September 28, 2007 11:59
Gratuitous automotive photos from Copenhagen
I saw this Austin Minor near the campus of the Copenhagen Business School. And I thought it was a beautiful thing. So was this Volvo driving through the City Hall Square:
I'm flying back to the U.S. today (Friday). So this will probably be the last of my Copenhagen dispatches.
September 28, 2007 6:25
More Lego excitement
By popular demand, a couple more photos from the Lego factory in Billund. A molding machine rolls out some black Legos:
And a robot, nicknamed "Olfert," replaces a full box of translucent green pieces with an empty one:
September 27, 2007 7:06
The Danish prime minister says he'd cut taxes more but voters don't want him to
Thursday afternoon I went to the annual summit of the Danish Confederation of Industries (Dansk Industri). There is nothing elsewhere in the Western world that compares with this organization: It is the Chamber of Commerce, the Business Roundtable and several other corporate organizations whose names I can't think of, all rolled into one. Plus it negotiates the labor agreements that determine how much maternity leave and how big a pension and how much continuing education Danish workers get.
Pretty much every Danish CEO of consequence was there, along with about half the cabinet and a bunch of labor leaders. The prime minister, Anders Fogh Rasmussen, gave a speech explaining his plan for making Denmark "the world's most competent nation": better education, more R&D, more skilled immigrants, slightly lower taxes. (I was able to understand all this because I had a headset through which a nice translator converted it all into English.)
The tax part was pretty funny. Dansk Industri is pushing for lower top income tax rates to keep talented Danes from leaving and attract talented foreigners. Fogh, as he's called, is the longtime tax expert of the liberal (read: sorta libertarian) party and is clearly sympathetic to such arguments. But the political realities here aren't what they are in the U.S.
"You might feel we're dragging our feet, but in this society opinion polls show that tax cuts are not a priority," Fogh said. "I think it's quite good to have tax relief in a country where opinion polls say people don't want it." (Everybody laughed at that.)
After his speech, Fogh didn't leave the building as any self-respecting American politician would, but sat down in the front row for the awarding of the Dansk Industri Produktpris. The winner was LM Glasfiber, for designing and making the world's longest windmill blade (61 meters!).
When that was all done, I wondered if it was appropriate for a reporter to accost the prime minister. Then a Danish reporter did it, and I figured it was okay. I ended up walking out of the auditorium deep in conversation with Fogh. Nothing he said was all that amazing, plus I'm tired and I want to go to bed, so I think I'll save the quotes for my eventual article. But still: Pretty cool, no?
September 27, 2007 11:33
Charming Danish customs
This was at the employment ministry Wednesday. I assumed the sign said "take one" rather than, say, "poison," so I took one and ate it. Pretty good. And I'm still alive.
I'd heard of the Copenhagen city bike system, where you put in a 20 kroner (about $4) coin to get a bike, then get the money back when you return the bike to one of hundreds of racks around the city. But Wednesday afternoon, when I really could have used one, there was none to be found at any bike rack I saw. Thursday morning I came across the lovely yellow thing pictured below, but didn't have the right coin and was in too much of a rush to go looking for change. So I really like the idea and all, but as a practical matter it has turned out to be pretty useless. Perhaps I should get myself a 20 kroner piece and hold on to it for life, so on every future visit to Copenhagen I'll be prepared.
Finally, this woman is killing weeds with a blowtorch:
September 27, 2007 5:32
Obligatory scenic Copenhagen photo, and more
Yeah, I probably ought to be commenting on the GM-UAW deal. But I've been running around interviewing Danes all day everyday for an article I'm going to write on the swell Danish economy, and don't have many brain cells left over for the American economy. I took this shot Wednesday on the way to a meeting with Knud Romer, author of the European sensation Den som blinker er bange for døden (He who blinks is afraid of death), a fictionalized account of his less than idyllic childhood as son of a German mother and a Danish father in southern Denmark. Seriously, it's huge in Germany and France. He's still looking for an American publisher, though. Come on, people, how can you resist this book?!?
