Plutonomy and good bank for Citigroup

The financial crisis is being considered, by a vast majority of economists, over.
Nobody discuss anymore how and whether to create "good banks". The zombie banks are back to business as usual although problems are still there.
Some cynics could say about this crisis "Much ado about nothing".

I do not know how to interpret the appointment of Professor Willem Buiter as Chief Economist in Citigroup. He elaborated on my original idea of "good banks" and defended it strongly. To do that he criticized his new employer Citigroup, which he defined "a conglomeration of worst-practice from across the financial spectrum". Citigroup, a zombie bank in those days, was for him and me one of the best candidate to be broken up and replaced by a new "good bank".


It will be interesting to know what Prof. Buiter, in his new leading role of the economics research unit and member of the Global Investment Committee of the Citi Private Bank, thinks of plutonomy and related investment strategies.

Plutonomy was described by Michael Moore's "Capitalism: A Love Story" with reference to the in-famous, and leaked, internal Citigroup memo of October 2005 (revisited in March 2006).

The content and language of those memos are upsetting, appalling and dramatic, telling us how wonderful is a world where economic growth is powered by and largely consumed by the wealthy, happy few.

Now we know more how the financial crisis really came about and how Citigroup, producing such a kind of research and advice, had become a zombie bank.

Rich countries bond defaults: or debt matters

Few days ago, inquiring minds asked Nobel Prize Krugman about debt/GDP ratio comparisons. There is a bizarre school of thought who tend to think that sovereign public debt does not matter or debt can be accumulated for long time without sustainability and solvency problems.
The Dubai crisis is simply reminding us: a) the financial crisis is not over b) any debt needs to be paid back, no matter if it's private or sovereign (or a mix of the two).
In the case of Dubai, Buiter is stressing that the debt of the Dubai World Group and of Nakheel was not Dubai sovereign debt or sovereign-guaranteed debt. Yet financial markets are reacting as if either private or public (sovereign) debt levels are important. As a matter of fact the financial crisis has shown how private debts of banks and financial institutions become public debt and greatly contribute to its growth.
The volume of activity in sovereign credit default swaps – which measure the cost to insure against bond default has recently increased enormously. Some countries, like Greece, are showing clear sign of Sovereign Credit Deterioration. Bets on rich country bond defaults aim at guessing Which of the “Rich Four” Countries Will Default First?.

Italy is an interesting case as CDS volumes (USD gross notional) and contracts increased both about 48% in one year. Italy has one of the highest debt/GDP ratio of the developed economies and CDS volume is now the highest for an individual country.

So what are CDS and Interest Rates Telling Us? Simply that investors are increasingly worried about debt in the world, particularly industrialized countries and they are hedging long-tail risk.
Although debt as the percentage of GDP is not the only criteria to really assign a viable ranking to the default risk, it's a reminder that investors would like to be paid back sooner or later and all bills have to be paid.
That is why it is so important that you eat debt immediately, on Thanksgiving.
And do not tell people that Dubai is a Black Swan when it's just a roasted turkey as usual.

TOO BIG TO JAIL

Mr Berlusconi repeatedly claims that he is the victim of persecution by leftwing magistrates and judges. Few hours ago he said that this situation could bring the country on brink of a civil war.

Italy is becoming a country where somebody is TOO BIG TO JAIL.

Italy, Belgium and US: debt comparison and jokes

Few days ago I asked Nobel Prize Krugman why he had compared the debt to GDP ratio of Italy and Belgium to US as the picture below shows:I was surprised that a Nobel Prize would consider Belgium and Italy role models and their past experience as advanced countries.

We got this reply: "Both countries are a mess!

Um, guys, that’s the point. Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we".

I am trying to follow it up here and here, but in the meantime I say YES, YOU CAN and GOD BLESS AMERICA.

Japan situation was not reviewed further, Belgium is not really relevant, but I wonder if Italian debt and deficits situation is just Deficit hysteria?

How worried should we be about the deficit?

Covers: what do they have in common?

DEFINETLY A ROCKSTAR BERLUSCONI SILVIO

Taxing financial transactions: why not Pigou taxes?

