Saturday, December 20, 2014

Cromnibus and the Swaps Pushout

White House insists things are good with Elizabeth Warren

President Obama apparently decided to support the omnibus budget bill late Thursday morning, December 11th. He supported the bill because Senate Majority Leader Harry Reid told him the threat of a government shutdown in the first quarter of 2015 was otherwise a real one, and the President should act quickly to get that off the table.

The next few hours appear to have been hectic ones, as alliances formed and shifted both for and against the bill, across party lines. The bill came to be called "cromnibus," apparently for "Continuing Resolution Omnibus." [Personally my first impression was that the "cr" stood from "cram." Alas not.]

At 9:37 Thursday evening, the bill passed the House, 219 to 206. Obama and House Speaker Boehner had both kept enough of their troops in line to get the result they both wanted.

The Senate passed it on Saturday night, with a vote of 56 to 40. The 40 who voted "no" included both Elizabeth Warren and Ted Cruz.

The cromnibus was indeed crammed: with various goodies for various important political lobbies and constituencies. Of these one of the most symbolically resonant is a repeal of a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 that had prohibited banks (beneficiaries not only of the 208 bail-out but in general of depositor insurance arrangements going back to the 1930s) from trading interest-rate swaps.

Kevin Yoder, the nominal author of the repeal amendment, isn't talking about it.

For those who came in late: an interest rate swap is a bet that one referenced index rate will go up or down relative to another. And no, in case you're wondering, interest-rate swaps didn't have a lot to do with the crises of 2007-08. But frankly -- or even doddly, they don't have a lot of social utility either. They are essentially gambling. And I understand that the federal government, which [again I should mention, insures depositors], might not want to let the bankers take depositors' money to Vegas with them for a fun weekend.

Anyway, the Obama administration invested a lot of energy and political capital in securing passage of Dodd-Frank. And then in working to get the necessary implementing regs through various agencies. Now they have made themselves complicit in the gutting of part of that ill -- a part with more intuitive appeal than much of it.

I have to say I am unsurprised at Senator Warren's reaction.

I also think we're seeing one of the issues of the Democratic primary campaign of 2016 take shape. Yes, I know, everybody thinks Hillary is a steam-roller and there won't be any primary campaign. But Hillary has associated herself quite closely with this administration. Four years in the top cabinet approach made that inevitable. Even now that she is in a position where she could distance herself she isn't doing so.

This leaves her open to challenge. It might be Warren who does the challenging. It might be someone else. We'll have to see.

Friday, December 19, 2014

Causal Chains

A thought today from Bertrand Russell's book, Human Knowledge.

Russell is here discussing the relationship of cause and effect. He considers the possibility that the relationship might be entirely subjective, just a name for the fact that A regularly precedes B in my experience. Whenever I see a dry match struck against a rock, I then see a flame, etc. He refers to this hypothesis as that of a "world consisting only of data," because it involves seeing causation (and other relations) as connections between one datum and another, not as facts about some external world whence come the data into my subjective consciousness.

And of that idea, he says this:

"As regards the irregularity of a world consisting only of data, this is an argument to which it is difficult to give precision. Roughly speaking, many sensations occur without any fixed antecedents in our own experience, and in a manner which suggests irresistibly that, if they have causes, these causes lie partly outside our experience. If you are hit on the head by a tile falling off a roof while you are walking below, you will experience a sudden violent pain which cannot be explained causally by anything of which you were aware before the accident happened. It is true that there are some extreme psychoanalysts who maintain that accidents happen only to people who have grown tired of life through reflecting on their sins, but I do not think such a view has many adherents."

Thursday, December 18, 2014

What is "Money"?


Almost exactly four years ago, economist Paul Krugman wrote the following explanation of the difficulty in defining the money supply for purpose of monetarist analysis. I think it is worth the resurrection.

Surely we don’t mean to identify money with pieces of green paper bearing portraits of dead presidents. Even Milton Friedman rejected that, more than half a century ago. For one thing, a lot of those pieces of green paper are pretty much inert — sitting outside the United States, in the hoards of drug dealers and such. For another, checking accounts are clearly a close substitute for cash in hand.

Friedman and Schwartz dealt with this by proposing broader aggregates –M1, which adds checking accounts, and M2, which adds a broader range of deposits. And circa 1960 you could argue that those aggregates were good enough.

But now we have a large shadow banking system, in which things like repo serve much the same function as deposits; M3 used to capture some of that, but the Fed discontinued it, in part I think because it wasn’t clear which repo belonged there, and data on repo not involving primary dealers is scattered. Whatever.

The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it’s not clear that any single number deserves to be called “the” money supply....

But if you’re determined to view economic affairs through a sort of paleo-monetarist lens, focused on the evils of “printing money”, you’re going to have a hard time in the modern world, where the definition of money is increasingly vague.

Some of Krugman's polemical vices show through there. For example, the phrase "even Milton Friedman," which suggests that Friedan was reluctant to abandon the cartoonish view that Krugman starts with. I don't believe he deserves the implications of that "even."

