CQ2

I went to a panel discussion tonight at Harvard on the current economic crisis. I figured the topic was important enough for me to skip out of work early (I was in a training class in Waltham) although the session did nothing to calm my anxiety about the current situation.

My notes on the discussion:

Jay Light, dean of the Business School

There are three main issues in the crisis at the moment:

(1) leverage

(2) transparency

(3) liquidity

Traditionally, home prices in the US have been 2.8 to 3.0 times income but it’s gone to 4.0 in the US and even higher elsewhere (6.0 in the UK, for example.) Short term credit markets have seized up. It’s been like a slow-motion train wreck, although the wreck has speeded up in the past 10-12 days. To resolve it we need the $700 billion to stop the patient from bleeding to death in the operating room. Next, we need to stablize the patient over the course of the next few months and then in the long term go through some process of rehabilitation, undoubtedly including regulatory reforms.

Rob Kaplan, professor of management and former vice-chairman of Goldman Sachs

The real problem that the economy is facing is that it’s engine of growth, the middle-American family, has slowed. The middle class, he said, is disappearing. Over the past ten years, middle class wages have stagnated but costs — including food, energy, and especially health care costs — have been rising rapidly,. This gap has been financed by tapping the equity in homes, a perfectly rational economic choice.

Like Jay Light, Kaplan believes the $700b plan is good and necessary but alone it is not enough. We as a country need comprehensive policy reforms to support the engine of the US economy, the middle class.

Elizabeth Warren, law professor

First of all, let’s be clear that this isn’t the fault of poor people; we hear about subprime loans and we think about poor people getting into houses they couldn’t afford but 80% of subprime loans were existing homeowners re-financing. It turned into a giant Ponzi scheme that inevitably came crashing down.

We have a new home finance industry that was never tested by a bubble and it’s clear that it didn’t survive its test.

One problem is that we don’t have a one-to-one correspondence between the debt owner and the debtor. Because mortgages were divided up and bundled you can’t work out specific situations between the lndor and the borrower like you could in the past. Instead, what we have is a zillion fractionalized shares. Ten percent of what the government will buy will be actual whole mortgages.

Her recommended solution is a Financial Product Safety Commission because at the base of it we’re dealing with a dirty faulty product. It doesn’t meet basic ’safety’ requirements; if it was a toaster, you wouldn’t be able to sell it (no matter what the price) in the US; why don’t we have similar regulation over financial instruments, which have proven to be very very dangerous?

Kenneth Rogoff, Professor of Public Policy

The financial sector is too big; as a sector it’s 3%-4% of the economy but in recent years it’s represented 30% of corporate profits, and because of all of the outsized pay packages, 10% of the wages in the country. The sector needs to shrink, which is what’s happening now. Why should we prop this sector up? What makes them more special than say the auto industry? This is especially true since we don’t know how much these investments are worth and the people that are going to *try* to price them for us are the same (unemployed) investment bankers who couldn’t do this before and created this whole mess in the first place.

Greg Mankiw, Professor of Economics

Falling housing prices, not bad underwriting, are the core of the problem; there was bad underwriting, for sure, but that isn’t all of it.

Everyone has known that the GSE (government-sponsored entities, i.e., Freddie Mac and Fannie Mae) were a problem but the politicians, on both sides of the aisle, didn’t wan to touch it. He served on a Bush-sponsored committee to review the GSEs and they made the same recommendations that a similar panel had made to Clinton but neither was acted upon.

As far as the presidential candidates’ responses, neither of them has done a stellar job of addressing the problem.

Robert Merton, University Professor and Nobel laureate

There has been a real wealth loss in the country, something like $16b to $18b.

There is a strong negative feedback loop going on in the financial markets now.

Need to figure out in the future how to reward innovation and take acceptable levels of risk without imploding the whole system.

(Coincidentally, I had written about Sanders Theatre a couple of weeks ago, so it was a real pleasure to be back there after fifteen years.  It’s such a beautiful space.)

See also Larry Summers’ piece in the Harvard alumni magazine

Nothing against Barbara Bush or anything, but I’m practically beside myself that I can use the occasion of an article on a presidential candidate’s mother to refer in context to Clifford Geertz.