September 26, 2007 9:53
A shocking image from a Danish gas station
To translate: That's $5.98 for exactly one gallon of diesel fuel, which is substantially cheaper than gas. (I was topping off the tank on my rental car before returning it at the Billund Airport Monday afternoon; hence the small amount--although I had no idea it would work out to be a gallon.)
September 26, 2007 4:50
Where I want to work when I grow up
This is part of the newsroom at Politiken, one of the leading Danish dailies (not the one that ran the cartoons, although they're owned by the same company). I know it's not much of a photo--I'm way too self-conscious to be any good as a photographer; I just want to take the shot quickly and unobtrusively and move on before anybody notices. Still, I hope it at least gives a hint of the fact that this is a lot more pleasant and Danishly stylish than the newspaper offices back home. Politiken is also in the midst of building an outdoor deck between the newsroom and the culture section, where people will be able to sit outside and drink their coffee on nice days.
Now there aren't all that many nice days in Copenhagen, and the Sacramento Bee has a totally sweet outdoor cafe on its roof. But my totally unscientific impression from visits to four Danish workplaces over the past couple of days is that an awful lot more thought and effort is put into making them pleasant than is the custom in the U.S. of A. (or the U.K., or Germany). I guess, with an unemployment rate of 3.2%, a workplace has to be nice or nobody would be willing to work there.
September 25, 2007 2:09
Slices of Lego history and soon-to-be history
That's the view from the room in Billund, Denmark, where Ole Kirk Christiansen founded Lego in 1932. Below is a Lego storage warehouse. Yes, every one of those boxes is full of Legos.
I spent Monday talking to various people at the company, which is in the process of outsourcing most of its production to Eastern Europe and Mexico. They'll keep making the really high end Lego Technic toys in Billund, and also keep a "concept manufacturing centre" for working on prototypes of new toys. If this reminds you of the way lots of American tech companies work these days, there's another parallel: Most of the outsourced work will be done by Flextronics.
September 24, 2007 3:58
The Danes are concerned
Some fun headlines from Børsen, the Danish financial daily. I'm guessing the "frygter" in the main headline means fears. The rest you can figure out. (Maersk being the world's leading container-shipping company.)
September 24, 2007 10:12
Killer slugs in Denmark
Meet a monstrous byproduct of European integration. The result of the Spanish slug moving north and breeding with the hardy local black slug. They call it a Draebersnegle, or killer slug.
See, this is why the Danes won't adopt the euro.
September 24, 2007 3:08
Denmark: Still green, still bucolic
The Curious Capitalist's Danish journey has begun. I don't have a whole lot to report yet, since I haven't done any reporting. Instead, I've been hanging out with relatives who have this lovely view. That and chewing some licorice-flavored gum.
I'll be headed to the big city soon, and it's supposed to rain the rest of the week. So no more rural idylls. The gum chewing, however, will continue.
September 21, 2007 10:58
Why the Yankees shouldn't hire Barry Ritholtz as pitching coach
Barry Ritholtz, one of my favorite financial bloggers, left a comment to my most recent post on Alan Greenspan. After declaring Paul Volcker the hero of the modern Fed story, he wrote:
Greenspan was like the long middle reliever in a baseball game. He took a big lead and ultimately gave alot of it away. He completely blew the dot com bubble -- as a few people observed at the time, the margin rules for dotcom stocks could have been tightened before things got way out of hand. (The Fed funds rate did not need to be adjusted in 1999 or 2000 to create the desired effect)In 2002-03, Greenspan did create ultra low rates. He took the Fed Fund rate to 1% and left it there for a year. That has led to a lot of subsequent ills, too numerous to list here.
So with the bases loaded, and no one out, Ben Bernanke has become the relief pitcher.
We can assess blame to Greenspan for those runners in scoring position . . .
It's a great analogy except for one thing: What kind of middle reliever pitches for 18 innings? One can, with reason, argue that Greenspan stayed on too long. I'm dubious of the argument about margin lending in the dot-com bubble, because I don't think most of the people buying dot-com stocks were doing it with borrowed money. But I would agree that Greenspan was out to lunch as the housing boom inflated into a bubble in 2005 (although it's worth pointing out that this was during the last of his 18 years in office).
