Re: Capital

1

Oh sure, you can't link to Hilzoy on this, you sexist.


Posted by: FL | Link to this comment | 06- 5-08 10:25 AM
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Yeah, link Hilzoy. He's great.


Posted by: baa | Link to this comment | 06- 5-08 10:27 AM
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Yeah, motherfucker. Don't try to make me read Kaus, because I won't do it.


Posted by: John Emerson | Link to this comment | 06- 5-08 10:28 AM
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1, 2, and 3 get it right, except for thinking Hilzoy is a dude.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 10:42 AM
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5

And so Sifu earns tenure at the University of Missed Jokes.


Posted by: FL | Link to this comment | 06- 5-08 10:46 AM
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4: and the fact that Ogeed did not link to Kaus, but rather straight through to David Corn's piece in Mother Jones.


Posted by: JP Stormcrow | Link to this comment | 06- 5-08 10:47 AM
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5: "Ole' Missed" for short.


Posted by: KR | Link to this comment | 06- 5-08 10:47 AM
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Here's the link to Hilzoy's piece for those whose familiarity with all these personalities is not at the level assumed so far.


Posted by: I don't pay | Link to this comment | 06- 5-08 10:48 AM
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5 gets it right, except that's not a real school, I don't think.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 10:50 AM
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6: Ogeed

And neither did Ogged.


Posted by: JP Stormcrow | Link to this comment | 06- 5-08 10:50 AM
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See Charles Norris's "The Trillion Dollars Meltdown"

That's Charles Morris. Chuck Norris's "trillion dollar meltdown" is also a book, but not on economics.


Posted by: Michael | Link to this comment | 06- 5-08 10:51 AM
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7 cracks me up.


Posted by: FL | Link to this comment | 06- 5-08 10:53 AM
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Ogged is at the apogeed of his powers right now.


Posted by: peter | Link to this comment | 06- 5-08 10:55 AM
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I, even I, was going to link to the Obsidian Wings piece with justified outrage.

Gramm, Gramm is a at a level of Republicanism that still manages to astonish me.


Posted by: bob mcmanus | Link to this comment | 06- 5-08 10:56 AM
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I remember when Gramm was supposed to be the establishment choice for the Presidential nomination for a little while. 2006? But he was even less popular with the rank and file than fellow plutocrat Mitt Romney, and Steve Forbes soon used his infinite funds to become the plutocratic candidate anyway.


Posted by: Fatman | Link to this comment | 06- 5-08 10:59 AM
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Er, 1996.


Posted by: Fatman | Link to this comment | 06- 5-08 10:59 AM
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14: Recall that Gramm started and was elected several times as a Democrat. he switched parties in 1981 after ratfucking the Dems by sharing their budget legislative strategy with the Republicans.

His son is an econ prof who seems to have mostly published on efficiency in betting markets.


Posted by: JP Stormcrow | Link to this comment | 06- 5-08 11:04 AM
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Father Flippanter called Phil Gramm the dirtiest name I have ever heard Father Flippanter utter. He still shudders to recall Gramm's froggy face and "life-long love affair with Texas A&M."


Posted by: Flippanter | Link to this comment | 06- 5-08 11:04 AM
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Ogged just wants to say he's blogged about corporate finance.

Next: wine.


Posted by: Becks | Link to this comment | 06- 5-08 11:14 AM
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That's Charles Morris. Chuck Norris's "trillion dollar meltdown" is also a book, but not on economics.

Chuck Norris does not recognize the concept "subprime". He uses a two-tier credit rating system: "worthless" and "Chuck Norris".

Bear Stearns attempted to launch a structured credit product based on securitised Chuck Norris. Big mistake. No one takes a tranche of Chuck.

Chuck Norris does not hedge his foreign currency risk. He enjoys it.


Posted by: ajay | Link to this comment | 06- 5-08 11:18 AM
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21

Chuck Norris has a swap for you: your face for his foot!


