John At The Center

The main effect will be to strengthen the hand of Ben Bernanke in Fed policymaking discussions – so US interest rates will stay low for a long while. If financial intermediaries draw the appropriate lessons from Dubai, Ireland, and Greece (and Iceland, the Baltics, Hungary, etc), they will be more careful about extending credit to places that are becoming overexuberant – even when it is cheap to increase debt levels.

But an outbreak of caution and care on the part of our biggest banks (and other investment managers) does not seem likely.

via Does Dubai Matter? Ask Ireland « The Baseline Scenario.

Prof Lo believes that some of the features of human behaviour – such as loss aversion, overconfidence, overreaction and other behavioural biases – that are underappreciated by simpler models are, in fact, rational. These aspects of human behaviour, while not conforming to the caricature of homo economicus, may be optimal strategies for human behaviour that have been honed by millennia of evolutionary pressure.

Indeed, he takes this evolutionary process seriously: he is fond of pointing out to his audiences that they have both “mammalian” and “reptilian” brains that can be employed at different moments. Prof Lo believes that prices reflect not just information in the market place, but also deep-seated and slowly evolved human biases.

via FT.com / Comment / Analysis – Organic mechanics.

here is a paper written many years ago by Hal Varian that extends the Goodwin-Kaldor model of business cycles. It is old-fashioned macro, but the interesting part is the wealth effect causing the difference between recessions and depressions. In particular, the results of the paper imply that shocks to wealth that change savings propensities — as we are seeing now — can cause recoveries that “may take a very long time, and differ quite substantially from the recovery pattern of a [typical] recession.”

via Economist’s View: “Catastrophe Theory and the Business Cycle”.

But few banks have the strong ties to local businesses and a rich heritage in the region HSBC can point to. Founded in 1865 as the Hongkong and Shanghai Banking Corporation by Thomas Sutherland, a Scot who was then working for the Peninsular and Oriental Steam Navigation, it established itself as the main financier for British shipping and trade in opium, silk and tea. It handled China’s first loan in 1874 and grew so important to Hong Kong that many consumers hold their entire pension in HSBC shares.

It was a good business for the better part of a century. But in the 1980s, when financial markets in the West were booming, HSBC decided to expand into the United States and Europe. It bought Marine Midland Bank in the United States and, after doubling its assets with the purchase of Midland Bank of Britain in 1992, HSBC moved its headquarters to London from Hong Kong.

Still hungry for market share in the American market, HSBC bought the subprime mortgage lender, Household International, for $14.2 billion in 2003, a purchase it now says it regrets. It was that business that made HSBC the first major bank in 2007 to sound the alarm about mortgage market losses after its own piled up.

Almost three years later, provisions for bad loans at the unit are finally starting to decline as HSBC winds down most of the business. Over the last two years, HSBC has relied on its earnings from emerging markets to compensate for losses in the United States.

Along the way, it was supported by Hong Kong investors like Li Ka-shing, Hong Kong’s richest man, who helped HSBC raise £12.5 billion, or $18.5 billion, in a rights issue earlier this year while many rivals had to accept government succor.

via HSBC to Refocus on Asian Markets – NYTimes.com.

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First, there’s the view that this is the beginning of many sovereign defaults, and that we’re now seeing the end of the ability of governments to use deficit spending to fight the slump. That’s the view being suggested, if I understand correctly, by the Roubini people and in a softer version by Gillian Tett.

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Alternatively, you can see this as basically just another commercial real estate bust. Either you view Dubai World as nothing special, despite sovereign ownership, as Willem Buiter does; or you think of the emirate as a whole as, in effect, a highly leveraged CRE investor facing the same problems as many others in the same situation.

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Finally, you can see Dubai as sui generis. And really, there has been nothing else quite like it.

via Dubai: Why, Yes, Our Collateral Is Underwater. Why Do You Ask? – J. Bradford DeLong’s Grasping Reality with All Eight Tentacles.

The Fed has an exit strategy – but only if the asset side of its balance sheet is solid.

via Bronte Capital: The Ides of March and the Fed exit strategy.

this suggests that CP is not being used to finance any active, economic purpose in the Land of the near-Free Loan itself – an inference further reinforced by the fact that domestic financial CP outstanding has plummeted to what is at least a 9-year low. Thus, the correlation between funding and forex hints that the raising of dollars for use abroad is indeed what is at work.

via FT Alphaville » Blog Archive » Debunking carry-trade denial.

It’s a familiar story: see Japan’s premature exit from the ZIRP in 2000, and also see 1937 — which was a monetary as well as fiscal bungle.

The truth is that policy should be piling on, not looking for the exit. But central bankers can’t wait to pull away the punchbowl, even though the party hasn’t started, and shows no signs of starting for years to come.

via No exit – Paul Krugman Blog – NYTimes.com.

Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

via Payback Time – Wave of Debt Payments Facing U.S. Government – NYTimes.com.

But what the story shows is that, ontologically, economics has been completely at sea, drifting on the surface in currents of our own making. We lack an anchored understanding of the nature of the reality that economics is supposed to illuminate.

via Economist’s View: Stabilities and Instabilities in the Macroeconomy.