disappears.

NY Fed avoided the obstacle underlined by Prof. Roudini, by triangularizing on JP Morgan: it doesn’t change much, exc. that JP Morgan has now insiders info allowing them to make perhaps the best offer for Bear assets. On Prof. Roudini’s close, we at de(e)pre(ce)ssion are even a bit bearer than he is, if possible: on the liquidation of Bear Stearn’s assets, markets deflation will carry on, etc. We will see.

PS. Hedge funds themselves take their time to read Roudini; financiacapital.com, advisor and a California’s fund general partner, suggests to his clients:

Nouriel Roubini’s Blog – Nouriel Roubini is a professor of economics at the Stern School of Business (NY University), and though sometimes too bearish in our opinion, his views on the various economic data are always worth the time to read.

Empirical and theoretical consequence: the shadow financial system has by now become what is called a critical, self-representing complex system, in system theory: they observe us observing them observing us  observing them… .

We formulate expectations upon them, expecting that we … expect them to …  because they expect that we … by supposing they expect that … (a long, but finite chain). Suggested reading: Niklas Luhman.


Posted by enzo fabio arcangeli March 15, 7:45 am GMT


  ECONOMIA INDUSTRIALE  INTERNAZIONALE 07/o8. CdlS economia internazionale, Vicenza, Università degli Studi di Verona 

 Cari allievi, benvenuti nella pagina didattica del prof. Arcangeli !

In questa pagina appariranno via via  tutti i MATERIALI DEL CORSO, in un ordine  temporale in forma di blog: in modo che in testa trovate le ultime versioni delle dispense,  le più recenti bibliografie per i saggi, o altri suggerimenti e comunicazioni, poi via via quelli precedenti.


imminente: programma del corso 

SUBPRIME SURPRISES. Today, even Paul Krugman has changed his prediction

Northern Rock branch Digg!  The world cycle has  entered a recession phase  generated in the US last summer, deeply entrenched with the highly unstable nature of current growth and institutions, money and markets (for historical reasons, plus theoretical ones Political Economy illustrated since long: the roots are in Malthus and Marx, Keynes and Kalecki).   Credit and financial markets were obviously the first ones shocked by the subprime crisis, a necessary consequence and dead end of Greenspan’s Fed easy money policy in the 1990s, again since 2003, and a “free market” social engineering experiment in enlarging financial K circulation to a new expropriation domain: stealing wealth from fresh new victims, the poor (first) and the rich all over the world, from Latin ghetto home buyers to Northern Rock clients (see 2007, Oct. 26 Krugman’s blog post A Catastrophe Foretold and my comment upon his revelations, the same day on my blog). But this was only the beginning of the Financial K “conspiracy” (K for Capital).  In October-November 2007, hyper-sensible Baltic Dry index of maritime freights (indexes do have senses, sentiments and even a soul: did you know?) got the blues, reached a cyclical peak and started to decline – you can see the weekly updated graph also by clicking here – meaning that world commodity markets and manufacturing were already affected, not just global finance.When a US report told the services sectors were also declining, Wall Street (- 3% on Tuesday Feb. 4) got also the blues, started panicking and detecting the recession, a quarter after experienced Baltic freight traders. I am not sure this might be tagged text book “globalization” and “rational expectations” alike behaviour, I suggest irrational stupidity. Mr Bernanke never thought to rebuke such irrationalities: on the contrary, he hurried up ensuring he will carry on doing the dirty-hiding dirty job for WS boyz-and-banks, everything is under control, interest rates will go further down (so what ?), after the exhibition of a mix of power-willing and sheer impotence in the base rebate 4.25 to 3. We know things are very different, no one is in control of the recession: see 2 base papers, in January 5 and 8 Prof. Nouriel Roubini’s fundamental blog, (1) and – in French – the contribution by François Chesnais in Carré Rouge – La brèche no.1, 2008, pp. 17-31. Their 3 titles carry the message:

  1. The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster.
  2. Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not.
  3. Fin d’un cycle. Sur la portée et le cheminement de la crise financière (End of a cycle. On the dimension and path of the financial crisis).