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:21 AM
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22

In all seriousness, can somebody more financified than me explain the difference between credit enhancement and credit default swaps?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:22 AM
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Stop that right now, Ajay!


Posted by: John Emerson | Link to this comment | 06- 5-08 11:22 AM
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22: No.


Posted by: John Emerson | Link to this comment | 06- 5-08 11:23 AM
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19: Golf!

18: Gramm was considered for President of A&M in 2002, but they went with Robert Gates. His wife Wendy Gramm, a professor of Econ at George Mason is a member of the board at A&M (and was at Enron, and had a suspiciously timed cash-in of her stock). I wonder if Corn basically cribbed from this more in-depth article in the Texas Observer.


Posted by: JP Stormcrow | Link to this comment | 06- 5-08 11:23 AM
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[Gramm]'s been mentioned as a possible Treasury secretary should McCain win.

Jesus, Mary and fucking Joseph. McCain could pull off the seemingly impossible trick of making GWB look as innocuous in retrospect as his dad.


Posted by: Jesus McQueen | Link to this comment | 06- 5-08 11:28 AM
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Moody's and S&P invented the rating "Chuck Norris" because AAA could not adequately describe Chuck Norris' sound risk management and capital reserves.

Chuck Norris does not buy monoline insurance; he roundhouse-kicks scheduled payment defaults in the face.

Chuck Norris' tears are exchangeable for terrorism risk/catastrophe insurance. Unfortunately, he has never cried.


Posted by: Flippanter | Link to this comment | 06- 5-08 11:29 AM
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22: I'm assuming you know what they both are: their functions are different. Credit enhancement is wrapped around a bond by the issuer and a monoline insurer, which means that investors limited to AAA products (like, say, pension funds) can buy your bonds.

CDS are bought after the fact. You needn't own the bond to buy a CDS on it, and you can use CDS for insurance, and also to create synthetic products - ie products that react the same way as an actual credit in terms of payouts and risk - in order to increase supply of a desirable credit.

Many US pension funds are heavily exposed to longevity risk - as pensioners' life expectancy increases, the funds will have to make payouts for longer. Their solution? Chuck Norris.

Traditionally, an investor who believes the market will rise is known as a "bull" and one who believes the market will fall is a "bear". One who believes the market will do whatever the hell he tells the market to do is known as a "Chuck".


Posted by: ajay | Link to this comment | 06- 5-08 11:29 AM
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28: Stop that right now, Ajay!


Posted by: John Emerson | Link to this comment | 06- 5-08 11:30 AM
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"Credit enhancement" is insurance bought by the bond issuer. You buy insurance for your bond so that if you default, the bond insurer picks up the slack. A "credit default swap" is a bet between third parties that the bond will default. You can use it like insurance, but you can use it just to gamble outright on the outcome.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 11:31 AM
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I suppose my pwnership had the same inevitability as death and taxes.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 11:31 AM
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31: death, taxes and Chuck.


Posted by: ajay | Link to this comment | 06- 5-08 11:34 AM
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Credit Enhancement: Ogged owes me a thousand bucks, but is unlikely to pay it all back. You loan me five hundred bucks based on Ogged's debt to me, but your loan is much safer (enhanced credit!) because Ogged would have to stiff me by more than $500 for you to not get paid back.

Credit Default Swaps: Ogged owes me a thousand bucks. I have doubts about his ability and desire to pay. You say that if I pay you $5 now, you'll agree to buy Ogged's IOU from me for $1000 if he doesn't pay.


Posted by: water moccasin | Link to this comment | 06- 5-08 11:34 AM
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34

Credit enhancement is wrapped around a bond by the issuer

Like bacon around steak. Mmm, bacon and steak.


Posted by: gswift | Link to this comment | 06- 5-08 11:35 AM
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35

Double-pwned.


Posted by: water moccasin | Link to this comment | 06- 5-08 11:36 AM
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Moody's told Chuck Norris to move capital from the holding company level to the insurer level or else suffer a rating downgrade. This has been recorded in history as the worst decision ever made.


