On Creativity

I love this clip of the great jazz pianist, Bill Evans. His advice on creativity is about the best I can imagine: deal with reality and essences, not appearances. This applies to serious work in any field, including finance, of course. He was a very special artist and this is a great interview.

Best Economic Chart of the Year

And it's good. From Donald Marron (the younger).

Gloomy but Worthwhile: Kyle Bass Interview

If you want to hear someone make a pretty thoughtful bearish case for Europe, Japan and the U.S., this is worthwhile.

Italy Can Save Itself and the Euro

So says Martin Feldstein, here.

European Banks as US "Shadow" Banks

Recent paper by Shin of Princeton, highlighted and linked by Krugman, arguing that the European banking system is acting as a gigantic boom-bust amplifier for the US.

Non-US bank branches that conduct business in dollars act as an element, a very big one, of the shadow banking system.

The paper is detailed. Shin draws this conclusion: "The global flow of funds perspective suggests that the European crisis of 2011 and the associated deleveraging of the European global banks will have far reaching implications not only for the eurozone, but also for credit supply conditions in the United States and capital flows to the emerging economies." Why? In the end the most important thing is that "dollar-denominated assets of banks outside the U.S. are comparable in size to the total assets of the US commercial bank sector."

On the Limits of Ratiocination

"If you have any fact which you think is really sinister...forget it, man, because you can never on your own think up all the non-sinister, perfectly valid explanations for that fact."

Errol Morris's short video at the NYT site on The Umbrella Man. HT Kedrosky.

Household Debt is What is Costing Jobs

Great article by Mian and Sufi explaining that debt levels are what is depressing demand, and costing 65% of the jobs lost in the current mini-Depression. Key point, which they reach by examining county-by-county variations in housing price declines:

"Our research suggests that 65 percent of the job losses from 2007 to 2009 came from the drop in household spending induced by the collapse in home prices and its effect on a highly levered household sector."

A related presentation of some of their details is here. Not a surprising conclusion, but the way they prove it is clever.

Europe's Limited Options

Good, brief interview with Willem Buiter. (HT Kedrosky.) Buiter is a former member of the Bank of England's Monetary Policy Committee, and is now chief economist at Citigroup.

Real GDP Per Capita for the Past 50 Years

A picture being worth 1,000 words. Created using FRED, a great tool. (Uses annual figures; details here.)

Briane Greene on String Theory and the Multiverse

Interviewed by Terry Gross on Fresh Air. Great interview...and math-free.

Long-Term Unemployment

A troubling graph of data from 1967 to present, from Pew, HT Paul Kedrosky.

Roger Lowenstein on Corzine and MF Global

It's fascinating to me how good Roger Lowenstein is at finding the right cord in financial stories, and tugging on it.

I like his take on the bankruptcy this week of MF Global. Jon Corzine should have known better. He is an ex-Goldman CEO, ex-New Jersey governor, ex-U.S. senator, and had been in charge at MF Global for more than a year.

In Lowenstein's words, Corzine apparently failed to learn from prior disasters at LTCM and Lehman. "Corzine had a ringside seat, and the message didn’t stick," Lowenstein writes, so how hopeful can we be for learning by humanity generally? Granted, the facts are still coming out.

Lowenstein's books on LTCM and Buffett are very worthwhile, too. His late father, Lou, was a securities law professor at Columbia. Back in the 1990s when I co-wrote, with the late Larry Soderquist, an article on laws and regulations pertaining to initial public offerings (abstract here), I discovered that Roger's father was one of the few people who had written something in that area that was actually useful and deep. So, like Hank Williams Jr. following Hank Williams Sr., Roger comes from a "family tradition" of thinking deeply, well, and morally about business and life. And like his pa, Roger can really write.

Law as Bungee Cord

From Brad DeLong, a post about the Bank of England. In the 19th Century, it stretched its legal authority (really, went beyond its authority) with regard to printing money, when it thought it needed to. Whether it should have done that or not is not as clear to me as it is to him, but the fact that it did is news to me, and interesting.

Social Conformity and Truth

Wanting to be part of a group can lead us to hold our tongues, of course. But according to Jonah Lehrer, it goes beyond that; it can actually change our memories.

