Category Archives: Current Affairs

Economy Explained With a Fable

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FT.com columnist Martin Wolf explains the current international economic environment with a play on Aesop's fable The Ant and the Grasshopper:

Everybody in the west knows the fable of the grasshopper and the ant. The grasshopper is lazy and sings away the summer, while the ant piles up stores for the winter. When the cold weather comes, the grasshopper begs the ant for food. The ant refuses and the grasshopper starves. The moral of this story? Idleness brings want…

As it happens, in the wider world, there are other ant nests. Asia, in particular, is full of them. There is a rich nest, rather like Germany, called Japan. There is also a huge, but poorer, nest called China. These also want to become rich by selling goods to grasshoppers at low prices and building up claims on grasshopper colonies. The Chinese nest even fixes the foreign price of its currency at a level that guarantees the extreme cheapness of its goods. Fortunately, for the Asians, or so it seems, there happens to be a very big and exceptionally industrious grasshopper colony, called America. Indeed, the only way you would know it is a grasshopper colony is that its motto is: “In shopping we trust”. Asian nests develop a relationship with America similar to Germany’s with its neighbours. Asian ants build up piles of grasshopper debt and feel rich…

Yet there is a difference. When the crash comes to America and households stop borrowing and spending and the fiscal deficit explodes, the government does not say to itself: “This is dangerous; we must cut back spending.” Instead, it says: “We must spend even more, to keep the economy humming.” So the fiscal deficit becomes enormous.

This makes the Asians nervous. So the leader of China’s nest tells America: “We, your creditors, insist you stop borrowing, just as European grasshoppers are now doing.” The leader of the American colony laughs: “We did not ask you to lend us this money. In fact, we told you it was a folly. We are going to make sure American grasshoppers have jobs. If you do not want to lend us money, raise the price of your currency. Then we will make what we used to buy and you will no longer have to lend to us.” So America teaches creditors a lesson from a dead sage: “If you owe your bank $100, you have a problem; but if you owe $100m, it does.” 

This Story Is Oh So Onion-y

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Truth really is stranger than fiction, and this story that I would swear came from The Onion (but apparently didn't) is proof:

Enter "Waterworld" star Kevin Costner, who has invented a device that cleans oil from sea water.

British Petroleum - desperate for ideas – gave the okay to test six of Costner's gizmos Wednesday, after the Army Corps of Engineers gave the machine a thumbs-up.

Costner's $24 million centrifuge machine has a Los Angeles-perfect name, "Ocean Therapy."

Placed on a barge, it sucks in oily water, separates out the oil and spits back clean water.


The Dangers of Living in a Chicken Little Society

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Bruce Schneier explains why basing decisions solely on "worst case scenarios" is not a good thing.  

There's a certain blindness that comes from worst-case thinking. An extension of theprecautionary principle, it involves imagining the worst possible outcome and then acting as if it were a certainty. It substitutes imagination for thinking, speculation for risk analysis, and fear for reason. It fosters powerlessness and vulnerability and magnifies social paralysis. And it makes us more vulnerable to the effects of terrorism.

Worst-case thinking means generally bad decision making for several reasons. First, it's only half of the cost-benefit equation. Every decision has costs and benefits, risks and rewards. By speculating about what can possibly go wrong, and then acting as if that is likely to happen, worst-case thinking focuses only on the extreme but improbable risks and does a poor job at assessing outcomes.

h/t to Ed Cone for the link.

Tomorrow’s Economic Forecast Decidedly Mixed

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You know how weather forecasters always hedge their bets with phrases like, "Tomorrow's forecast is decidedly mixed" which, to me, is like saying "You may or may not wake up tomorrow."  Anyway, all the recent economic news has me thinking that our economic forecast is, well, decidedly mixed.  In bullet point fashion:

Yep.  All in all I'd say our economic outlook is decidedly mixed, and I'll even go out on a limb and say that the markets will close either up or down tomorrow.  Tomorrow I'll tell you why the winner of the 2011 Super Bowl will most likely be a team that plays in the NFL.

Have a Little Hitch in Your Giddy Up? Blame the Economy.

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As if losing jobs and nest eggs isn't bad enough, apparently the Great Recession is also killing the libidos of the grey haired set:

Americans 45 and older are far more open to sex outside of marriage than they were 10 years ago, but they are engaging in sex less often and with less satisfaction, according to a major new survey by AARP.

What's the problem?

AARP's sex and relationship expert, sociologist Pepper Schwartz, thinks that financial stress is a prime culprit.