Posted by: Flippanter | Link to this comment | 06- 5-08 11:36 AM
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I read Hilzoy's comment. The one problem with it are that credit default swaps are objectively awesome. The problem is that they're backed by investment banks, who cannot be trusted with more than ten dollars at a time. They should be traded on exchanges like futures.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 11:37 AM
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38

Thanks, y'all.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:38 AM
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39

37: presumably some regulation wouldn't hurt them any?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:38 AM
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Credit Enhancement: Ogged owes me a thousand bucks, but is unlikely to pay it all back. You loan me five hundred bucks based on Ogged's debt to me, but your loan is much safer (enhanced credit!) because Ogged would have to stiff me by more than $500 for you to not get paid back.

More like Ogged wants to borrow a thousand bucks, but you don't want to lend money to some Internet pervert with a dubious reputation, so Ogged pays me $x to guaranty the loan, which means that when he stiffs you, I pay the loan and get to hunt him for sport look to Ogged's collateral for repayment.


Posted by: Flippanter | Link to this comment | 06- 5-08 11:39 AM
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40: right, that sounds more like it (I'm more familiar with credit enhancement, being an internet pervert).


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:40 AM
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37: also, why are credit default swaps more useful than shorting?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:41 AM
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Yes, CDSes would be better if seasoned with the sweet nectar of government regulation.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 11:42 AM
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15, 16: Yes, before Rudy's flameout, Gramm's campaign was regarded as the world benchmark in most $s spent for fewest votes received. He went from frontrunner to out of the race after finishing 5th in Iowa. At the time Molly Ivins said "even his friends don't like him."


Posted by: JP Stormcrow | Link to this comment | 06- 5-08 11:42 AM
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What was funny to me at the time was that it was obvious that Gramm was going to do horribly. He just radiated a reptilian unlikeability. It amazed me that the media took him at all seriously. At least Rudy could point to polls.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 11:44 AM
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44: Seriously, what kind of pervert, Internet or otherwise, has a lifelong love affair with Texas A&M? Harvard has those glass flowers at least.


Posted by: Flippanter | Link to this comment | 06- 5-08 11:44 AM
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35: much clearer explanation than mine.

Chuck Norris once emerged from his burrow and saw a shadow. The date was October 29, 1929.


Posted by: ajay | Link to this comment | 06- 5-08 11:45 AM
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48

Hmm... I thought credit enhancement was a generic term that included insurance and overcollateralization.

Also, I think that for shorting you need someone to loan you the bond so you can sell it. You can buy as many CDS as you want, regardless of if you have the bond being swapped against. This can lead to hilarity when trying to redeem the CDS.


Posted by: water moccasin | Link to this comment | 06- 5-08 11:46 AM
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Chuck Norris's balance sheet does not balance. He is the only institution in the world in which the assets exceed the liabilities plus shareholders equity.

Chuck Norris does not issue securities. When he needs to raise capital, he commands his cash balance to expand.

Chuck Norris does not hedge his beta. He grabs r at both ends and twists it into alpha.


Posted by: KR | Link to this comment | 06- 5-08 11:47 AM
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why are credit default swaps more useful than shorting?

Limited supply - if you want to short something you have to borrow it and sell it with the hope of buying it back later. You can write as many CDS as you like.


Posted by: ajay | Link to this comment | 06- 5-08 11:48 AM
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The big finance criminal in Portland while I was there was Andrew Wiederhorn, who was convicted of various forms of bribery and misrepresentation. He was a whiz kid and there had been a worshipful series about him in the Oregonian not long before his criminal operation started to be revealed.

The odd little tidbit I remember was that at one point his main asset was an enormous quantity of bad debt, which (IIRC) he bought on credit, farmed out, and then borrowed against to finance his other operations. In my financial naivety that already looked either crooked or impossible. But it worked up to a point.

