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Worst Crisis Since The Great Depression?

NYU Economist Nouriel Roubini accurately predicted the current financial crisis, and what he has to say now deserves attention:

Since the onset of the liquidity and credit crunch last summer this column has been arguing that monetary policy would be impotent to address such a crunch because, in part, of the existence of a non-bank “shadow financial system”. This system is composed of conduits, SIVs, investment banks/broker dealers, money market funds, hedge funds and other non bank financial institutions.

All these institutions look similar to banks because they are highly leveraged and borrow short and in liquid ways and invest or lend long and in illiquid ways. This shadow financial system is, like banks, subject not only to credit and market risk but also to rollover or liquidity risk, i.e. the risk deriving from having a large stock of short term liabilities (relative to liquid assets) that may not roll over if creditors decide to withdraw their credits to these institutions.

Unlike banks this shadow financial system does not have access to the lender of last resort support of the central bank as these are not depository institutions regulated by the central banks. What we are now observing – with the case of Bear Stearns and the recent disaster among SIVs, conduits, run on a number of hedge funds and money market funds is a generalized liquidity run on this shadow financial system.

The response of the Fed to this run has been radical and in the form of the extension of the lender of last resort support to non bank financial institutions. Specifically, the new $200 bn term facility allows primary dealers – many of which are non banks – to swap their toxic mortgage backed securities for US Treasuries; second, the Fed provided emergency support to Bear Stearns and following the purchase of Bear Stearns by JPMorgan, is now providing a $30 bn plus support to JPMorgan to help the rescue of Bear Stearns; finally, now the Fed is allowing primary dealers to access the Fed discount window at the same terms as banks.

This is the most radical change and expansions of Fed powers and functions since the Great Depression: essentially the Fed now can lend unlimited amounts to non bank highly leveraged institutions that it does not regulate. The Fed is treating this run on the shadow financial system as a liquidity run but the Fed has no idea of whether such institutions are insolvent. As JPMorgan paid only about $200 million for Bear Stearns – and only after the Fed promised a $30 billlion loan – this was a clear case where this non bank financial institution was insolvent.

The Fed has no idea of which other primary dealers may be insolvent as it does not supervise and regulate those primary dealers that are not banks. But it is treating this crisis – the most severe financial crisis in the US since the Great Depression – as if it was purely a liquidity crisis. By lending massive amounts to potentially insolvent institutions that it does not supervise or regulate and that may be insolvent the Fed is taking serious financial risks and seriously exacerbate moral hazard distortions. Here you have highly leveraged non bank financial institutions that made reckless investments and lending, had extremely poor risk management and altogether disregarded liquidity risks; some may be insolvent but now the Fed is providing them with a blank check for unlimited amounts. This is a most radical action and a signal of how severe the crisis of the banking system and non-bank shadow financial system is. This is the worst US financial crisis since the Great Depression and the Fed is treating it as if it was only a liquidity crisis. But this is not just a liquidity crisis; it is rather a credit and insolvency crisis. And it is not the job of the Fed to bail out insolvent non bank financial institutions. If a bail out should occur this is a fiscal policy action that should be decided by Congress after the relevant equity holders have been wiped out and senior management fired without golden parachutes and huge severance packages.

RGE Monitor

An Excellent Development

Sports Illustrated, which faces fierce daily, even hourly, competition with ESPN, Yahoo Sports and others, has something its main rivals do not: a 53-year trove of articles and photos, most of it from an era when the magazine dominated the field of long-form sports writing and color sports photography.

On Thursday, the magazine will introduce the Vault, a free site within SI.com that contains all the words Sports Illustrated has ever published and many of the images, along with video and other material, in a searchable database.

via the NY Times

Environmentalists: A common Flaw

I like to consider myself an environmentalist, but I almost never call myself one. Mainly because I really don't want to be associated with a lot of the people who do.

Because environmentalists are usually right about the facts of the issues they attempt to confront: global warming is a reality, the rape of the world's forests is a disaster in the making, corporate pollution is poisoning us, and the extinction of animal species is both an ecological and a human disaster. On the science and on most policy issues, the environmentalists are right.