And what about then-Treasury Secretary John Snow, then-House Banking Committee chairman Mike Oxley, then-Senate Banking Committee Chairman Richard Shelby, and then-and-now President George Bush? Any really major attempt to crack down on the craziness in mortgage markets would have had to go through them. Why aren't they getting raked over the coals?
Oh, it's because they didn't $8 million book advances? Never mind.
September 21, 2007 5:09
Leading quant hedge fund manager sort of explains what went wrong
Cliff Asness of AQR Capital Management, one of the hedge funds briefly caught in the Great Quant Meltdown of August 2007, has been sending around a "working paper" that attempts to explain what the heck happened. As with everything Cliff writes, it's more entertaining than an explanation of quantitative investing has any right to be. (Although be warned: It's still an explanation of quantitative investing.) A few highlights:
Q. How do you know the problem was “deleveraging” vs. just bad stock picking?... First, the very size of the moves. The world is highly “fat-tailed”, meaning very big events happen more often than most models assume (the so-called “Black Swan” problem), particularly at short horizons. This is not something we just discovered; it always has affected the sizing of our bets. ...
Second, the linear nature of the declines and the comebacks. When they were falling and then when they were rising, these strategies moved in a near straight line throughout the trading day. It looked just like what it was – someone working large orders to take down their risk – and then someone putting that risk back on. It did not look like the random losses or gains of getting many small bets right or wrong.
Third, models are composed of many factors, some of which are low or negatively correlated with each other (value and momentum are the most prominent example of this phenomenon). During this period, all of the more well-known factors performed very poorly. That is a sure sign people were taking down risk in similar models....
He actually gives a fourth reason, but it's pretty closely related to the third. Then there's this:
I have said before that “there is a new risk factor in our world,” but it would have been more accurate if I had said “there is a new risk factor in our world and it is us.” It is our collective action going forward (where “our” refers to quant market-neutral managers or those employing very similar strategies) that now affects a world we didn’t realize we had such influence over, and this is undoubtedly an important short-term risk factor.
Finally:
Q. On the night quant equity strategies hit their lows, how did you feel getting a phone call from Ken Griffin of Citadel?
I looked up and saw the Valkyries coming and heard the grim reaper’s scythe knocking on my door. I did my best to run to the light.
September 21, 2007 12:49
New column: The competent technocrat who became miscast as an all-seeing guru
I've got a new column up online and in the new issue of Time with a shrinking iceberg on the cover (and a cool story by Jamie Graff about the battle for the Arctic inside). It begins:
He has been out of office for more than a year and a half now--and has spent, by his own account, a notable amount of that time in the bathtub. Yet many Americans still want to believe that Alan Greenspan is in charge of the economy.
In olden times, mainly the late 1990s, faith in Greenspan's omnipotence was expressed almost exclusively in positive terms. He was the "maestro," as Bob Woodward dubbed him in a best-selling book; the senior member of the "Committee to Save the World," as this magazine put it in a 1999 cover story; the Federal Reserve chairman who didn't just preside over the longest economic expansion in U.S. history but also was credited with somehow willing it to happen.Since that long boom ended in 2001, though, griping and whining have been ascendant. Greenspan was a bubble blower, the main criticism goes, a man whose lax monetary policies encouraged excess and speculation. What's more, he failed to thwart George W. Bush's demolition of the budget surpluses built up in the Clinton years. These complaints were steadily gaining in volume, thanks to the collapse of a mortgage-lending boom that began on Greenspan's watch, when the man jumped into the fray in mid-September with The Age of Turbulence, a new book about his life, and a barrage of media interviews to promote it.
So is Alan Greenspan really the root of all economic evil? Uh, no. Read more.
How did I end up (sort of) defending Greenspan? Mainly because the criticism today is so over-the-top. John Cassidy's nuance-free Portfolio takedown to a certain extent set me off (although not nearly as much as it set Brad DeLong off).
Greenspan was a conscientious and more-than-competent technocrat at the Fed. He may not have been entirely up to dealing with the new financial world that his success helped create, and his forays outside of monetary policy became increasingly problematic (and tone deaf) as his time in office wore on. But the current tendency to blame him for every last one of America's economic problems is almost as ridiculous as the late-1990s tendency to give him sole credit for the country's economic boom.