"The economy has had an impact on these people," she said. "They're more liberal in their attitudes, yet they are having sex less often. The only thing I see that's changed in a negative direction is financial worries."

When All Else Fails Break Out the Legal Mumbo Jumbo

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What to do when you can't cap the gusher?  Why, set your attorneys loose:

Alabama Attorney General Troy King said tonight that he has told representatives of BP Plc. that they should stop circulating settlement agreements among coastal Alabamians.

The agreements, King said, essentially require that people give up the right to sue in exchange for payment of up to $5,000.

King said BP's efforts were particularly strong in Bayou La Batre.

The attorney general said he is prohibited from giving legal advice to private citizens, but added that "people need to proceed with caution and understand the ramifications before signing something like that.

(h/t to Ed Cone for the link)

We Are What We Do

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Russell Roberts, an economics professor at my alma mater, has written a compelling paper about the financial meltdown.  An excerpt from the summary:

How did this happen? Whose fault was it? Some blame capitalism for being inherently unstable. Some blame Wall Street for its greed, hubris, and stupidity. But greed, hubris, and stupidity are always with us. What changed in recent years that created such a destructive set of decisions that culminated in the collapse of the housing market and the financial system?

In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises. 

A Not So Surprising Effect of New Arizona Law

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A new law in Arizona has garnered a lot of attention nation-wide and in the process has stirred up quite a debate about issues like illegal immigration, civil rights and states' rights.  According to this blog post by Yes! Weekly's Jordan Green it is also already having an effect on the University of Arizona:

We have already begun to feel an impact from SB 1070. The families of a number of out-of-state students (to date all of them honors students) have told us that they are changing their plans and will be sending their children to universities in other states. This should sadden anyone who cares about attracting the best and brightest students to Arizona.

I think this is just the beginning for Arizona.  In the very near future I suspect you'll be seeing business conventions moved to venues in other states, business and leisure travel to the state curtailed, and boycotts called by special interest groups.

Usually hot-button issues like this result in a lot noise without much action for a short time and then blow over, but this one feels different.  It feels like this one could turn into a major economic and social event for Arizona.

Something for Nothing

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I was doing some research for the day job and came across this article about a panel discussion on the future of GSEs (Fannie Mae and Freddie Mac).  There are several good quotes contained within, but these two really caught my eye: 

But according to White and Booher, it was a broader cultural issue, an unbalanced federal housing policy that stressed homeownership at the expense of rational underwriting. “I believe that the deception of our culture, that money grows on trees, that there can be action and no reaction, is so prevalent that we live in a fantasy world,” White said. “And members of Congress were the ultimate actors there.”

That unbalanced housing policy was prevalent on the operations side as well. "The problem really starts with a culture that’s increasingly looking for something for nothing,” Durkin of Wood Partners explained. “That permeates our housing policy.”

I really do hope my children's generation ends up being smarter than mine or my parents'. 

A Little Tarnish for BB&T

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Winston-Salem based BB&T has enjoyed a very strong, positive public image especially during the last few years as other "local" banks like Wachovia painted themselves as evil-banker-villain people.  Well, it looks like the sterling image is in danger of being tarnished.  To wit, two stories in the last week (h/t to Ed Cone for lead to first story):

Visions of Profits Gone, Lot Buyers Sue (News & Observer)

Attorney Wes Hodges, whose firm filed the suits against Saunders, said that buyers were subjected to high-pressure sales tactics. He said they were told it was certain that they would reap big profits by the time the two-year loans came due and that the subdivisions would be finished by then.

He said prices of the lots were artificially increased via fraudulent appraisals and that the lender – BB&T in most cases – signed off on the loans knowing the prices had beenhyped. The frontline bankers approving the loans were paid bonuses of up to 100 percent of their annual salary for hitting targets for the number of loans written, he said.

BB&T is a defendant.A spokeswoman for the bank said it doesn't comment on ongoing litigation but that it will vigorously contest the allegations.

Whistle-Blower Ordered Re-Hired in a Ponzi Scheme (Associated Press)

The BB&T Corporation must rehire a former company investigator who said she was fired after exposing a $100 million North Carolina development scam, an administrative law judge said in a ruling released Friday. The decision, made by Judge Jeffrey Tureck, said the investigator, Amy Stroupe, should be reinstated to her position with back pay because of protection afforded by whistle-blower laws…

Investigators say the development, known as the Village of Penland, was a Ponzi scheme, and Judge Tureck said in his ruling that the bank was assisting the fraud by making loans to investors in the community.