The revolution is here

Class War, an anarchist newspaper, has produced a special edition to promote the protest with an image of former Royal Bank of Scotland Group Plc CEO Fred Goodwin, whose house was vandalized this week, on a guillotine under the headline “Ready to Riot.” Another shows people dancing around a fire with the slogan “How to keep warm in the credit crunch -- Burn a Banker!” Public anger erupted at Goodwin’s 703,000 pounds annual pension after RBS was bailed out by the government.

The English Revolution culminated with the beheading of Charles I in 1649, ending the so-called divine right of kings in England. Today’s protesters say they draw inspiration from 17th century radicalism.

Four marches will converge on the Bank of England at midday on April 1 for a protest the organizers call “Financial Fools Day.” At the same time, there are plans for a blockade of the European Climate Exchange, in Bishopsgate, to protest against the market in carbon emissions.

It is appropriate that it begin at the birthplace of central banking: 

The Bank of England, founded in 1694, has been the target of demonstrators before, according to the Bank’s Web site. In 1780 the bank, known as the Old Lady of Threadneedle Street, was provided with a military guard after it was threatened by a mob during anti-government riots. This was only discontinued in 1973.

Read the rest here.

Gee, I hope Tim Geithner is a nice guy...

Because he just threw out the rule of law:

It would give the Treasury the power to restructure troubled companies to avoid economy-wide risks that would fall from either a bankruptcy or taxpayer-funded bailout. The government would either seize the company in a conservatorship, which would keep the company going while it is restructured, or in a receivership, which would break up the company and sell its assets.

Unlike in a bankruptcy that gives precedence to creditors, the Treasury plan would allow the government to unwind the company in the best interests of the economy as a whole.

If the government took control of a financial company, existing shareholders, management and creditors could lose everything. Existing contracts could be renegotiated or repudiated.

"Had the government possessed the authorities contained in the proposed legislation, it could have resolved AIG in an orderly manner that shared losses among equity and debt holders in a way that maintained confidence in the institution's ability to fulfill its obligations to insurance policyholders and other systemically important customers [my emphasis]," the Treasury said.

Who needs the courts when Tim Geithner and his pals can figure it out. Right. I'm afraid "systemically important customers" will mean those who lobby and bribe the most, which actually isn't too far from the way it was.

Read the rest here.

This is why I love Hungarians

Even though they are socialists, they are not assholes:

Hungarian Prime Minister Ferenc Gyurcsany says he will stand down, as his government's popularity plummets amid the global financial crisis.

The Socialist leader, in power since 2004, told his party congress that he considered himself a hindrance to further economic and social reforms.

He is to officially notify parliament of his decision on Monday.

Badly hit by the global credit crisis, Hungary received a $25.1bn (£17bn) IMF-led loan last October.

"I hear that I am the obstacle to the co-operation required for changes, for a stable governing majority and the responsible behaviour of the opposition," he was quoted as saying on Saturday by Reuters news agency.

"I hope it is this way, that it is only me that is the obstacle, because if so, then I am eliminating this obstacle now.

"I propose that we form a new government under a new prime minister."

Something to remember.

AIG, when does it stop?

From Reuters:

The payments to AIG counterparties include the provision of collateral to back up credit default swaps, a form of financial insurance that AIG's London office was writing; the purchase of the collateralized default obligations, a type of complex debt security that underlay that insurance; and payments to counterparties of a securities lending program.

Through three separate types of transactions, Goldman received an aggregate $12.9 billion. Among European banks, SocGen was the biggest recipient at $11.9 billion, Deutsche got $11.8 billion and Barclays was paid $8.5 billion.

The AIG disclosures are still incomplete in that they do not include payments to the banks since December 31.

The list of counterparties was made public by AIG amid growing pressure on the insurer to come clean about the true beneficiaries of the bailout ahead of a congressional hearing on Wednesday at which AIG chief executive Edward Liddy is slated to testify.

Democratic Congressman Paul Kanjorski, whose committee will quiz Liddy, said the counterparties and bonuses would both be topics for investigation at the hearing.

Summers -- speaking before the payments to banks were made public -- called the AIG bonuses "outrageous" but said contracts must be honored, even though Treasury Secretary Timothy Geithner had "negotiated very forcefully" with AIG and done all that was "legally permissible" to limit the payments.

"We're not a country where contacts just get abrogated willy nilly," Summers, a former treasury secretary, said on CBS's "Face the Nation" program. "What the lesson is, is this: We don't really have a satisfactory regulatory regime in place."

Yes we do, it's called bankruptcy.  Yes, it would be calamitous.  How else do you propose ending this gross corporate welfare?