September 20, 2007 8:27
The dollar crash
Talk of a dollar crash has been all in the air today. The Daily Telegraph's Ambrose Evans-Pritchard, who would have to be taken seriously if only because of that name, but also happens to be a pretty smart and well-connected financial columnist, had this to say (via Barry Ritholtz):
Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.
"This is a very dangerous situation for the dollar," said Hans Redeker, currency chief at BNP Paribas."Saudi Arabia has $800bn (£400bn) in their future generation fund, and the entire region has $3,500bn under management. They face an inflationary threat and do not want to import an interest rate policy set for the recessionary conditions in the United States," he said.
And in the FT:
The dollar plunged, government bond yields soared and the price of oil hit a record high on Thursday amid growing concern that interest rate cuts by the Federal Reserve could stoke inflation.
The dollar already has crashed against the freely traded currencies: it's down more than 40% against the euro over the past few years. That doesn't mean it won't drop even further against the euro, but the bigger issue at the moment is with the countries (China, India, Saudi Arabia) that have been formally or informally linking their currencies to the dollar, and are beginning to decide that maybe that isn't such a great idea. Lots of people in Congress have been begging China in particular to get rid of the dollar link, of course, and the dollar's decline is, as Michael Phillips wrote in the W$J today, already reducing the trade deficit. But the adjustment could be ugly.
This isn't the end of the world. It may, however, be the beginning of the end of the rest of the world loaning us money with which to buy large flat-screen TVs.
September 20, 2007 3:18
Ben Bernanke demonstrates yet again that he is not Alan Greenspan
Testifying before the House Financial Services Committee today, Ben Bernanke allowed that the mortgage lending industry could probably do with a a few more rules:
We are looking closely at some mortgage lending practices, including prepayment penalties, escrow accounts for taxes and insurance, stated-income and low-documentation lending, and the evaluation of a borrower's ability to repay.
This represents a big shift. During his 18 years in charge, Alan Greenspan seemed pretty uninterested in the Federal Reserve's role in regulating the banking industry. Regulation interfered with the magic of free markets, his reasoning went. Plus (I'm making a guess here) he probably thought it was pretty boring.
Greenspan didn't have a problem with the Fed's regulation of interest rates, of course, but interest rate policy is a less intrusive, easier-to-reverse (not to mention more glamorous) way of affecting behavior than laws and regulations. It's also an extremely blunt instrument, though, which was why Greenspan said he was reluctant to use it to pop possible investment bubbles.
But it's at least conceivable that regulations aimed at reining in particularly short-sighted market practices could temper the rise of bubbles--as well as protect some consumers from their consequences. Which appears to be what Bernanke is thinking.
September 20, 2007 11:07
The secret to Denmark's economic success: the word "hej"
The Curious Capitalist is going on a road trip next week to Denmark (because that's where it's all happening), and I've been studying up on the language. It rocks. This, from Aalborg University "medialogy" professor Jens Arnspang, demonstrates how linguistic efficiency allows Danes to devote valuable brain cells to more important matters:
Good Morning: HejGood Midday: Hej
Good Evening : Hej
Hello: Hej
Goodbye: Hej
Happy to see you: Hej
Oh, are you there again: Hej
We met before: Hej
We never met: Hej
What a surprise to see you here: Hej
Oh, I did not expect you back so soon: Hej
Could you do me a favor: Hej
Please don't interfere here: Hej
Get lost: Hej
Please help me: Hej
I'd like to get to know you: Hej
Would you like to get to know me: Hej
I love you: Hej
Get out of my life: Hej
September 19, 2007 3:59
The musical explanation of the subprime crisis that you've been waiting for
From the Richter Scales, a San Francisco area a cappella group, to the tune of "It's a Fine, Fine Line Between Love and a Waste of Time" from the musical Avenue Q (thanks for the tip, Julie). As Fed-related musical humor goes, it's no "Every Breath You Take", but it's actually kind of nice to listen to:
Update: The video might take a minute to show up. Just wait, or hit refresh if you don't seem to be getting anywhere.
