JGBs nearing 1% ...

... You've got to be joking!

SSRN-The Future of Public Debt: Prospects and Implications by Stephen Cecchetti, Madhusudan Mohanty, Fabrizio Zampolli

SSRN-The Future of Public Debt: Prospects and Implications by Stephen Cecchetti, Madhusudan Mohanty, Fabrizio Zampolli: "Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability."

Here we have a classic case of authors purporting of coming to a conclusion after some analysis, but all they have done is make some assumptions and then reproduce their assumptions in a different form in their conclusions.

Jerome Kerviel again

FT.com / Companies / Banks - Kerviel team ‘frequently’ broke limits: "There was no risk-reporting system for traders on the Delta One trading desk when he joined the team in 2007, and implementing regular reporting “was not a priority”, Mr Cordelle said. One of his priorities included recruiting staff for the rapidly expanding desk"

Yep, this is what you do - take on more risk makers and don't hire risk managers. It'll work every time.

Jerome Kerviel

This is why we have problems: FT.com / Companies / Banks - Kerviel team ‘frequently’ broke limits: "Eric Cordelle, Mr Kerviel’s immediate supervisor at the French bank, denied knowledge of the €50bn of unhedged positions built up by the 33-year-old in January 2008, saying he was overworked and had neither the resources nor the tools to monitor individual traders’ positions."

Problems with LIBOR - van Deventer

Donald van Deventer has an interesting article on LIBOR here. He presents good evidence that LIBOR is being systematically underquoted.

'Rogue trader' trial opens in Paris - Europe - Al Jazeera English

'Rogue trader' trial opens in Paris - Europe - Al Jazeera English: "'Rogue trader' trial opens in Paris


The trial of Jerome Kerviel, the alleged 'rogue trader' who is accused of unauthorised deals that cost Societe Generale, the French bank, $5.85bn has started in Paris."

Watch this space.

I've just come across this report from Goldman Sachs examining 44 major fiscal corrections in the OECD since 1975. I'm not sure what to make of it, except that it seems to be getting conclusions from the data that satisfy the authors' prior beliefs.

In a review of every major fiscal correction in the OECD since 1975, we find
that decisive budgetary adjustments that have focused on reducing
government expenditure have (i) been successful in correcting fiscal
imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond
and equity market outperformance. Tax-driven fiscal adjustments, by contrast,
typically fail to correct fiscal imbalances and are damaging for growth.

Their analysis includes case studies of Ireland, Sweden and Canada that show there is another possible explanatory variable - change of government. These three countries, which had large turn arounds in growth, all had change of government before the fiscal contraction was put in place. It is quite possible that the animal spirits that provoked the change in government, themselves led to renewed activity in the economy.

There's another implication for government spending that is strong in their analysis but doesn't even make it to a single phrase in their conclusion, which is what makes me suspect that they have a conclusion and interpret the data to fit that conclusion. In their regressions of average growth relative to OECD (Table 1) the strongest coefficient is for government investment i.e. government spending on capital works has a strong effect on subsequent growth than either increases in tax or reduction in current government spending.

So how to prime growth? Shift government expenditure from current spending to investment and cut taxes. But my caveat still holds - none of their regressions are believeable while we have a major regression variable not taken into account - change of government.

The Madoff Circle: Who Knew What? - ProPublica

An interesting article showing more about the Madoff clientele. It was always hard to believe he was acting on his own.

The Madoff Circle: Who Knew What? - ProPublica: "The Madoff Circle: Who Knew What?"

SSRN-An Autopsy of the U.S. Financial System by Ross Levine

Levine gives a nice view of the failure of the US financial system in this paperAn Autopsy of the U.S. Financial System:
"In this postmortem, I find that the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise. The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products. Rather, the evidence indicates that regulatory agencies were aware of the growing fragility of the financial system associated with their policies during the decade before the crisis and yet chose not to modify those policies."

"In this autopsy, I assess whether key financial policies during the period from 1996 through 2006 contributed to the financial system’s collapse. I analyze the decade before the cascade of financial institution insolvencies and bailouts and hence before policymakers shifted into an “emergency response” mode. Thus, I examine a comparatively calm period during which the regulatory authorities could assess the evolving impact of their policies and make adjustments. Specifically, I study five important policies: (1) SEC policies toward credit rating agencies, (2) Federal Reserve policies that allowed banks to reduce their capital cushions through the use of credit default swaps, (3) SEC and Federal Reserve policies concerning over-the-counter derivatives, (4) SEC policies toward the consolidated supervision of major investment banks, and (5) government policies toward two housing-finance entities, Fannie Mae and Freddie Mac. From this examination, I draw tentative conclusions about the determinants of the crisis.

The evidence indicates that senior policymakers repeatedly designed, implemented, and maintained policies that destabilized the global financial system in the decade before the crisis. The policies incentivized financial institutions to engage in activities that generated enormous short-run profits but dramatically increased long-run fragility. Moreover, the evidence suggests that the regulatory agencies were aware of the consequences of their policies and yet chose not to modify those policies. On the whole, these policy decisions reflect neither a lack of information nor an absence of regulatory power. They represent the selection -- and most importantly the maintenance -- of policies that increased financial fragility. The crisis did not just happen to policymakers."

Yep, the US financial system committed suicide. Makes sense to me.

Fantastic charts on 200 years that changed the world ...

... It's really the last 60, since the end of WW2.

www.bit.ly/anBJBK


Thanks to Brad DeLong for putting this in his blog. http://delong.typepad.com/sdj/