Via Language Log, there’s a must-read profile in Time Magazine about Obama’s mother by Amanda Ripley:

Each of us lives a life of contradictory truths. We are not one thing or another. Barack Obama’s mother was at least a dozen things. S. Ann Soetoro was a teen mother who later got a Ph.D. in anthropology; a white woman from the Midwest who was more comfortable in Indonesia; a natural-born mother obsessed with her work; a romantic pragmatist, if such a thing is possible.

As Benjamin Zimmer writes in Language Log, after he gets the principal issue of pronouncing Obama’s sister’s name out of the way:

So Barack Obama has a half-sister versed in Indonesian figures of speech (regardless of Barack’s own proficiency in Indonesian). Not only that, he has another half-sister, on his father’s side, who is trained in Germanic languages and linguistics. According to Spiegel Online, Auma Obama studied at University of Heidelberg’s Neuphilologische Fakultät before continuing her graduate work at University of Bayreuth in the Interkulturelle Germanistik program. Her dissertation was on literary reflections of the concept of labor. It’s a fascinating extended clan, though you’d never know it watching the Democratic Convention’s genericized depiction of the Obamas as an “all-American family.”

Ripley’s piece, neatly staged in three acts, is broadly sympathetic but expertly done and full of insightful detail; a thick description, to use Geertz’s felicitous phrase.  And an appropriate one, too,  given that Obama’s mother was — like Geertz — an anthropologist of Indonesia who wrote a thousand page disseratation on ‘peasant blacksmithing,’ a classic thick description if there ever was one.

Barry Ritholtz has a characteristically blunt assessment of the current financial crisis:

There is a choice to be made: Either we regulate the Banks, or leave it to the vagaries of the free markets to punish those who trade with, or place their assets in the wrong institutions. But for God’s sake, do not give us the worst of both worlds — do not allow banks the freedom to make horrific but preventable mistakes (i.e., only lending money to those who can pay it back), but then expect the taxpayers to foot the trillion dollar bill.

You can practically hear him pounding the table as he writes. He’s angry at Alan Greenspan for getting us into this mess, for politicians refusing to acknowledge reality, at regulators for failing in their obligations, and at much else besides.

The old Thai capital of Ayutthaya was a fantastically cosmopolitan place in the seventeenth century. Among others, there were French, Dutch, Portuguese, Spanish, Japanese, and Persian colonies living around the city. The Japanese residents alone included ronin, traders, and Japanese Christian refugees. (The photo above is of Japanese mercenaries in the service of the Thai king — note the elephants and the rising sun flag.)

As you might imagine, the characters that wound up in seventeenth-century Ayutthaya were not exactly run of the mill personalities. There was then apparently a job title of “adventurer,” along the lines of the Man Who Would be King: see, for example, Filipe de Brito de Nicote, the Portuguese adventurer in the nearby Arakan coast of Burma, or the unappealing Bastian Gonsalves, aka Sebastian Gonzales Tibao or Sebastian Gonslaves Tibeau. The chaotic history of the failed Portuguese colonization of Chittagong and Sandwip Island (modern Bangladesh) and Arakan is still waiting for a movie.

One of these adventurers was the Greek Constantine Phaulkon who became, briefly, an important character in late 17th century Ayutthaya and married Maria Pina de Guimar, a Luso-Japanese (presumably Catholic) mestizo.

Could you get a more obscure ethnic designation than “Luso-Japanese mestizo”? Only in Ayutthaya.

Or Macao; but that’s another story.

12 April 1865, Appomattomax courthouse.

Joshua Chamberlain was selected to receive the Confederate surrender. He describes the scene thus:

The momentous meaning of this occasion impressed me deeply. I resolved to mark it by some token of recognition, which could be no other than a salute of arms. Well aware of the responsibility assumed, and of the criticisms that would follow, as the sequel proved, nothing of that kind could move me in the least. The act could be defended, if needful, by the suggestion that such a salute was not to the cause for which the flag of the Confederacy stood, but to its going down before the flag of the Union. My main reason, however, was one for which I sought no authority nor asked forgiveness. Before us in proud humiliation stood the embodiment of manhood: men whom neither toils and sufferings, nor the fact of death, nor disaster, nor hopelessness could bend from their resolve; standing before us now, thin, worn, and famished, but erect, and with eyes looking level into ours, waking memories that bound us together as no other bond;–was not such manhood to be welcomed back into a Union so tested and assured?