But on the human front ... they leave a lot to be desired. And this in turn has a lot to do with why their rightness fails to translate into effective action.

The classic case, in my mind, is the way environmentalists in the Northwest have worked to bring a halt to the destruction of old-growth forest in the Lower 48 in the 1980s and '90s, but did so in such a way that they permanently alienated people who should have been allies in that fight: the residents near the forests that were being torn down.

Most of these folks worked in the timber industry, but few of them trusted their corporate bosses much at all. And the reality was that their bosses' rapine behavior -- especially the mass liquidation of forest stocks in the 1980s -- may have meant a short-term uptick in the local economies, but they guaranteed a future where scarcely any cutting or milling would even be possible, because the entire stock of cuttable woods would be gone.

But if you talked to urban environmentalists at the time (and even now), their attitudes about working people in those small towns was strikingly uniform: Those people were just anachronisms, and they should just work up fresh resumes (maybe go back to school) and go get jobs elsewhere. Indeed, a surprising number of them believed that the world would be better off if there just were no timber cutting at all.

It was clear that, as well as they might grasp some of the scientific realities of the issues (and not even those all that well, considering how many of them really believed the nonsense about halting all logging) they had little understanding of the human consequences of their argument. Many people who live in rural areas do so because that's what their ancestors did, and they log because that's how daddy and granddaddy and great-granddaddy made their livings; their family homes are not just dwellings, and they can't and won't just up and move into another one as if it were a condo. People who live in rural areas are often deeply rooted.

A smart approach for the environmentalists would have been to win these people in the true "grassroots" to their side -- arguing for maintaining the long-term viability of working forests by not overcutting, keeping jobs permanent, and requiring better working conditions and pay in the mills, as well as retraining for the sake of modernization. Argue for preserving wildlife habitat because, among other things, it helps improve hunting.

But culturally, they just couldn't do it because too many of those urban environmentalists couldn't help looking down their pert little noses at those poor redneck schlubs in the sticks.

Much more from Dave Neiwert at his Orcinus blog

cartoonbank.com

Cutest Car ever?

A number of adorable contenders can be viewed at oobject.com

Lying: "A developmental milestone"

For two decades, parents have rated “honesty” as the trait they most wanted in their children. Other traits, such as confidence or good judgment, don’t even come close. On paper, the kids are getting this message. In surveys, 98 percent said that trust and honesty were essential in a personal relationship. Depending on their ages, 96 to 98 percent said lying is morally wrong.

So when do the 98 percent who think lying is wrong become the 98 percent who lie?

It starts very young. Indeed, bright kids -- those who do better on other academic indicators -- are able to start lying at 2 or 3. "Lying is related to intelligence," explains Dr. Victoria Talwar, an assistant professor at Montreal's McGill University and a leading expert on children's lying behavior.

Although we think of truthfulness as a young child's paramount virtue, it turns out that lying is the more advanced skill. A child who is going to lie must recognize the truth, intellectually conceive of an alternate reality, and be able to convincingly sell that new reality to someone else. Therefore, lying demands both advanced cognitive development and social skills that honesty simply doesn't require. "It's a developmental milestone," Talwar has concluded.

Read on in NY Magazine (via Bruce Schneier)

Slip Slidin' Away

via fxstreet.com

Ho-Hum

This woman pedestrian either has nerves of steel, or she was well medicated.

Gee, What a surprise

Prozac, the bestselling antidepressant taken by 40 million people worldwide, does not work and nor do similar drugs in the same class, according to a major review released today.

The study examined all available data on the drugs, including results from clinical trials that the manufacturers chose not to publish at the time. The trials compared the effect on patients taking the drugs with those given a placebo or sugar pill.

When all the data was pulled together, it appeared that patients had improved - but those on placebo improved just as much as those on the drugs.

The only exception is in the most severely depressed patients, according to the authors - Prof Irving Kirsch from the department of psychology at Hull University and colleagues in the US and Canada. But that is probably because the placebo stopped working so well, they say, rather than the drugs having worked better.

"Given these results, there seems little reason to prescribe antidepressant medication to any but the most severely depressed patients, unless alternative treatments have failed," says Kirsch. "This study raises serious issues that need to be addressed surrounding drug licensing and how drug trial data is reported."