"Hi! My name is Andrew. I own more bad debt than anyone between here and Chicago. Wanna fuck?"



Posted by: John Emerson | Link to this comment | 06- 5-08 11:48 AM
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What was funny to me at the time was that it was obvious that Gramm was going to do horribly. He just radiated a reptilian unlikeability. It amazed me that the media took him at all seriously.

By then, many of us felt our sense of reptilian unlikeability seriously misalligned with our fellow citizens', so we didn't dare judge on this basis.


Posted by: I don't pay | Link to this comment | 06- 5-08 11:48 AM
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48: yeah it seems like you could get overleveraged against no actual value anywhere in a hurry; what's to stop the market from building up a massive liability in the event of default on some little piddly bond?

I guess "nothing" is my answer.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:48 AM
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54

Chuck Norris has no delta. Chuck Norris is omega.


Posted by: Flippanter | Link to this comment | 06- 5-08 11:48 AM
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51.2: well, most bad debt gets paid off at least partially, most of the time.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:49 AM
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56

49 is pretty awesome.


Posted by: Cala | Link to this comment | 06- 5-08 11:50 AM
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In fact, the market has built up huge liabilities in event of default. If corporations started defaulting on bonds on a large scale, the investment banks would be screwed. And by "screwed" I mean, of course, "using their influence in Washington to reach into your wallet".


Posted by: Walt Someguy | Link to this comment | 06- 5-08 11:52 AM
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Chuck Norris's balance sheet does not balance. He is the only institution in the world in which the assets exceed the liabilities plus shareholders equity.

A foul lie. Chuck Norris has no liabilities.

AAA - not only the highest possible credit rating, but also the noise made by the last analyst to suggest taking Chuck Norris off it.

Catastrophe risk reinsurers refuse to cover potential damages caused by roundhouse kicks from Chuck Norris. First of all, there's not enough money in the world to cover the maximum possible outlay. Second, you probably deserved it.


Posted by: ajay | Link to this comment | 06- 5-08 11:56 AM
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57: right. This seems not-so-good. So you would regulate the amount of CDS obligation that one bond could have attached, or you would regulate how often they could be traded, or both?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:56 AM
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Oh man, ajay's comment just made me imagine what the combination of cat bonds, CDS, and global warming could do. Aahh! Damn you people making my imagination all crazy in the service of Chuck Norris jokes.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 11:58 AM
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When a butterfly flaps its wings in China, Chuck Norris invests in Indian equities.


Posted by: Flippanter | Link to this comment | 06- 5-08 12:00 PM
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I would like to see regulation that makes them work like futures markets: the contracts are standardized, they are traded on exchanges, and there are a bunch of mechanisms that minimize the risks from default.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 12:01 PM
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Well, that was the reason for the Bear Stearns bailout. It's all about the swaps, baby. Yesterday's article on the cutbacks of the rich is just the beginning, if the swaps go bust. Which of course they must, since the bonds are crap.


Posted by: Tassled Loafered Leech | Link to this comment | 06- 5-08 12:02 PM
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62: are any derivatives traded that way? Do futures count as derivatives?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 12:03 PM
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Paging Jesus.

The kissass series on Portland's whiz kid finance criminal-to-be was by the Oregonian's star reporter, Tom Haller, a Pulitzer Prize nominee who was given several awards for the Wiederhorn piece. It was regarded as a great coup.

Some time after the piece came out Haller was caught accepting free parking from Wiederhorn, who by that time was a convicted criminal and ex-con.Whether there had been earlier corruption is unknown to me.

Pre scandal story about the story.


Posted by: John Emerson | Link to this comment | 06- 5-08 12:06 PM
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Futures do count as derivatives. I think options traded on exchanges work the same way.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 12:07 PM
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P.S. The Oregonian has taken the series off its website.


Posted by: John Emerson | Link to this comment | 06- 5-08 12:08 PM
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In Chuck Norris's portfolio, risk and return are negatively correlated.