September 19, 2007 11:44
Greenspan worship continues, although it's got nothing on Rubin worship
Barbara Kiviat has a very entertaining piece up on Time.com about the visit she paid yesterday to a Greenspan book signing down at the Wall Street Borders. A highlight:
So, had they read the book, which had been selling since the day before? No. But the question prompted Oliver Young to remove his copy from the Borders bag he was holding and open it up to the pictures section. "Are there any pictures of Robert Rubin in here?" he asked. "Robert Rubin was here a few years ago. I really like him. I was really excited to meet him." Young found his Rubin picture — a reproduction of a 1999 Time magazine cover that included Greenspan, then-Treasury Secretary Rubin, and Rubin's then-deputy Lawrence Summers. "Yeah, I have this issue," Young said. "This was a great issue."
September 19, 2007 10:43
So maybe it wasn't a bailout, after all
This morning's inflation report--CPI down 0.1%, core CPI up just 0.2%--supports the case that maybe the Fed's big rate cut yesterday was less a Wall Street bailout than plain old-fashioned monetary policy. One month of data isn't what you could call conclusive evidence and it's hard to look at the rising price of oil and the declining value of the dollar and not see some inflationary threat in the future, but still: the economy is clearly slowing, the job market is stalled, inflation is for the moment out of the picture. Of course the Fed shoulda cut rates to 4.75%!
No, I'm not sure I entirely buy that either. But if we keep getting economic numbers like this I might come around.
Update: Dr. Inflation himself, Brandeis University's Stephen Cecchetti, has this to say about the CPI report:
Looking at the trend, every indicator of inflation is down substantially for where it was a year ago. The six month change in headline inflation has fallen from 4.8 to 3.8 percent (a.r.); the Median CPI is down from 3.5 to 2.5 percent (a.r.); the 16 percent trimmed mean has fallen from 3.2 to 2.2 percent (a.r.); and the conventional core measure excluding food and energy has gone from 3.3 to 2.0 percent (a.r.). My conclusion is that over the last year the inflation trend has fallen by roughly one full percentage point.
He goes on to give his blessing to the Fed's rate cut:
Regular readers of this report know that I am an inflation hawk; and I fully agree with the view that you cannot bail out people who did stupid things. Nevertheless, there are many reasons this was the right thing to do. On the inflation front, this is not the time to worry about inflation two years from now. Instead, policymakers are rightly focused on containing the damage of the fairly severe problems in short-term lending markets. On bailing out, you don't destroy the economy in order to punish people who took irresponsible risks. Instead, you make sure the mess isn't too big, and then you work on regulation and supervision to ensure it doesn't happen again.
Update 2: A mostly contrary view that I just found in my inbox from Unicredit's Harm Bandholz (he was writing about yesterday's PPI report, but same difference):
[T]his should be the end–-not the beginning--of a period with better inflation figures: Energy prices just reached new all-time highs and unfavorable basis effects are likely to lift the y-o-y rates of all inflation measures strongly. The PPI y-o-y rate might easily reach 51/4% in October, while the CPI y-o-y rate should exceed 31/2%.
September 18, 2007 2:39
Worldwide nonexclusive: The Fed cuts rates!
In the most breathlessly anticipated move of Ben Bernanke's young career as Fed chairman, the Federal Open Market Committee just announced that it's cutting the Federal funds target rate by half a percentage point, to 4.75%.
What does that mean? It means that the traders at the Fed's open market desk in New York will start buying up lots of Treasury securities from brokers. This creates money out of thin air, and causes the interest rate that the banks charge each other on overnight loans to drop. You can read all about it here. The Fed also cut the rate that it charges banks that borrow directly from it, the discount rate, from 5.75% to 5.25%.
But what does it really mean? Are we going to have a recession? Are financial markets going to stop wigging out? Are there going to be more rate cuts? Nobody knows, not even Ben Bernanke. And if anyone tells you they do, don't believe them.
The stock market loved the news, with the Dow rising 200 points immediately after the cut was announced. This was mainly because most people expected a quarter-point cut, and were happily surprised. But given the way the Dow has been jumping around lately, this means positively nothing. It could easily be down 300 points tomorrow.