Still, if we understand that it is a cartoonish view, an expositor can legitimately start with it and use it to move forward to other possible understandings on money, as Krugman does here.

He makes a good point, and the rise of bitcoin and its imitators in the four years since he wrote have made it a better point. "Money" is a tricky concept. Unfortunately, Krugman himself isn't always consistent with that point, himself employing simplistic notions of money when they serve his politics.

Case in point: here.

Sunday, December 14, 2014

Currency War

Nouriel Roubini recently tweeted, "Currency wars coming, but don't bet on gold."

Roubini is an economist affiliated with New York University, Stern Sch. of Business. He has had an on-and-off relationship with the International Monetary Fund, and is probably best known to the general economics-literate public for the book Bailouts or Bail-Ins? (2004).

That Roubini believes "currency wars" are coming means that opinion has gone well beyond the "usual suspects."

But why does he mean you shouldn't bet on gold? In essence, he believes that as all currencies are about to drop in value relative to real assets, you should do your best to turn your currency into real assets. And this doesn't mean shiny metals. It means real estate and equities.

Saturday, December 13, 2014

Time: Good Choice 

Sometimes I argue with Time's choices for person of the year.

This year I cannot. The "Ebola fighters" generically are the POTY, and I can't imagine anyone more deserving.

All I'll do then, to pad out this entry, is quote a bit of Time's own thoughtful commentary on the Ebola outbreak that has made so many calamitous headlines in 2014.

"This was a test of the world's ability to respond to potential pandemics, and it did not go well. It exposed corruption in African governments along with complacency in Western capitals and jealousy among among competing bureaucrats. It triggered mistrust from Monrovia to Manhattan."

That's sobering, even if the alliteration in that final sentence is a little too neat.

The other finalists for the POTY distinction were: Ferguson protestors; Vladimir Putin; Taylor Swift; Tim Cook; Roger Goodell; Massoud Barzani; Jack Ma. Perhaps I should have been paying attention to some stories with greater care this year, because I had to Google each of the latter two. Barzani is the president of the Kurdish regional govt in northern Iraq. It's been a big year for him, with ISIS and all that. Jack Ma is the CEO of Alibaba, essentially China's answer to eBay.

Seeing the alternatives laid out like that simply confirms my sense that the actual choice was the right one.

Friday, December 12, 2014

Temasek and automatic trading

Temasek, an investment company managing Singapore's surplus revenues, has bought a significant stake in a high-tech trading company: that is, 10% of Virtu.

Here's what Reuters said about the deal on Sunday.

Virtu's CEO is happy about this. "Temasek is an ideal partner for Virtu," etc. Why? Because Virtu is expanding "into new asset classes and geographies."

But what comes to my mind is that Virtu is the kind of operation that serves as the missing 'bad guy' in Michael Lewis' book, Flash Boys.

Lewis' book plays up the market distortions, the "rigging" of markets in his term, that can be accomplished through contemporary electronic/algorithmic wizardry. When the emphasis is on the speed for the wizardly machinations, this is called "high-frequency trading," though speed itself may not be quite as 'of the essence' as that term suggests.

One feature of Lewis' book that many readers found odd was that while he highlights and profiles the activities of some individuals who are seeking to create an 'antidote' to the poison of HFT, and he describes the poison itself in technical terms, he doesn't describe the poisoners in human terms. Who are they?

The most we get is that Goldman Sachs is involved, and hired Sergey Aleynikov to help it get into the act. But we also get the idea that Goldman was a big lumbering dinosaur in this area, and that the actual troublemakers of HFT were working within smaller institutions, like nimble mammals slipping in and out of the Dino's ken.

At any rate, Lewis left them in the shadows. One of the nimble mammals, though, that he would have named had he sought to illuminate that side of his story, would have been Virtu.

Thursday, December 11, 2014

John Jay Chapman

I've just read a fine essay by Christopher Reid about the journalist/essayist John Jay Chapman (1862-1933).

Here's the link, if you would also like to dip into it.

And here's a link to one of Chapman's essays, Professorial Ethics (1910).

In that essay, Chapman writes that the type of men who become the presidents of colleges are those who, a rule, began life with ambitions in scholarship, "but their talents for affairs have been developed at the expense of their taste for learning, and they have become hard men. As towards their faculties they have been autocrats, because the age has demanded autocracy here; as toward the millionaire they have been sycophants, because the age has demanded sycophancy here."

Nowadays the word "millionaire" doesn't work well in this context. A million won't go as far in buying sycophants as once it did. Billionaires, though? Make that change and the passage likely still works fine.
Chapman certainly shared my admiration for William James. He wrote this essay on him.
Here's a nice line from it. "the center and focus of his thought fell within his nature, but not within his intellect. You were thus played upon by a logic which was not the logic of intellect, but a far deeper thing, limpid and clear in itself, confused and refractory only when you tried to deal with it intellectually."
Enough random quoting for the day....