Read the full article in The Guardian (U.K.)

Yes, Snowball the Cockatoo can Dance

and, I'd add, he does so better than some people I've seen...

via arbroath

The Evolution of Car Logos

German engineer August Horch, who used to work for Karl Benz, founded his own automobile company A. Horch & Cie in 1899. A decade later, he was forced out of his own company and set up a new company in another town and continued using the Horch brand. His former partners sued him, and August Horch was forced to look for a new name.

When Horch was talking to his business partner Franz Fikentscher at Franz’s apartment, Franz’s son came up with the name Audi:

During this meeting Franz’s son was quietly studying Latin in a corner of the room. Several times he looked like he was on the verge of saying something but would just swallow his words and continue working, until he finally blurted out, "Father - audiatur et altera pars… wouldn’t it be a good idea to call it audi instead of horch?". "Horch!" in German means "Hark!" or "listen", which is "Audi" in Latin. The idea was enthusiastically accepted by everyone attending the meeting. (Source: Wikipedia, A History of Progress (1996) - Chronicle of the Audi AG)

And so Audiwerke GmbH was born in 1910. In 1932, four car makers Audi, Horch, DKW, and Wanderer merged to form Auto Union. The logo of Auto Union, four interlinked rings that would later become the modern Audi logo, was used only in racing cars - the four factories continued to produce cars under their own names and emblems.

Many more interesting examples can be found at Neatorama

Headline of the Week

Athlete Hit by Javelin Is Healthy, but Angry

From the New York Times

Nubs

Well, what do you know? Some good – and honest – news from Iraq. Nothing to do with the "success" of the surge, of course.

A pack of desert dogs lived at one of the Iraqi border forts the unit patrolled. A wiry German shepherd-border collie mix was the alpha dog. Maj. Brian Dennis took a liking to the animal, whose nubby ears had been cut off as a puppy. Dennis, a 37-year-old Marine serving his second tour in Iraq, saw the dog about each time they visited the fort. He named him "Nubs."

At first, Nubs wouldn't give the Marine the time of day. "Nubs wouldn't have anything to do with him," Marsha Cargo, the Marine's mother, told ABC News. "Brian just kept working on him and working on him."

Over a period of months, the animal came around, befriending Dennis and his fellow Marines. During one visit, Dennis found Nubs with a deep puncture wound on his left side. He later learned the injury was inflicted by a screwdriver. He helped nurse the dog back to health.

The time came, however, for Dennis' unit to relocate 70 miles from Nubs' home fort. He may have wanted to take Nubs with the unit, Dennis wrote in one one of his e-mails home, but there were too many dogs to rescue and keeping a canine was against the rules. As always, Nubs sprinted alongside the Hummers as they pulled away for what Dennis assumed was the last time he would see the dog.

Two days later, Nubs wandered inexplicably in below-freezing conditions into Dennis' new camp, shocking the Marine unit. "I won't even address the gauntlet he had to run of dog packs, wolves, and God knows what else to get here," Dennis wrote. "When he arrived he looked like he'd just been through a war zone.

The rest of Nubs' story can be read on the ABC website

Yearning to Believe

I found myself at loose ends in a beach town in Thailand on Christmas morning, 2006. Away from my family in Philadelphia, I was visiting a friend who was planning an early retirement in Southeast Asia. While wandering near the edge of town, I spotted a spirit house, a sort of miniature temple mounted on a pedestal like a bird house. Although irreligious, I noted the fruit offerings strewn around it and was attracted to its makeshift beauty.

Pausing at the shrine, I saw a small Internet café just beyond it, empty except for three nubile young women who were giggling and periodically running up to one or another of the many computers in the room. The desire for my morning Diet Coke, the need to check my email, and the palpable mirth bubbling out of the women drew me into the place.

Despite the goings-on, I first took care of my caffeine and correspondence demands. Soon, however, I noticed there were Webcams on all the computers. It was obvious that the young women were multi-tasking, sending instant messages and occasional pictures in quick succession to nine farangs (Thai for Western foreigners) scattered around the world.

