Top Financial Stories 2010

I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.

By "stories," I don't mean themes, such as "China Rising" or "EU unraveling." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.

Further, I don't rank them, as in a top ten list. I generally assign one top story to each of the twelve months.

All that said, here is this year's list.

January. Google announcement. Google said that it was no longer willing to censor its searches in the People's Republic of China in accord with the desires of the authorities there. This was part of an escalating dispute that would lead to Google pulling out of China altogether in March.

February. Two competing biotech companies in Denmark claimed a break through in the production of commercially viable cellulosic ethanol.

March. U.S. health care reform bill finally passed -- though the actual changes are to be phased in over a period of years. Judicial challenges to the new law are an ongoing story as the year ends.

April. Greek bonds. The S&P rating for these bonds was lowered to junk level. The unfortunate acronym "PIIGS" for the 'periphery' countries of the EU receives some currency. (For the record, that's Portugal, Ireland, Italy, Greece, and Spain.)

May. The EU Finance Ministers. The Finance Ministers over-rode the strong objections of both the outgoing and the incoming UK government, approving the Alternative Investment Fund Manager (AIFM) Directive.

June. The Gulf of Mexico oil spill. This spill had begun with an explosion on the Deep Horizon platform in April, but it grew as a story week after week, and only this month did it attain totemic full-sh!t-storm significance, even at the level of diplomacy between US and UK.

July. The Dodd-Frank bill reforming the way the financial services industry in the U.S. is regulated, passed. Obama signed it. Much of it kicks the can forward, authorizing reports and possible new regs by a variety of agencies. Some obvious reforms, like the consolidation of CFTC with SEC, go still unmade.

August. The Hong Kong Monetary Authority. The HKMA announced the tightening of its rules on mortgage lending. This reflected its concerns about a developing real estate bubble in the Special Administrative Region.

September. Muncipal bonds in the U.S. Meredith Whitney put out a 600 page report predicting big trouble ahead for the municipal bond market in the US. By serendipity, she released this just as Harrisburg, PA was getting into big fiscal trouble.

October. Sarkozy, President of France. This month, the President pushed pension reforms through the French legislature despite crippling nationwide strikes. (And since we're talking about France, this was also the month that Kerviel was sentenced.)

November. Midterm elections in the US. The most remarkable development here, from the point of view of this list, was the defeat of a proposition designed to suspend AB32, in California, and the election of a Governor committed to enforcing same. AB32 is California's cap-and-trade bill regarding carbon emissions. This development has kept cap-and-trade alive, despite its political failure at the federal level.

December. Ireland. In crisis, and after cutting a deeply unpopular deal with the IMF, Ireland enacts legislation that readies a sweeping re-organization of the banking sector there. Memories of the "Celtic tiger" are just that.

A quick perusal of this list shows that it is much less of a US-centric compilation than most of its precursors in this blog. I have a hometown bias. In this case, though, only five of the stores that strike me as the biggest in their respective months are US-oriented. Five are European, and the other two are Chinese. What does that mean? Nothing much, I suppose.

Happy new year everyone.

Mad Men Thoughts: Part II

Cicily and I continue our viewing of episodes of the television show Mad Men. We aren't viewing them in "real time," but in our own time, and we've only recently moved from the later episodes of the second season into the earlier episodes of the third.

The second season covers the period from Valentine's Day 1962 until the Cuban Missile Crisis that October.

The Missile Crisis provides an obvious way to have the various characters contemplate their own mortality. Specifically, it leads to a conversation between Peggy and Father Gill that, I imagine, is meant to signify the state of the pre-Vatican-II-Council Catholic Church: just why it needed the reforms that Council brought.

Peggy is an ambitious career woman who arrived at Sterling Cooper in the first episode, and who has since become a copywriter. She had a brief fling with accounts manager Pete early on, became pregnant as a result, and gave up the child, so that her sister could raise him as her child. If I understand correctly, Father Gill has gotten wind of this and wants to get Peggy to confess it.

During the Cuba crisis, Gill makes an impassioned pitch that Peggy should confess her sins in order to save herself from hell -- to which she might be consigned rather quickly if the missiles start flying.

The Vatican II Council convened, as it happened, in October 1962, though unless I missed something the fact went unmentioned in the episode. Still, it is hard to believe the screenwriters were unaware of that fact, when seeing the Gill-Peggy interaction.

By the time of the opening episode of the third season, Sterling Cooper has become a subsidiary of a London-based ad company. The Londoners are laying off Americans, making everyone remaining quite nervous. Also, Don Draper and a closeted-guy member of his creative team, Sal, go to Baltimore to meet with the bosses of London Fog, a company with no actual London connection but which has had success branding its raincoats. (Also, as one of the actual Londoners explains, there's no such thing. The so-called "fog" of Dickens novels and other literature of the period was industrial soot -- London, as it happens, was the first industrialized metropolis in history.)