At Chuck Norris's trading desk, there isn't a bid/ask spread; there's a deign-to-take/mercifully allow spread.


Posted by: Knecht Ruprecht | Link to this comment | 06- 5-08 12:09 PM
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69

Ajay is banned.


Posted by: John Emerson | Link to this comment | 06- 5-08 12:09 PM
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70

Then clearly it never happened, John.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 12:09 PM
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They're actually moving towards central clearing of CDS, which should help simplify the market even without more regulation...


Posted by: ajay | Link to this comment | 06- 5-08 12:14 PM
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nope, everyone fails the exam; these distinctions based on history and structure are unimportant. The important point from an economic point of view is that CDS settle cash on event and enhancement settles pay as you go.

in related news, "oooh, everything has to chwade on an exchwange, oooh twanspawency, ooh cowwattewal" is the twattiest thing in the world of financial regulation and the moment and that's pretty damn twatty. CDS aren't made to be standardised or exchange traded - they're specific protection against specific events and no more amenable to exchange trading than any other kind of insurance.


Posted by: derauqsd | Link to this comment | 06- 5-08 12:15 PM
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BTW, Wendy Gramm (Phil's wife) was head of the Commodity Futures Trading Council from 1988 to 1992.


Posted by: JP Stormcrow | Link to this comment | 06- 5-08 12:15 PM
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Chuck Norris does not recognize the concept "subprime". He uses a two-tier credit rating system: "worthless" and "Chuck Norris".

This made me laugh. I now pronounce you Chuck and Larry (Kudlow).


Posted by: Populuxe | Link to this comment | 06- 5-08 12:15 PM
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what's to stop the market from building up a massive liability in the event of default on some little piddly bond?

The thing is, nobody knows the extent to which stuff like this has happened, which string could potentially get pulled and unravel the entire sweater of structured finance [BANNED!]. There's no big centralized record of the bets everybody has made, no map of their relationships. So institutions don't know if they're sitting on a land mine, and neither does the Fed. That's why everybody is sweating. It's also why things have calmed down a bit recently, I think -- nothing big blew up after Bear Stearns, so maybe nothing else will? But I don't think anyone knows for sure.


Posted by: PGD | Link to this comment | 06- 5-08 12:16 PM
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By the way, I hear that Chuck Norris got a job as an inter-dealer broker, and lasted four minutes before he went home crying like a baby.


Posted by: dsquared | Link to this comment | 06- 5-08 12:17 PM
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72: single name, sure, but what about index CDS?


Posted by: ajay | Link to this comment | 06- 5-08 12:18 PM
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72: how would you regulate them, then?

Clear explanation of the first principles; do I then gather that the only reason enhanced bonds can't be further enhanced upon, or that bonds can't be divvied up and then the chunks enhanced upon indefinitely, is tradition and the ceiling of a max bond rating?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 12:19 PM
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There's no big centralized record of the bets everybody has made, no map of their relationships. So institutions don't know if they're sitting on a land mine, and neither does the Fed.

This uniformed bullshit is a particular bete noir of mine, and has been a commonplace since LTCM of learned chin-stroking comments written about the OTC derivatives market by nearly everyone in the world, apart from the small community of people who know more than jack shit about securities settlement. Every single time the system has been put to the test, including LTCM itself, it has actually worked just fine because everyone has had common sense and worked together. There is no need for this central repository of information, nobody has ever explained what they would actually do with it if they had it, and the fact that institutions in fact do know what their counterparty relationships are can be transparently proved by the fact that the cheques nearly always arrive on time. God this stuff gets my goat.


Posted by: derauqsd | Link to this comment | 06- 5-08 12:20 PM
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77: also a lot more complicated than you think because these indices have to roll over regularly and the composition changes can be significant.