Feeling unmoored and a bit voyeuristic, I eavesdropped...

Do read the rest of John Allen Paulos' piece at 3 Quarks Daily

No Photoshop

This is the Indian bodybuilder Aditya 'Romeo' Dev., all 33 inches of him. See and learn more of him here

Cat Fight

But not an ordinary version. This one occurs with a window separating the two felines. Also, the one inside produces some very serious vocalizations!

The Evolution of Logos

Many more more interesting examples, as well as detailed discussion on a number of the best known tech companies' various logos, can be found at Neatorama

Dan Dennett on Memes

Eight Generatives

The internet is a copy machine. At its most foundational level, it copies every action, every character, every thought we make while we ride upon it. In order to send a message from one corner of the internet to another, the protocols of communication demand that the whole message be copied along the way several times. IT companies make a lot of money selling equipment that facilitates this ceaseless copying. Every bit of data ever produced on any computer is copied somewhere. The digital economy is thus run on a river of copies. Unlike the mass-produced reproductions of the machine age, these copies are not just cheap, they are free.

Our digital communication network has been engineered so that copies flow with as little friction as possible. Indeed, copies flow so freely we could think of the internet as a super-distribution system, where once a copy is introduced it will continue to flow through the network forever, much like electricity in a superconductive wire. We see evidence of this in real life. Once anything that can be copied is brought into contact with internet, it will be copied, and those copies never leave. Even a dog knows you can't erase something once its flowed on the internet.

This super-distribution system has become the foundation of our economy and wealth. The instant reduplication of data, ideas, and media underpins all the major economic sectors in our economy, particularly those involved with exports -- that is, those industries where the US has a competitive advantage. Our wealth sits upon a very large device that copies promiscuously and constantly.

Yet the previous round of wealth in this economy was built on selling precious copies, so the free flow of free copies tends to undermine the established order. If reproductions of our best efforts are free, how can we keep going? To put it simply, how does one make money selling free copies?

I have an answer. The simplest way I can put it is thus:

When copies are super abundant, they become worthless. When copies are super abundant, stuff which can't be copied becomes scarce and valuable.

When copies are free, you need to sell things which can not be copied.

Well, what can't be copied?

There are a number of qualities that can't be copied. Consider "trust." Trust cannot be copied. You can't purchase it. Trust must be earned, over time. It cannot be downloaded. Or faked. Or counterfeited (at least for long). If everything else is equal, you'll always prefer to deal with someone you can trust. So trust is an intangible that has increasing value in a copy saturated world.

There are a number of other qualities similar to trust that are difficult to copy, and thus become valuable in this network economy. I think the best way to examine them is not from the eye of the producer, manufacturer, or creator, but from the eye of the user. We can start with a simple user question: why would we ever pay for anything that we could get for free? When anyone buys a version of something they could get for free, what are they purchasing?

From my study of the network economy I see roughly eight categories of intangible value that we buy when we pay for something that could be free.

In a real sense, these are eight things that are better than free. Eight uncopyable values. I call them "generatives." A generative value is a quality or attribute that must be generated, grown, cultivated, nurtured. A generative thing can not be copied, cloned, faked, replicated, counterfeited, or reproduced. It is generated uniquely, in place, over time. In the digital arena, generative qualities add value to free copies, and therefore are something that can be sold.

Read the rest of Kevin Kelly's thought-provoking theory

(American) Football and Wittgenstein

On the outside chance that you happen to know something about both, then you are very likely to enjoy this Michael Bérubé piece

Brushes with the System

My good friend Abbas Raza, Editor of the outstanding blog 3 Quarks Daily (which I often reference), is an excellent, and very amusing storyteller. He currently has a piece up at The Smart Set, which begins as follows, and is definitely worth reading in its entirety.

It was about five years ago. I was returning from Pakistan and standing in the immigration line at JFK, completely exhausted after a 20-hour flight. When my turn came up at the counter, the INS agent looked at my papers, typed a few things into his computer, and then asked me to follow him to a large room at the side of the immigration hall. I was informed that I was being detained. Two agents handcuffed me and led me to another smaller room. When I asked what I had done. They said things like, "Oh, you know what you've done. We know who you are."