Goldman's Fund to Profit from the Protests

A gem from satirist Andy Borowitz.

OK, Maybe Not

BRUSSELS—Doubts grew about the effectiveness of a key proposal for stemming Europe's deepening debt crisis as it emerged that officials have ruled out a plan for the euro-zone's bailout fund to directly guarantee bond issues.
 
From The Wall Street Journal, Oct. 20, 2011.

Structure of Proposed European Rescue Fund

More stuctured finance is likely on the way, according to today's big story in The Guardian. Monoline insurance didn't go so well here in the States, during our bubble. For Europe's sake, I hope it works out a little better now. Of course, the article is discussing a proposal, not an agreement, so...stay tuned.

Well Said, Mr. Soros

From a blog post today by George Soros at the FT site, regarding Europe:

"The banking and sovereign debt problems are mutually self reinforcing. The decline in government bond prices has exposed the banks’ undercapitalisation and the prospect that governments will have to finance recapitalisation has driven up risk premiums on government bonds."

Clang, Clang, Clang, Boom!

Wolfgang Munchau: "This is the equivalent of putting explosives into a can, before kicking it down the road." (Link here; registration required.) He writes in opposition to the idea of leveraging the 440 billion euro fund that is being set up to stanch the eurozone's sovereign debt and bank capital crisis.

Robert Shiller on Stocks

Interview with Robert Shiller on stock market valuation. HT: Greg Mankiw's Blog.

Deception in Nature

Octopuses, squid, and cuttlefish use optical deception to hide underwater. One of the coolest videos I have seen in a long time. From the public radio show, Science Friday. Link here.

Grantham

It's always worth reading Jeremy Grantham, of GMO. In a letter from August, he lays out a predominantly bearish case on the U.S. economy and stock market. He emphasizes, particularly on pages 7 and 8, the risk of corporate profit margins regressing to the mean. But read the whole thing.

Krugman Solves the Financial Crisis

Just use neutrinos!

Correlation is not Causation

As FT Alphaville illustrates, delightfully.

Roots of the Great Contraction, by a BIS Sage

I love this talk by Bill White.

White was the chief economist of the Bank for International Settlements, in Basel, from 1995-2008. During the bubble of the aughts, White's team at the BIS was one of the very few sources that accurately reported on the big imbalances in the world economy and tried to sound some warnings. The BIS is the central bank for central bankers.

In the talk, which he gave last month, White is deeply insightful and wry about the policy mistakes that helped get our economy, and Europe's, into so much trouble in the past few years. He talks at the 16-minute mark, and again briefly at the 1 hour 20 minute mark, for a total of about 22 minutes in all. The occasion is a gathering of Nobel laureates in Lindau, Germany. White does not get very technical. Mere mortals would be bragging about their past good calls, but he resists that.

White partly faults banks, hedge funds and the like, but sees the crisis as rooted even more in mistakes by central banks -- specifically in their creation of moral hazard through lowering interest rates to soften each serious market problem or bust that has happened since 1987. It is troubling, but very interesting, to hear him say that he thinks that the imbalances that we had in 2007 did not actually go away.

The Whole Problem, in a Nutshell

Banks are dumping "tail risk" on the rest of us.

Problems with European Banks

A good update by CR and Kash Mansori.

A&P

Recommended listening: an interview on Fresh Air with Marc Levinson about his book, The Great A&P.

Most interesting is his description of what grocery stores were like before the advent of this huge chain about a century ago. Also, I liked learning how the chain eventually fell apart. There are lessons on the life cycle of businesses to be learned here. There is an unavoidable analogy to Wal-Mart, too.

Break Up Big Banks

As usual, Simon Johnson has it right. Higher capital requirements are well and good, but big banks are inherently unsafe and need to be broken into smaller size. Banks that are too big to fail are also too big to exist.

Universities and Religion

Nothing is so sublime that it can't be bureaucratized.

The Second Great Contraction

This piece by Kenneth Rogoff, former IMF chief economist, now at Harvard, is excellent. He argues that calling the recent economic troubles a recession will tend to mislead us. He says that the proper name is the Second Great Contraction. If you think of pneumonia as just a really bad version of a cold, you won't treat it properly. I am not sure he is right about inflation being part of the cure, but he is, at minimum, framing the question properly.