 Today, even Paul Krugman is changing his prediction. Still resisting the idea, because he knows very well how devastating for the US the crisis might and perhaps will be, he admits a denti stretti that  “the double-bubble nature of the underlying problem — a housing bubble and a credit bubble combined” will be tougher than the 1980 and 1991 recessions. He even talks of a new President getting to the White House (Jan. 2009) in the middle of the storm: if you follow his NYT op-eds and blog (a must), you know that his adamantine intellectual honesty is at work. Being optimistic, I counter-argue that Ms. Clinton\Obama (or Mac Cain) will have to tackle either a long recession in her\his first term, or a full depression in both. My friend and colleague Carlota Perez started the epilogue of a very useful, almost prophetic post- Schumpeterian book by saying: “In June 2002, as this book is going to press, the world is at the turning point. The decisions being taken at this crossroads will determine how long, how deep and how widespread the current recession will be and whether what lies ahead is a depression, a gilded age or a true golden age”. We are back to that point, but the total lack of political-institutional decisions and longterm management (called for by Carlota), in such a crazy world, that it is hard to believe it is still Capitalism, stole us the golden age. Now we have choices and destiny in between a shaky cyclical recession, a decade of depression in the 2010s, and re-inventing Socialism. For empirical facts and analyses, search  my blog, or excerpts from my “blog before the blog” from summer 2007: where I report and discuss how the recession has been read in real time: e.g. by Attac in July 2007, The Economist in October, etc. You’ll perhaps come to the conclusion that Bernanke bosses, the Wall Street boyz: either they are analphabet, or they have no time to read anything, nor even economic news and bulletins. If the Fed wasn’t the Fed (a purely Keynesian matter, discussed also in some comments to Prof. Roubini’s blog) Bernanke, instead of burning billion $ in “rites of winter, then spring and summer”, should have just sent them a Xmas card with a free (0 cost) yearly subscription to: http://investmenttools.com/futures/bdi_baltic_dry_index.htm  NOTES _ (1) Prof. Roubini reached a climax when, in a creative Dostò-Shakespearian mood, he described Alan Greenspan’s decision making this way.To Raise or Not To Raise? Reading into Greenspan Hamletian Mind. Aug 29, 2004As Greenspan sips through long reams of obscure economic data (are cardboard production data a good leading indicator of economic activity?) while relaxing daily in his bathtub, he is pondering whether he should increase the Fed Funds rate at the September 21st FOMC meeting. Here is what he is mumbling in his mind, in between a bubble bath and endless wonky economic statistics:”Well, the September 21st decision will be a real tough one, the last one before the elections! I thought that the economy was perking up; and then we hit this Q2 “soft patch”! But is it really a soft patch as we have been claiming in public or the beginning of a deeper deceleration of the U.S. and global economy? Japan is also slowing down (…) and figures from Europe are the usual mixed bag with overall softness and a sub-part Q2 growth of 2%. So, I am usually as Kriptic in public as Delphi’s oracle but on this one I am a bit schizophrenic myself even in private. I haven’t really figured out what to do! I feel like Hamlet: to raise or not to raise?”

Published in: on February 10, 2008 at 4:36 am  Comments (1)  
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Carré Rouge et la Brèche: l’union fait la force

Du site http://www.labreche.ch/RevLB/2007/RevLB01.htm on reproduit aussi dans notre file pdf: carrerouge_labreche la page qui annonce que les revues marxistes Carré Rouge et La brèche se sont unifiés à partir du no.1 de la nouvelle Revue trimestrielle “Carré rouge / La brèche”, qui vient de paraitre. Le formulaire pour s’abonnner est sur le site.

Au sommaire:
Pourquoi cette revue?
Les salarié-e-s s’affrontent à un changement de période qui est le résultat de la rencontre dans le temps de plusieurs développements historiques. Ce constat devra conduire la réflexion portée par cette revue.

Fin d’un cycle. Sur la portée et le cheminement de la crise financière
L’hypothèse défendue dans cet article est que l’économie mondiale se dirige vers une crise d’une certaine importance (…) au moment où les instruments mis en oeuvre par les banques centrales ont commencé à montrer leurs limites, à force d’avoir été utilisés de façon répétée depuis vingt ans.
François Chesnais

Dossier Ecologie politique

L’environnement social et naturel du capitalisme fossile
Elmar Altvater
Atteinte aux processus fondamentaux de la reproduction naturelle. L’écologie de la destruction.
John Bellamy Foster
Agrocarburants. La nouvelle panacée capitaliste

Will Super Tuesday somehow affect the recession path?

february 8, 2008. Click this date for a 10 pages file of this week’s (February 8 to the 1st) first entries into this baby blog: depression or recession? At the moment, we might be still before the fork, and the blog title follows. Main arguments, dictated by the quickly unfolding events after the disputed Fed’s move:
FAQ 1: What if the Fed continues to cut the rate, at a rate of 125 points a month?
FAQ 2, Super Tuesday: Prof. Roubini argues the policy maker can’t stop the financial catastrophe. He is right,  but what if  a leadership and a new political process emerge from an America fed up with the establishment  and an overwhelming, unrestricted markets power?
Feb. 8, Frankfurt: ECB on hold (already changing adjectives on € zone inflation)
Feb. 7, Yesterday’s mood in Avenida Paulista (SP) was mixed feelings
Feb.5, Just an IMS Report for another Black Tuesday? The oddness of Wall Street boyz mood
Feb. 1, US non farm employment just negative (first time since August 2003).
MORE: a) in blog page SUBPRIME SURPRISES, there is a_primer_on_subprime.pdf, a 20 pp. still provisional, very draft work-in-progress, with a Political Economy analysis of the unfolding recession\depression, with perhaps original (at least, not textbook) policy implications:1. monetary policies have now counter-intuitive and counter-willing effects:

more money&credit, lower interest rates = deeper depression

2. fiscal policies (in the countries that can afford such a luxury) might do better, wasn’t the recession rooted in long term structural processes (à la Carlota Perez);

b) in the 30 pp. long file: 080131-0707deeprecessionblog.pdf – in blog style and reverse time order, there is the legacy of my posts before this blog started: many useful analyses and comments to what happened to the world economy in the past 9 months (when I had this blog in mind, like Jupiter Minerva, and Gods were planning to strike a recession to humans on some planet).