For some reason I had been kind of hoping Bernanke and Co. would stand fast, just to stick it to all those whiners on Wall Street and in Detroit. But they did at least hold out all the way to their regularly scheduled meeting, and with all the signs of a weakening economy it would be kinda perverse to hold rates steady just to thwart Jim Cramer.
Update: Andy Busch, the global FX strategist at BMO Capital Markets in Chicago (the BMO stands for Bank of Montreal), offers this pithy assessment:
Yield curve steepens, stocks rally, dollar tanks, and gold soars. The market is now looking at expectations for Fed Funds to 4.25% by February. Given the recent drop in import prices and PPI, a lower dollar is a big benefit with little risk on inflation. It pumps up GDP by around .5% per quarter and offsets half of the losses from the housing sector.
Bernanke continues the Greenspan put and assists those that made poor credit decisions without the consequences of market discipline. Like a teenager with a car and no curfew, we'll be having more problems down the road from these actions. But for now, who cares? Everyone's happy and it keeps the politicians at bay. Jim Cramer is a modern day financial seer.
September 18, 2007 2:04
A business school professor explains how it all went wrong for business schools
Rakesh Khurana, the young Harvard Business School professor who made a splash five years ago with his book Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs, is back. This time, in an interesting choice for a guy who doesn't have tenure yet, he is taking on his employer (and its ilk) with From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession.
The book is large and dense, and I cannot claim to have read more than a few intriguing little bits of it. (We'll have to wait until after Rakesh gets tenure for him to start churning out breezy business bestsellers.) But I did go to a lunch for journalists Monday where Rakesh talked about the book (mealtime conversations will be a major theme in the Curious Capitalist this week). Portfolio.com blogger and occasional Curious Capitalist commenter Felix Salmon was there too, was the only attendee with enough courage to order a glass of wine (go, Felix!), and has already posted at length on Rakesh's arguments:
This idea of the role of management has become delegitimated over the past 30 years (roughly since George W Bush got his MBA from Harvard in 1975), to the point at which MBA students now speak of creating shareholder value as though there were no other conceivable purpose to management. ...
Without this higher purpose, business schools have become cast adrift ... The professors, most of whom do not have MBAs themselves, find themselves more the servants than the masters of their aggressive and ambitious students, who generally aspire to end up in whichever sector will make them the most money. As a result, says Khurana, there is now "an implicit contract between students and faculty: if you don't push us, we won't push you". There is no exam at the end of the degree which tests knowledge or ability, and there's certainly nothing analagous to the Hippocratic oath; rather, business schools have become credentialling factories, advertising themselves on the basis of the wealth of their graduates and the value of the contacts one receives there.
Rakesh clearly wants to do what he can to turn this around and establish/reestablish management as a true profession. This will be very hard to do, though, as long as most of the students at elite business schools don't want to go into corporate management. As Rakesh himself says, the bulk of Harvard MBA students plan to either become agents for others (consultants, investment bankers, private equity managers) or professional speculators.
September 17, 2007 4:30
Why the Fed shouldn't cut rates Tuesday
I had breakfast Friday morning with Lena Komileva, the Group G7 Economist at Tullett Prebon. To get all Lunch With the FT about it, it was at the London Hotel, I had the scrambled eggs with smoked salmon, and she had an omelet with herbs, which I remember because she pronounced the "h" (she's English).
Yes, it was a breakfast with somebody with an unwieldy, unprepossessing title from a firm you've never heard of. But Tullett Prebon is actually pretty interesting--a London-based "inter-dealer broker" that specializes in all sorts of weird and mostly incomprehensible derivatives and is doing a booming business in these turbulent times. And Komileva started off with a rapid-fire explanation of why the Fed shouldn't cut rates Tuesday that left me slack-jawed in awe. She talked so fast that I never got around to pulling out a notebook and taking notes--it seemed pointless. But here's my reconstruction-from-memory of her case:
There still isn't conclusive evidence that the U.S. economy is headed for a recession. The negative August jobs number was due in large part to a cut in government payrolls that won't repeat itself. So what the Fed is dealing with is still chiefly a financial-market problem, not an economic one. Plus the threat of inflation, the combating of which is supposed to be the Fed's main job, is still very present with the price of oil hitting all-time highs.