Instructions had been given; and when the head of each division column comes opposite our group, our bugle sounds the signal and instantly our whole line from right to left, regiment by regiment in succession, gives the soldiers salutation, from the “order arms” to the old “carry”–the marching salute. Gordon at the head of the column, riding with heavy spirit and. downcast face, catches the sound of shifting arms, looks up, and, taking the meaning, wheels superbly, making with himself and his horse one uplifted figure, with profound salutation as he drops the point of his sword to the boot toe; then facing to his own command, gives word for his successive brigades to pass us with the same position of the manual,–honor answering honor. On our part not a sound of trumpet more, nor roll of drum; not a cheer, nor word nor whisper of vain-glorying, nor motion of man standing again at the order, but an awed stillness rather, and breath-holding, as if it were the passing of the dead!

I think you’d have to be more hard-hearted than me to not be moved by that scene. Chamberlain, hero of the second day of Gettysburg at Little Round Top with the 20th Maine and later president of Bowdoin College, continues:

What visions thronged as we looked into each others eyes! Here pass the men of Antietam, the Bloody Lane, the Sunken Road, the Cornfield, the Burnside-Bridge; the men whom Stonewall Jackson on the second night at Fredericksburg begged Lee to let him take and crush the two corps of the Army of the Potomac huddled in the streets in darkness and confusion; the men who swept away the Eleventh Corps at Chancellorsville; who left six thousand of their companions around the bases of Culps and Cemetery Hills at Gettysburg; these survivors of the terrible Wilderness, the Bloody-Angle at Spottsylvania, the slaughter pen of Cold Harbor, the whirlpool of Bethesda Church!

The whole passage is well worth reading, especially on the anniversary of that “chill gray morning.”

I highly recommend reading a great, thickly detailed, optimistic article on Pakistan, “A New Deal in Pakistan,” by William Dalrymple in The New York Review of Books. The thrust of his nuanced article is that the stereotype of fundamentalist Pakistan doesn’t hold water and that the recent elections are a cause for hope:

To widespread surprise, the elections in Pakistan were free and fair; and Pakistanis voted heavily in favor of liberal centrist parties opposed to both the mullahs and the army. Here, in a country normally held up in the more Islamophobic right-wing press of Western countries as the epitome of “what went wrong” in the Islamic world, a popular election resulted in an unequivocal vote for moderate, secular democracy.

I certainly missed that; I knew there were elections and that they had gone badly for Musharraf, but I didn’t understand the full import of those elections. And Pakistan, over the last five years, has been changing. Among the changes that Dalrymple notes are the booming economy, especially in the cities (”full of gay designers and beautiful models”) and the growth of a newly prosperous middle class:

It was this newly enriched and empowered urban middle class that showed its political muscle for the first time with the organization of a lawyers’ movement, whose protests against the dismissal of the chief justice soon swelled into a full-scale pro-democracy campaign, despite Musharraf’s harassment and arrest of many lawyers. The movement represented a huge shift in Pakistani civil society’s participation in politics. The middle class were at last moving from their living rooms onto the streets, from dinner parties into political parties.

But these changes go beyond the secular city; even in traditionalist strongholds such as the Northwest Frontier Province (ancient Udyana, homeplace of none other than Padmasambhava but I digress), the pro-Taliban party in power lost, decisively, to the Awami National Party (ANP).

[The ANP] is a remnant of what was once a mighty force: the nonviolent and secular Red Shirts movement, which, before the creation of Pakistan, was originally led by Khan Abdul Ghaffar Khan, an important ally of Mahatma Gandhi from the North-West Frontier Province. Ghaffar Khan was locked up by one Pakistani general after another for much of the time between Partition and his death in 1988, but his political movement has survived both the generals and a succession of bomb blasts aimed at its party, and has now—after nearly fifty years in opposition—made a dramatic comeback under the leadership of Ghaffar Khan’s grandson, Asfandyar Wali Khan.