There are still too few supporters of the idea of taxing financial transactions. I still contend that if governments need to raise revenues, as they need to do it sooner or later, it's better to tax capitals rather than consumption (for instance with VAT), production or labor.
On the other hand they could fund any tax credit scheme envisaged for job creation with a simple tax on financial transactions. The latter is often called Tobin Tax, but I rather consider it a tax of Pigou (who was born before Tobin and 132 years ago on November 18th) to the extent that the existence of negative externalities of capital movements and financial trades is sufficient justification for government intervention.

As a matter of fact and this crisis shows, financial transactions originated by toxic assets or any other speculative trade are polluting by their same origin.

Along the same lines one should think of windfall taxes (for instance on banking profits or bonuses) and tax on portfolio inflow transactions (a measure of capital control, aimed also at impacting currency appreciation, like the one introduced recently by Brazil).

All three kinds of taxes are Pigouvian in nature and scope. The rationale behind such taxes is that many types of financial transactions and economic agents, particularly those involving complex financial instruments and innovation, generates negative externalities either in terms of systemic risk, over size (for instance to big to fail) of institutions or excess of liquidity (hot money chasing nonexistent investment opportunities which result in assets bubbles), undesirable complex and high-risk financial transactions or simple and disorderly, but unwanted by a national government, appreciation of a currency.

In similar circumstances, taxes have been found to be more effective, and rewarding for governments, than regulation by requiring economic agents to internalize the external and social costs while making their capital movements and investments. This tends to align private incentive, including short term speculation, with social costs and benefits, with little distortions and great efficiency also taking into account costs imposed on others, particularly taxpayers, that are not taken into account by those taking the action and making the financial transaction.

UPDATE: Hopefully IMF is going to study this type of taxes.
I think the bill being drafted in US by Democratic Reps. Peter DeFazio (Ore.) and Ed Perlmutter (Colo.) on the sale and purchase of financial instruments such as stocks, options, derivatives and futures, should get economists and politician attention. It makes a lot of sense.

Testing linear thinking

Quantitative and cognitive models always rest on assumptions about the way the world works.
In statistics regression models are no exception.

If any of these assumptions is violated insights yielded by the model or conclusions drawn therefrom may be (at best) seriously biased or misleading or (at worst) false indicative and counter factual conditionals.

Everything depends on how people mentally represent information processing which may also end up in straightforward lies. Lies damned lies and statistics.

Looking at last Eurozone GDP's data, which always are presented in a confusing way (no matter if you are economist) stressing either quarterly or annual change, trend or seasonally adjusted, one could wonder if the crisis and recessions are over. It's not enough to say that after five consecutive quarters of declines, Eurozone GDP rose by 0.4 per cent in quarter-on-quarter.

Sometimes complex stories can be described with just a single still image. Is it always a picture worth a thousand words?

Although graphs are impressive nobody can really understand what is going on.


For instance, industrial production is going up and down, but when is up its growth is not entirely reflected in the GDP growth. This normally means that economic insights, let alone predictions, yielded by a linear regression model based on industrial production variable may be (at best) inefficient or (at worst) seriously biased or misleading. This describes the impact if the assumption that a straight line describes data doesn't hold.

Then you see that unemployment is at record high and keeps rising and economists tell you that this variable is normally lagging behind the recovery. Thus no matter if GDP rises you can come to the conclusion that we are going to have structurally high unemployment in EU and US.

About Italy economy it's interesting to look at the picture below from Edward Hugh's post:

How to interpret this trend? Any second derivative changing sign or turning point?

You may wonder if there is a cogent case in Italy to be optimist or somebody is lying processing information as they like and fit any personal and political purpose.

You owe money: or when the unthinkable becomes thinkable

Somebody thinks that governments may run a Ponzi scheme, which is a financial organization with liabilities and no assets backing those liabilities. The scheme can last only as long as everyone believes the debt can be paid back.

What does it happen if a government does not have money to pay what it owes you? The question is being debated here and here.
It is apparent that some countries will need spending cuts and/or tax increases over the next decade to return the country's debt-to-GDP ratio to a sustainable level or say below 60%. Italy is not in a good shape nor trend.
It is not yet clear, from an economic and accounting point of view, why some governments are still reluctant to opt for a Tobin tax or a windfall tax among the tax increases needed to fill any revenue gap. If governments like to run Ponzi schemes and financial institutions like to create money with money, why shouldn't we tax financial transactions and extra-profit from money creation? Isn't better to raise revenues now than defaulting on debt later?