In any case, if making an exchange traded contract a success was just a matter of theoretical possibility, we'd all be up to our nuts in exchanges. There's nothing to stop any given exchange launching a contract and seeing if it takes off, but I bet they don't because the counterparties actually like trading on an OTC basis where they don't have to deal with an open order book and where liquidity provision is fairly priced. In general, institutional markets ought to be OTC in my book; the only rationale for exchanges is to guarantee best execution for non-professional customers.


Posted by: derauqsd | Link to this comment | 06- 5-08 12:25 PM
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80: but so how do you avoid speculation by random, overleveraged thrid parties, leading to bear sterns-style massive bailouts if things start to fail? Or is that not a problem for some reason I don't follow?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 12:27 PM
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65: Tom Hallman. He ended up finally winning a Pulitzer in 2001. In addition to Wiederhorn, there are three awful people mentioned in that story, though Hallman's not one of them. Evil editor whose name I will not bring myself to mention called the O series a blowjob, but he was just envious; he'd have liked to administer it himself. You may have seen this follow-up, John. I'd hoped to get a pleasant sense of schadenfreude from it, but AW hasn't suffered enough. He should have been crushed like a bug.


Posted by: Jesus McQueen | Link to this comment | 06- 5-08 12:29 PM
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79: I'll accept that because I do, in fact, know a lot less than d-squared on this and I do not claim to be part of the small community of people who truly work in this area. Getting a tongue-lashing from Dsq is one of the important ways the internet can be used as a learning tool.

However, isn't the "nearly always" part of this:

can be transparently proved by the fact that the cheques nearly always arrive on time.

a problem, since financial regulation is all about preventing low-probability but potentially disastrous events?

And in this case:

Every single time the system has been put to the test, including LTCM itself, it has actually worked just fine because everyone has had common sense and worked together.

doesn't "having common sense and working together" mean everybody getting together and doing a bailout?

I guess the question is whether the occasional ad hoc rescue mission that's necessary when the system lacks some transparency is just a mild cost of doing business, or some kind of new version of a credit-crippling bank run.

OK, D-squared, chew me out again, but please make the reasons why I am an idiot as specific and detailed as possible.


Posted by: PGD | Link to this comment | 06- 5-08 12:29 PM
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I'm realizing that the best way to get dequaserd to answer a question is to say something completely wrong with a sense of deep certainty, so please rephrase my earlier questions in that manner.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 12:36 PM
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65
Some time after the piece came out Haller was caught accepting free parking from Wiederhorn, who by that time was a convicted criminal and ex-con.Whether there had been earlier corruption is unknown to me.

Seriously? I know parking spaces are worth 10 times as much in major cities as anywhere I've ever driven, and maybe Oregon is even worse than usual or something, but still, damn. Talk about stupid.


Posted by: Cyrus | Link to this comment | 06- 5-08 12:37 PM
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but so how do you avoid speculation by random, overleveraged thrid parties, leading to bear sterns-style massive bailouts if things start to fail?

You mean, "How do we avoid the normal business of securities trading, which occasionally leads to incredibly smooth and seamless takeovers of failing organisations with practically no consequences for the real economy at all?"

Give over. If we were talking about trucking, or vacum cleaner manufacturing, the question "how can we regulate this industry to make sure none of the incumbent payers can possibly ever go bankrupt", this question would seem as daft as it actually is.

83: Sorry about that PGD, you probably copped a few bullets which I was saving up for my "Falling Down" style massacre at the Financial Times, which prints one of these chinstrokers a week. The point is, as Richard Portes always said "the optimal frequency of crises is not zero". There are all sorts of intrinsic instabilities in the system and it might indeed all fall down around our ears one day, but the lack of a central counterparty is not an important problem. The information can be and is shared when it's neeed, and nobody needs the bureaucratic overhead. Derivatives settlement is actually a very efficient and well-organised function IMO - this is a red herring, it's got nothing to do with the real risk. As I say, nobody ever really bothers to explain what they would do with this great big central settlement thing if it existed, or how it would all help. Also note that Barings Bank went under purely because of positions in exchange-traded derivatives; also Jerome Kerviel's positions were all built up on exchange.