“Who am I? What have I done?”

“You should know that better than we do, now shouldn’t you?”

When I asked to contact a lawyer, I was informed that I hadn't yet been admitted to the United States, and so had no legal standing. No lawyer would be called, nor would I be allowed to call anyone else. They took my cuffs off, fingerprinted me (very difficult because of my sweaty palms), recuffed me, and then left me there.

It was at this point that my knees went a little trembly. I had heard many stories of Pakistanis being held for months without charges under the Patriot Act, and now I had visions of Guantanamo in my head, and I became almost dizzy with the adrenaline rush of fear. I thought that I must have been mistaken for someone else, God knows who, and there would be no chance to clear my name. I sat in that room for a few sweat-drenched hours before a couple of INS officers came in with two police officers from the NYPD. The NYPD officers told me that they had a warrant for my arrest. This immediately came as a huge relief to me, because whatever it was they wanted with me, I would rather be held by the NYPD in New York, than in some INS facility. I felt like whatever it was, I would be able to clear it up.

That's when things started to get weird: The NYPD officers addressed me as Mr. Edward Sampson, as in, "Let's go, Sampson." When I protested that I wasn't Edward Sampson, whoever that might be, they told me that fingerprints don't lie, and I had a full 10-finger match as one (wanted) Edward Sampson.

Read the rest of Abbas' piece

Think Shredding Documents is Safe?

Think again.

Nineteen years ago, as the Berlin Wall crumbled and democracy swept through communist East Germany, STASI agents – members of the secret police – worked feverishly to destroy millions of top-secret documents in an effort to keep them from Western eyes.

Attempting to shred some 45 million items as quickly as possible, the agents fed page after page into shredding machines. The equipment quickly jammed, leaving the agents to tear up the materials by hand and throw them into garbage bags meant to be incinerated.

But with East Germany quickly falling into the hands of the west, the agents were stopped before they could burn the shreds. Some 600 million pieces in 16,000 bags became the property of the current German government. They have remained, for the most part, in that state.

Then, in May 2007, the German government revealed the world's most sophisticated pattern-recognition machine, the $8.5 million dollar (U.S.) E-Puzzler, which can digitally put back together even the most finely shredded papers.

Developed in Berlin by the Fraunhofer Institute of Production Facilities and Construction Technology, the E-puzzler is a computerized conveyor belt that runs shards of shredded and torn paper through a digital scanner.

Scanning up to 10,000 shreds at once, the machine links them together by their colour, typeface, outline, shape and texture – not unlike how the average human might try to piece together a puzzle. The machine then displays a digital image of the original document on a computer screen.

More from The Star

Where is the Economy Headed?

No high-profile economist has been more accurate in predicting the current crisis than Nouriel Roubini. Here are some of his current thoughts:

The scary free fall in recent days of US and global stock markets is no surprise to the readers of this column as it has been analyzed and predicted for a while now. The collapse of global equity markets on Monday January 21st is not just an episode of financial contagion from the US stock market to other stock markets.

It rather signals that global stock markets are now beginning to price the following things.

First, the US recession is unavoidable and has already started; and this recession will be ugly, deep and severe, much more severe than the mild 8-month recessions in 1990-91 and 2001.

Second, the rest of the world will not decouple from the US since – as discussed in detail below – many trade, financial, currency, policy, confidence links – lead to a transmission of negative growth shocks in the US to the rest of the world that will lead to a sharp global growth slowdown: 2008 will be the year of recoupling rather than decoupling.

Third, the US stock market has already started to reflect in the last few weeks the consequences on earnings and corporate profitability of a severe US recession.

Fourth, a growing realization that even aggressive Fed easing will not prevent this severe recession, i.e. that we are at the last leg of the stock market’s sucker’s rally and that the Bernanke put has very little value as massive financial losses will increase regardless of what the Fed does.

Fifth, now other global stock markets are now starting to price the effects of the US hard landing on the rest of the world growth, the phenomenon of recoupling.