Addendum: James Hamilton agrees.

Crisis brings common sense to California

Could marijuana be the answer to the economic misery facing California? Democratic State Assembly member Tom Ammiano thinks so. Ammiano introduced legislation last month that would legalize pot and allow the state to regulate and tax its sale — a move that could mean billions for the cash-strapped state. Pot is, after all, California's biggest cash crop, responsible for $14 billion in annual sales, dwarfing the state's second largest agricultural commodity — milk and cream — which brings in $7.3 billion annually, according to the most recent USDA statistics. The state's tax collectors estimate the bill would bring in about $1.3 billion in much-needed revenue a year, offsetting some of the billions in service cuts and spending reductions outlined in the recently approved state budget.

Read the rest in Time.

Challenge of the day

Name one aspect or spending item of the federal government that doesn't infuriate a lot of people.  I can only think of one: the National Science Foundation.  And that's probably because it's so small that few people even know about it.

Compare that to what Chick-fil-A does for people (OK, they are annoying, but not infuriating).

I suggest that the "stimulus" should be directed towards the NSF and Chick-fil-A.

Party's over

Chinese Premier Wen Jiabao said Friday that he is "worried" about the country's vast $1 trillion holdings in U.S. Treasuries and that China will pursue a policy of diversification when comes to its future foreign exchange holdings.

From the WaPo.  And get this, the party started suckin' last summer.  I wonder when they'll kick everyone out:

Starting last summer, China's big state-owned banks -- including Bank of China and Bank of Communications -- began dramatically reducing their holdings in Fannie Mae and Freddie Mac debt. In September, as what began as a U.S. problem began to spread around the globe, Ha Jiming, chief economist for the China International Capital Corp., warned in a report that Chinese government officials have realized that it's a "bad idea to put all their eggs in one basket." At that time, China had held a fifth of its currency reserves in Fannie and Freddie debt.

Time for a world currency?

KAZAKH President Nursultan Nazarbayev has won backing for his plan for a single world currency from an intellectual architect of the euro currency, Nobel-prize winner Professor Robert Mundell.

That's from The Australian.  As Mundell has argued, little countries stand to benefit most from a world currency.  Consider this:

In a world of big international banks and multinational corporations, there is not much scope in practice for the monetary independence of any except a few large countries.

Mundell's argument hinges on economies of scale in convenience, information, policy, and insulation from international monetary shocks.  Ultimately, he seems most concerned about inflation, and he believes inflation can be minimized by minimizing the number of currency issuers.  I don't believe that.  As he says, from 1949 to 1973 there was a de facto world currency, the US dollar, since nearly everyone was pegged to it.  That ended when we went off the gold standard, and then engaged in double digit inflation throughout the 1970s.  So what is to prevent a world central bank from doing the same?  Say the UN institutes a world central bank.  Can we really trust the UN to produce a steady money supply, transparently and without corruption, avoiding the temptation to abscond with the dough, aka seignorage?  How transparent are central banks now? (try this link)

I believe money is like all goods in that quality matters, and thus reputation for quality matters.  Hence, we need competition, and lots of it.  Free banks did that for us, and they can do it again.

What took Iceland down?

I blame mainly incompetent politicians and central bankers.  Read the whole article in Vanity Fair:

There’s a charming lack of financial experience in Icelandic financial-policymaking circles. The minister for business affairs is a philosopher. The finance minister is a veterinarian. The Central Bank governor is a poet. Haarde, though, is a trained economist—just not a very good one. The economics department at the University of Iceland has him pegged as a B-minus student. As a group, the Independence Party’s leaders have a reputation for not knowing much about finance and for refusing to avail themselves of experts who do. An Icelandic professor at the London School of Economics named Jon Danielsson, who specializes in financial panics, has had his offer to help spurned; so have several well-known financial economists at the University of Iceland. Even the advice of really smart central bankers from seriously big countries went ignored. It’s not hard to see why the Independence Party and its prime minister fail to appeal to Icelandic women: they are the guy driving his family around in search of some familiar landmark and refusing, over his wife’s complaints, to stop and ask directions.

Runner up goes to certain beliefs in "hidden people":

Alcoa, the biggest aluminum company in the country, encountered two problems peculiar to Iceland when, in 2004, it set about erecting its giant smelting plant. The first was the so-called “hidden people”—or, to put it more plainly, elves—in whom some large number of Icelanders, steeped long and thoroughly in their rich folkloric culture, sincerely believe. Before Alcoa could build its smelter it had to defer to a government expert to scour the enclosed plant site and certify that no elves were on or under it. It was a delicate corporate situation, an Alcoa spokesman told me, because they had to pay hard cash to declare the site elf-free but, as he put it, “we couldn’t as a company be in a position of acknowledging the existence of hidden people.”