A small cut in the Federal funds target wouldn't do much to settle markets, since most people already have such a cut baked into their forecasts. A big cut might unsettle markets by driving the dollar further downward and raising both fears of inflation and worries that the Fed knows about some big problems to come that others don't.Also, to reassure markets in the case of a rate cut, the Federal Open Market Committee would probably feel obliged to accompany it with an optimistic statement implying disingenuously that further cuts might not be needed. If it left rates unchanged, on the other hand, the Fed could make clear that it remains very concerned and is willing to step in if necessary.
All this would free the Fed to focus on what Komileva thinks should be its highest priority: browbeating big banks and investment firms into sharply writing down the value of their mortgage portfolios. If all the banks cut the value of their mortgage books by 25%, and took the resulting hit to earnings, there would be a couple of horrible days on the stock market, followed by a slow, steady return to confidence.
So that's the Komileva Plan. On Tuesday we'll find out it it looks anything like the Bernanke Plan.
Update: In a note sent out to Tullett Prebon customers today, Komileva declared that she no longer harbors much hope that the Fed will do what she wants:
We now think that the Fed is likely to see the window of opportunity to implement more complex measures on Tuesday as small and will instead opt to bring the Fed fund target rate in line with the effective rate by cutting it by 25 bps, but signal that any further policy easing will be dependent on evidence in the economic data that the risks from tight conditions in money markets onto the real economy are beginning to materialize.
September 17, 2007 3:40
Greenspan: What I really meant with that ARM speech
The Greenspanmania will stop soon, I promise. But this, from an interview Fortune's Andy Serwer did with Greenspan, is really interesting:
Q: Now of course people are pointing fingers at you, Chairman Greenspan, in terms of the so-called housing bubble bursting and saying that you're responsible or partly responsible. Look at what he said in 2004, adjustable rate mortgages are prudent. These are things that homeowners should look to invest in or buy. How do you respond to those critics?
A: I think revisionist history is coming on with a rush. The speech I made actually referred essentially to conforming mortgages at that time. Remember, subprimes were not on the horizon. They were there, but they were very small. The big rush occurred much later.I was really taking a Fed study which had demonstrated that the insurance you're getting to have a fixed rate mortgage was very high, and that there are a number of people who perceive that they won't be in their home for two years, who would do far better with adjustable rate mortgages.
Now the truth of the matter is, the speech that was made in February, as I recall, 2004, and there was a big hubbub that somebody was raising the question that I was downgrading the 30-year mortgage. A week later, I was at the Economic Club of New York, and somebody asked the same question you just asked, and I said that I may have not made it clear that what really I was focusing on was a very small segment of the mortgage choices and that I thought that people who had special individual cases ought to be looking at adjustable rate mortgages.
Indeed, those took out adjustable rate mortgages within the next few weeks after I made both of those statements, had they refinanced into fixed rate 30-year mortgages 18 months later would have come out way ahead because a 30-year mortgage didn't change. ...
I have never had an adjustable rate mortgage. I always pay the price for the insurance. I like 30-year mortgages. So the bottom line is, take your choices, but I would have written the same article, same speech, that I did in February 2004.
It was a good article. It was a good speech.
It's sort of like his explanation of his Bush tax-cut endorsement: I was saying something nuanced, but the media removed all the nuance. Which is probably true. But maybe it should have taught him to keep quiet, no?
September 17, 2007 11:52
Greenspan: Nostalgia for the Ford administration, plus a lack of self-awareness, made me do it
Upon opening my copy of The Age of Turbulence, the first thing I checked was the acknowledgments, to make sure my friend Peter Petre got some credit for, uh, ghostwriting the book. Sure enough:
Peter Petre has been my collaborator in the writing. He taught me the age-old art of narrating in the first person. I had always viewed myself as an observer of events, never as part of them. The transition was a struggle and Peter was patient.
So it wasn't really all written long-hand in the bathtub, I guess.