Thus, the Monday Massacre in global stock markets is – more than a case of financial contagion – a revenge of economic fundamentals as investors are waking up from the delusion that the US would avoid a hard landing and that the rest of the world could decouple from such hard landing. A reality check is now occurring after stock markets remained for too long in the delusional triple dream of a US soft landing, of a Fed being able to ease and avoid the hard landing, and of a world miraculously decoupling from the US hard landing. As predicted here at the beginning of the year 2008 will be ugly bearish for US and global equity markets.

Roubini's blog is an indespensible resource for those who seek clear-eyed economic analyses. You can read the rest of the above article at his blog, though (free) registration may be required.

The World's Most Horrifying Insects

Alex Levinton has assembled a disturbing list of the five most horrifying bugs in the world. They do sound scary, of course, but some of the descriptions are also quite funny. Take the "Bullet Ant", for example:

From: Rainforests from Nicaragua to Paraguay

Why you must fear it: It's a full inch long, it lives in trees and thus can and will fall on you to scare you away from its hive--the one you didn't know was there, because it's in a fucking tree. Before it does this, it shrieks at you. This ant, you see, can shriek.

It's called a Bullet Ant because its 'unusually severe' sting feels like getting shot. On the Schmidt Sting Index, Bullet Ants rate as the number one most try-not-to-shit-out-your-spine painful in the entirety of the Kingdom Arthropoda.

Also--and we do feel the need to stress this--they fucking shriek at you before they attack.

More bugs from Alex, including video clips, right here

No Left Turn

Now here's an interesting example of cost-effective, environmentally sound, corporate (of all things!) creativity:

It seems that sitting in the left lane, engine idling, waiting for oncoming traffic to clear so you can make a left-hand turn, is minutely wasteful — of time and peace of mind, for sure, but also of gas and therefore money. Not a ton of gas and money if we’re talking about just you and your Windstar, say, but immensely wasteful if we’re talking about more than 95,000 big square brown trucks delivering packages every day. And this realization — that when you operate a gigantic fleet of vehicles, tiny improvements in the efficiency of each one will translate to huge savings overall — is what led U.P.S. to limit further the number of left-hand turns its drivers make.

The company employs what it calls a “package flow” software program, which among other hyperefficient practices involving the packing and sorting of its cargo, maps out routes for every one of its drivers, drastically reducing the number of left-hand turns they make (taking into consideration, of course, those instances where not to make the left-hand turn would result in a ridiculously circuitous route).

Last year, according to Heather Robinson, a U.P.S. spokeswoman, the software helped the company shave 28.5 million miles off its delivery routes, which has resulted in savings of roughly three million gallons of gas and has reduced CO2 emissions by 31,000 metric tons. So what can Brown do for you? We can’t speak to how good or bad they are in the parcel-delivery world, but they won’t be clogging up the left-hand lane while they do their business.

New York Times

Fractals in Africa

Mathematician Ron Eglash explains the fascinating use of fractals by African cultures, how such "robust algorithms" led to computers, and how their understanding can help children open up to the world of mathematics.

via Ted Talks

They Work Harder

"[Right before we began rehearsals], while the rest of our future company was enjoying their Christmas in London, Rex arrived three days before the holidays to begin work in advance with Fritz [Loewe, Lerner's partner], Moss [Hart, the producer], and me.

"It was another example of something I found to be true throughout my professional life. Every genuinely great star with whom I have ever worked is a star not only because of talent and that indefinable substance, but because he works harder than anyone else, cares more than anyone else and his sense of perfection, which is deeper than anyone else's, demands more of him.

"I remember when I was doing a film with Fred Astaire, it was nothing for him to work three or four days on two bars of music. One evening in the dark grey hours of dusk, I was walking across the deserted MGM lot when a small, weary figure with a towel around his neck suddenly appeared out of one of the giant cube sound stages. It was Fred. He came over to me, threw his arm around my shoulder and said: 'Oh, Alan, why doesn't someone tell me I cannot dance?' The tormented illogic of his question made any answer insipid, and all I could do was walk with him in silence. Why doesn't someone tell Fred Astaire he cannot dance? Because no one would ever ask that question but Fred Astaire. Which is why he is Fred Astaire."

This gem, written by the author Alan Jay Lerner, was brought to you via the always excellent Delancy Place