Draper catches sight (I won't try to explain how -- but Don was not playing the sneak -- the sight was an innocent accident) of an encounter that establishes for him that Sal is in fact gay. On the airplane flight back to NYC, Don tells Sal that he has an idea for a new ad campaign for London Fog. The tagline would be "Limit Your Exposure." At that moment, the significance of this phase is ambiguous. Are we really supposed to take this as an idea for a campaign, or is Don sending a message to Sal: "I don't care about your sexuality, but since others might I hope you'll keep it better hidden hereafter than you did last night."

It later turns out that Don and Sal are intent on putting together a "Limit Your Exposure" campaign. That doesn't change the obvious fact that Don was sending a message on the plane. Perhaps what was originally intended as a discreet message to Sal (to be discreet) got away from them both and became their actual campaign.

Snoopy's Christmas

Am I violating someone's copyright? Heck, I'll live dangerously.

The news it came out in the First World War
The bloody Red Baron was flying once more
The Allied Command ignored all of its men
And called on Snoopy to do it again

The Allied Command has a rather low opinion of its own men. Snoopy's flying-ace fantasy on top opf his doghouse was firmly established in the pop-cultural consciousness well before The Royal Guardsmen did this in 1967. But Snoopy always seemed to lose his imagined battles with the Red Baron. He'd go down in flames, shouting "Curse you!" That was the running gag. So how had the Allied Command developed its confidence in his ability to do "it again" -- if "it" means anything they should want done?

Was the night before Christmas and forty below
When Snoopy went up in search of his foe
He spied the Red Baron and fiercely they fought
With ice on his wings, Snoopy knew he was caught

Wasn't it just as cold for the Red Baron? Why wasn't there ice on his wings too?

CHORUS:

Christmas bells those Christmas bells
Ring out from the land
Asking peace of all the world
And good will to man

The Baron had Snoopy dead in his sights
He reached for the trigger to pull it up tight
Why he didn't shoot, well, we'll never know
Or was it the bells from the village below

There's a wikipedia article on this song. Oddly, that article (as of the time of this writing anyway!) says that the Baron doesn't fire "possibly due to his respect for Snoopy's prowess at flying." I don't see any basis for that supposition. The suggestion is that he didn't fire out of a Christmas-eve act of compassion.

REFRAIN

The Baron made Snoopy fly to the Rhine
And forced him to land behind the enemy lines
Snoopy was certain that this was the end
When the Baron cried out "Merry Christmas, mein friend!"

How far, I wonder, was the trip from the site of initial contact to this Rhine-bank place where they finally landed. Snoopy was apparently doomed, earlier in the song, because he had ice on his wings. Are we supposed to conclude that the ice harmed his ability to maneuver sufficiently for a dogfight, but not his ability to fly in a straight line to the Rhine?

The Baron then offered a holiday toast
And Snoopy our hero saluted his host
And then with a roar they were both on their way
Each knowing they'd meet on some other day

REFRAIN TWICE.

We again here a few bars of O Tannenbaum after the final two refrains of the tune proper -- this time it is being played by a piano, not sung as in the intro.

I trust all my readers have had a wonderful Christmas and will enjoy the remainder of this holiday season.

From John Milton's Nativity Ode

Time will run back, and fetch the age of gold,
And spekl'd vanity
Will sicken soon and die,
And leprous sin will melt from earthly mould,
And Hell itself will pass away,
And leave her dolorous mansions to the peering day.

Yea Truth, and Justice then
Will down return to men,
Th'enamelled Arras of the Rainbow wearing,
And Mercy set between,
Thron'd in celestial sheen,
With radiant feet the tissued clouds down steering,
And Heav'n as at some festival,
Will open wide the Gates of her high Palace Hall.

[lines 135-148].

I love these lines, and post them here each year due to the vividness with which they display hope, the most forward-looking of the virtues.

Merry Christmas

Fannie, Freddie, Joey and Petey

A controversy involving Joe Nocera and Peter Wallison draws my attention, because it has a good deal to do with how we understand the crisis of 2007-08.

Joe Nocera is a long-time business journalist, the co-author with Bethany McLean of a newly published book, "All the Devils are Here." As the Shakespearean title suggests, McLean/Nocera's theory is that the crisis had a lot of causes, plenty of "devils." The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, play a role in their story, but only a supporting role. They are not leading the devilish pack.

Peter Wallison is a member of the Financial Crisis Inquiry Commission, the bipartisan panel that is supposed to issue a report soon explaining what did happen in 2007-08 and why. Wallison, it is fair to say, wants to give Fannie and Freddie a larger share of the blame than Nocera does. Okay --everybody agrees the GSEs get some blame, and how much sounds like an appropriate subject for debate. So ... have at it, guys!

The problem, though, is that this is the US in the early 21st century and it is amongst us always easier to tell someone to shut up than it is to discuss substantive differences. Besides, "shut up" is so much snappier a thing to say. THAT is probably the worst of our devils. But I digress....

On December 17, Nocera wrote in his column that he had spoken to Wallison about their differences and that Wallison claimed to have seen still-secret papers. (What? not on Wikileaks yet?) here.

"Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he’s right and I’m wrong. Well, we’ll see," writes Nocera.

Nocera makes his point without reference to anything secret. The GSEs, in his view, struggled to keep up with the private market operations like Ameriquest and Countrywide, fearing that they would become irrelevant, and politically vulnerable, if they didn't act in line with those practices.

Wallison has replied. He confirms here the sentiments that Nocera attributed to him about those secret documents.

"I told him this was wrong—that as part of the Commission’s work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire—a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commission’s report. But he repeated his own dogma immediately thereafter."


This strikes me as fundamentally the wrong attitude to take. Wallison is saying that Nocera should "hold his fire" until he becomes aware of facts that will sooner or later become available. Well ... no. Every rational human being is entitled to form an opinion based on such facts as are available to that person. One should hold and express one's opinions with a consciousness of fallibility, but the idea that one should "hold one's fire" because there might yet be other facts is a demand for a lifetime of silence. It will always be the case that there might yet be more facts out there! So what?? If Nocera were writing about the causes of the outbreak of the American Revolution in 1775 it might be the case that there are still as yet unknown documents somewhere. That is not a signal to "hold one's fire." Indeed, it should be an incentive to fire away -- it may help in smoking out the new stuff.

Nocera should keep expressing the views that he forms on the basis of facts known to him, and if and when Wallison feels free to make further facts known, he should do so.

In the meantime, the rest of us are entitled to suspect that this talk about "internal documents" about which Wallison will write in the future is a tad too convenient. Felix Salmon puts it well.

So much for the ethos of debate.

On the underlying dispute, I would say (subject to being disproven by any "internal documents" that become external down the road) that the real cause of the bubble was monetary policy, not micro-economic factors, not regulatory shenanigans, and not the GSEs. Greenspan created the Housing bubble in order to get us out of the recession of 2000-02, which was caused by the busting of the previous (dotcom) bubble, which was also largely caused by monetary policy. In order to get off this merry-go-round, we need sound money.

Given all that, though, I am inclined to think that the Republicans do overstate the GSE role. It gives them a government target to shoot at, and a target that seems smaller and safer than shooting at the Federal Reserve. Ron Paul, of course, is the honorable exception. He targets the elephant.

From Florence to Houston

Below is an outline for the second chapter as represented in the table of contents for my projected book.

I've already done the same for the first chapter. We will focus here on the institution of lending money for a fixed rate of interest: this is "usury" or "riba" to its foes.

I. Renaissance Florence
A. Theology, Damnation, and Evasion
B. The Rise of the Medici

II. The North of Europe
A. Luther on usury
B. Calvin
C. Calvinism in the Lowlands
D. London and the Classical Economists

III. Colonies and States
A. Debt in the Colonies
B. Debt and the Founders
C. The Post-Classical Economics of Henry George

Here I will make in essence the points I sought to make in this blog on November 19, 2010.

D. Leverage, the Business Cycle, and Enron

The difficulties that arise when finance becomes too disconnected from the physical world, when an excess of liquidity gives rise to dreams of infinite leverage, are well illustrated in the rise and fall of the now infamous energy-trading firm, and it is a cautionary tale we should heed even this early in our study.

We have addressed thus far the fundamental ideas of speculation and leverage (i.e. debt). We need to introduce the final key idea from our subtitle, regulation: and we will do that in the next chapter.

More on Phaedo

As faithful readers may remember, on December 12th I commented on an argument in Plato's Phaedo, under the more contemporary inspiration of Anderson Brown.

Now I think I may have grasped a point that puzzled me then. For when Socrates is challenged with the idea that the soul may be a sort of harmony, and thus dependent upon the physical instrument that plays it, his response is to contend that this can't be a good analogy. Why not? Because having a soul is a binary choice: you either have one or you don't. Being harmonious, or melodic, though, is a matter of degree. Some tunes are more tuneful than others.

Setting aside Brown's exegesis of the passage, I found the argument weak. It appeared to be a mere playing with words. Surely, a defender of the soul-as-harmony theory could say that we sometimes use "harmony" in a binary sense, while at other times using it as a matter of degree. Indeed, as a music critic might use the word "soul" in writing of R&B musicians, it is susceptible to a matter-of-degree interpretation too.

But perhaps Plato's point is two-fold. First: if we think of the tune Mary-had-a-little-lamb as a Platonic Idea (as Plato presumably would have), then we will think of the first musician ever to have played that tune on whatever instrument -- or the first composer ever to put it to paper -- not as its creator but as the discoverer of that bit of imaginative space.

Second, though, there is a sharp distinction. The soul is that which does the discovering. A particular tune is that which is discovered. They are as different as subject and object.

Plato is then saying that (a) both tune and appreciative soul can exist in some sense without embodiment, but (b) the soul exists in a fuller, more active, sense than the tune. The soul is that which rejects one tune for another, deciding that one is more "tuneful" than the other.

I'm reminded a bit of something Wittgenstein said about the self. My self would not be part of the contents of a book called "The world as I found it." The self is the finder.