(Hat tip to Tyler)

Not Brazil, but not bad

Carnival in Germany. My kind of people.

(HT to Larry).

Turn up the printing press

So says Scott Sumner:

Many economists simply assume that the current contraction has been caused by the financial crisis. After all, isn’t that obvious? Actually, no. For nearly a year after the onset of the financial crisis nominal GDP continued growing at better than a 3% clip. Now it is plunging. Most seem to assume that this new state of affairs was somehow caused by the Lehman failure, and the subsequent loss of confidence in the entire financial system.

My view is that this reverses the causality; it seems much more plausible that the current problems in the financial system are being caused by the recent (and expected future) sharp fall in nominal GDP. An unexpected decline in nominal
GDP puts stress on a banking system that is based on nominal debt. It is even more disruptive to a system that has become highly leveraged in expectation that the Great Moderation would continue, i.e., that central banks would insure that we never again saw a repeat of the plunging nominal GDP of the early 1930s. And it is devastating in a system that was both highly leveraged and already buffeted by severe losses in residential lending.

The 2007 subprime crisis did not cause the stock market crash of 2008, as stocks were still only modestly below record levels in early June 2008. The October crash occurred when investors began to see deflation and depression on the horizon, and saw that loan losses would spread from the already weakened subprime sector into the sort of commercial and industrial loans which would have been sound had nominal GDP continued expanding at close to 5%/year.

Read the whole thing. I tend to agree. But I'm trying to get his opinion on free banking as a long term solution to financial instability.

(HT to Tyler).

Why did they switch?

The bill did not pass on September 29 because, despite significant pressure from the financial sector, the real side of the economy had not suffered commensurately with the financial side. That is, neither unemployment nor foreclosures were “high enough” in a sufficient number of congressional districts. The regressions show that legislators who switched their vote between September 29 and October 3 likely caved in to the lobbying efforts of the American Bankers Association. Hence, in all probability the October 3 vote would have failed again had it not been for the pressure exerted by the ABA.

That's from Carlos Ramirez, of GMU and the FDIC. He also taught me macro.

Signs of hope

In Europe:

The European Union has turned into an undemocratic and elitist project comparable to the Communist dictatorships of eastern Europe that forbade alternative thinking, Czech President Vaclav Klaus told the European Parliament on Thursday.

Klaus, whose country now holds the rotating EU presidency, set out a scathing attack on the EU project and its institutions, provoking boos from many lawmakers, some of whom walked out, but applause from nationalists and other anti-EU legislators.

I saw Klaus speak about the environment, and I got to meet him. He makes me wish we had a rotating presidency. I'd love to see Governor Sanford of South Carolina as president, if only for a year.

Addendum: French students are not hopeful. 10-1 odds that the EU disintegrates.

One idea you won't hear from Congress

There are, to be sure, risks of political interference from government involvement in banking, but all of the current proposals for increasing lending require more government involvement. The challenge is to find one that increases lending and does the least harm.

If the government starts as a shareholder in new, healthy banks that eventually end up entirely in the hands of the private sector, the political risks start small and diminish. If instead the government combines open-ended and opaque financial support for troubled banks with promises of tight supervision and punishment for bad behavior, the risks are large and grow over time.

That's Paul Romer, not in Congress. He also (most likely) doesn't get paid by the big banks.

(HT to Tyler).

Stimulus is working, in DC

There is good news for workers who still have jobs. A WorldatWork survey of more than 1,000 U.S. companies found that 77 percent of the work force can expect to receive base pay raises this year.

And Washington is among the four metro areas with the largest projected salary budget increases of 3.1 percent. The other three are: Philadelphia, Pittsburgh and San Francisco.

The results in the "WorldatWork Special Update: 2008-09 Salary Budget Survey" were determined from interviews in early December, after credit markets tightened and after the presidential election in order to gather the latest outlook for compensation plans for 2009.

A survey conducted in April 2008 found salary budget increases of 3.9 percent in the Washington area (also the top of the range) along with Boston, Denver, Houston, Los Angeles, Philadelphia, San Diego and San Francisco.

That's from the Washington Business Journal. It is already the case that the 3 richest counties and 9 of the 20 richest counties are suburbs of DC. Let's hear it for targeted stimulus! Maybe the idea is a kind of trickle-down economics. We get rich in DC, then we buy stuff from the rest of you poor bastards. I just got back from Haiti, but that's a long way to go for poverty tourism. Soon I'll be able to do it in my own country! First up is Seattle.