Because Peter is my friend, I can't review the book. I do think it's okay to comment on the substance, though. And so after the acknowledgments, I turned to Chapter 10, "Downturn," to read Greenspan's take on the infamous 2001 Senate testimony in which he appeared to wholeheartedly endorse the Bush tax cuts. This passage struck me:
During those last days of December and first days of January, I indulged in a bit of fantasy, envisioning this as the government that might have existed had Gerald Ford garnered the extra 1 percent of the vote he'd needed to edge past Jimmy Carter into a second term. ... I thought we had a golden opportunity to advance the ideals of effective, fiscally conservative government and free markets.
Greenspan's story line, then, is that he wanted to believe that the Bushies would do the right thing, and thus was willing to cut them lots of slack. It was only later that he realized that, unlike every other presidential administration he had experienced, the Bush gang had absolutely no interest in adjusting its political plans to changing economic reality.
That brings us back to the question, raised by Karen Tumulty this morning, of why the heck he didn't say something sooner once he realized Bush was going to be an inveterate budget buster?
I think it's because Greenspan is an astute politician who didn't want to ruin his relationship with an increasingly popular president. Greenspan's explanation in the book is that he naively misunderstood how the press and Congress would selectively construe his carefully balanced statements about taxes and the budget. This seems a bit rich. Although I guess if you believe that line from the acknowledgments, where Greenspan says "I had always viewed myself as an observer of events, never as part of them," then maybe he really didn't understand the impact he could have.
September 17, 2007 10:21
Worldwide photo exclusive: Greenspan's "Age of Turbulence" does midtown Manhattan
After drinking my morning coffee, I went out to get a copy of the Greenspan book. I was initially flummoxed by the discovery that the Barnes & Noble closest to my office is becoming an Ann Taylor, but then found another B & N on 5th Ave. between 45th and 46th Streets.
The book was not prominently displayed--Bill Clinton's Giving was getting all the love in this particular store. But it was available, and cost me $26.55 after tax. You may be wondering why, as the economics columnist for a reasonably major media outlet, I had to go buy a copy while people at the W$J and Washington Post not only already had copies but interviews with Big Al. The answer is pretty simple: Some rival newsweekly paid a bunch of money to excerpt the book.
So anyway, I bought the book. And as I walked through Rockefeller Center on the way back to the office I was seized by the desire to photograph it with my cameraphone:
I was worried that photo might be too dark, so I took another next to a sun-drenched flower box:
And finally, back at the Time & Life Building:
So there, now I've done my part to mindlessly promote the book. Now maybe I should read it.
Update: I have it on good authority that Newsweek did not pay big bucks for its Greenspan excerpt. It's just that, with Time hitting newsstands on Fridays now instead of Mondays, publishers hoping to build a publicity barrage around a Sunday night appearance on 60 Minutes have no real choice but to go with them. Not that I'm complaining: Fortune ran a great cover story on Greenspan in 1996, and it was one of the two worst-selling issues of the year.
Update 2: My free copy of the book was delivered at 11:40 a.m. I gave it away.
September 17, 2007 8:55
The Greenspanmania continues
From Greg Ip's Q&A with Greenspan on the W$J's economics blog:
At the Fed you said housing was in a froth, but you avoided calling it a bubble. From the vantage point of 2007, can you say now that it was in a bubble? Oh yeah. Lots of froths are equal to a bubble… What was driving prices higher was essentially the aftermath of the decline of the Soviet Union and the fall in real long term interest rates which drove up residential prices all over the world. And indeed, the U.S. was not at the top of the list by any means. It drove them up sooner in Britain and Australia as I recall. I find this issue that the Federal Reserve created the housing bubble just utterly devoid of any awareness of who created all the other bubbles. And they all look alike. Long-term real interest rates moved [in] parallel all over the world and the results were what you always get: a fall in equity [risk] premiums, a rise in price:earnings ratios, huge increases in liquidity, and large increases in the market values of assets.
and on Iraq:
Tell me about your views on the importance of deposing Saddam. My view of the second Gulf War was that getting Saddam out of there was very important, but had nothing to do with weapons of mass destruction, it had to do with oil. My view of Saddam over the 20 years … was that he was very critically moving towards control of the Strait of Hormuz and as a consequence of that, control of the oil market. His purpose would be very much similar to [Venezuelan President Hugo] Chavez’s actions and I think it would be very dangerous for us. So getting him out to me seemed a very important priority.