That’s a little dizzying to think about, Gandhi’s allies in charge — again! — of the NWFP.

Dalrymple’s article was so good that I went looking for more by him and I’m now, ecstatically, reading his From the Holy Mountain, about old Christian communities in the Middle East.

James Miles of The Economist was, coincidentally, on an officially sanctioned visit to Lhasa when the riots broke out there last week. He spoke with CNN, giving the first good account that I’ve seen of the violence. Several points stand out for me, including the extent of the destruction, the lack of an immediate crackdown by the authorities in response, the surprise on the part of the Han Chinese targets of the violence, and the curent martial law effectively — although not explictly — in place now.

(His excellent article, “Trashing the Beijing Road” is available now at the Economist website, but no promises how long that link will work without a subscription.)

(more…)

Via the Big Picture and Paul Kedrosky (again), a frightening view of the potential depths of the sub-prime crisis, still unfolding:

This report discusses the implications of the recent financial market turmoil for central banks. We start by characterizing the disruptions in the financial markets and compare these dislocations to previous periods of financial stress. We confirm the conventional view that the current problems in financial markets are concentrated in institutions that have exposure to mortgage securities. We use several methods to estimate the ultimate losses on these securities. Our best (very uncertain) guess is that the losses will total about $400 billion, with about half being borne by leveraged U.S. financial institutions. We then highlight the role of leverage and mark-to-market accounting in propagating this shock. This perspective implies an estimate of the eventual contraction in balance sheets of these institutions, which will include a substantial reduction in credit to businesses and households. We close by exploring the feedback from credit availability to the broader economy and provide new evidence that contractions in financial institutions balance sheets’ cause a reduction in real GDP growth.

Leveraged Losses: Lessons from the Mortgage Market Meltdowns [.pdf] by David Greenlaw of Morgan Stanley, Jan Hatzius of Goldman Sachs, Anil Kashyap of the University of Chicago and Hyun Song Shin of Princeton University.

They’re talking, in total, about two trillion dollars and 1.5% of GDP!

Ahora estamos lejos de aquel valle de dolor
pero su memoria nunca olvidaremos;
Así que antes de que continuemos esta reunión
pongámonos en pie por nuestros gloriosos muertos.

One of my first, and one of my favorite, memories of living in Manhattan was the beautiful four-hand piano music (Schubert?) that came pouring out of our neighbor’s apartment. Already in her mid-eighties, spirit undimmed, Henrietta was full of music and life.

She was one of those characters — a real character — that seem larger than life, although in her case I don’t think she was much over five foot even. Part of the original folk scene in NYC in the early sixies, she knew everyone from Leadbelly to Woody Guthrie and Pete Seeger. She wrote Woody’s authorized biography, A Mighty Hard Road. Supposedly, I learned from her NY Times obit, Pete wrote “Kisses Sweeter than Wine” in her bathroom. Still when we knew her she was politically active and I think — although I may be conflating imagination with reality here — we sang “We Shall Overcome” in her apartment together once. She loved the fact that my grandparents were Spanish Republicans in NYC in the 1930’s — she, too, had protested fascism before WWII and afterwards had spent time in Spain and North Africa chronicling the music of Sephardic women. Oh, the stories. She had also spent years doing field recordings, again of women’s songs, in Mexico and Central America, and was on a first name basis with both of the Lomaxes, father and son. She had a long-running radio show in NYC and had interviewed a young Bob Dylan in the early sixties, although she still didn’t like the idea of him going electric. Seriously! How cool is that?

Her corner apartment, stuffed full of mementos from her adventurous life, had been a regular party stop all those forty years ago and still, when we lived next door, radiated light and song.

How could anyone afford them?  Well, it turns out, they couldn’t.  That emperor, like so many others, didn’t have any clothes.  But the ’sub-prime’ mortgage mess, which has spread to a credit mess may have already metastasized throughout the banking system.  (See a previous post for a related dynamic in quant hedge funds last August.)

Paul Krugman writes in the New York Times, “What we are witnessing,” says Bill Gross of the bond manager Pimco, “is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August.”

To reinterate: Bill Gross says that our banking system is breaking down and it’s so complicated that no one, including Ben Bernanke understands it.