Posted by: dsquared | Link to this comment | 06- 5-08 12:40 PM
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"free parking" s/b "free porking". That explains the discrepancy


Posted by: | Link to this comment | 06- 5-08 12:41 PM
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Give over. If we were talking about trucking, or vacum cleaner manufacturing, the question "how can we regulate this industry to make sure none of the incumbent payers can possibly ever go bankrupt", this question would seem as daft as it actually is.

Well, presumably financial institutions are more susceptible to chain reactions that vacuum cleaner manufacturers. Also, isn't the problem on some level that if you allow basically unlimited leveraging of a given chunk of equity you can create instability on a truly massive scale? I would assume that this -- despite the fact that it's been handled through hail-fellow-well-met style handshakes and backslapping in the past -- would be what people are scared of?


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 12:47 PM
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I'm not arguing for completely unregulated banking or anything, but all this prescriptive micromanaging is just a) bullshit and b) totally unrelated to the objective it aims to achieve.


Posted by: dsquared | Link to this comment | 06- 5-08 12:51 PM
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No problem, I'm here to learn.

If we were talking about trucking, or vacum cleaner manufacturing,

But isn't the point of regulation exactly that the financial system isn't trucking or manufacturing, but has a special role as the source of credit in the economy? So if too much of it goes down at once, you get a self-reinforcing spiral of defaults?

Or is the "bank run" thinking dating from the Depression just hopelessly obsolete now.

nobody ever really bothers to explain what they would do with this great big central settlement thing if it existed, or how it would all help.

My vague thinking was that it would allow you to do prudential regulation of investment banks, capital requirements and such.


Posted by: PGD | Link to this comment | 06- 5-08 12:52 PM
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I'm totally agin' it, then. Fuck that shit!


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 12:52 PM
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91 to 89.


Posted by: Sifu Tweety | Link to this comment | 06- 5-08 12:53 PM
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Parking in downtown Portland is about $100 / month minimum. The Oregonian was a bit touchy about the issue, since they'd been conned into providing cover for a felon.


Posted by: John Emerson | Link to this comment | 06- 5-08 12:58 PM
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Like "The Financial Times", PGD is a bone stupid motherfucker. It's really nervy of him to show his face in public.


Posted by: John Emerson | Link to this comment | 06- 5-08 1:02 PM
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My vague thinking was that it would allow you to do prudential regulation of investment banks, capital requirements and such.

If you're going to regulate, regulate. Back-door regulation doesn't seem in the spirit of disclosure that should animate financial regulation.


Posted by: Flippanter | Link to this comment | 06- 5-08 1:03 PM
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82:

And he hired former Clinton aide Lanny Davis, a lawyer and p.r. troubleshooter who once tried to quell the Monica Lewinsky story, to peddle Wiederhorn's claim of being wrongfully victimized. "What's happened to me has been totally unfair," Wiederhorn says.

Davis' strategy: Bring down Wiederhorn's federal prosecutor, Lance Caldwell, by saying that Caldwell lost his perspective and exercised poor judgment because he was too personally invested in Wiederhorn's case. Davis' main argument seems to revolve around geography--that Caldwell lives down the road from the Wiederhorns' mansion and that Caldwell's behavior "suggests somebody who resents Andy's lifestyle."

Karen Immergut of the Clinton impeachment also plays a walkon role later in the story.


Posted by: John Emerson | Link to this comment | 06- 5-08 1:12 PM
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DSquared, you ought to write a book. Seriously. I usually enjoy reading your stuff, especially the more serious stuff, but it's all ad hoc polemic, and at this point I only have a rather sketchy idea about what you actually think about things.


Posted by: John Emerson | Link to this comment | 06- 5-08 1:14 PM
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gosh how flattering. To be honest it's not going to happen though - what I don't like about books is that they tie you down to just saying one thing about issues where you actually want to say half a dozen contradictory things. I might do a "Best of D^2D" thing a bit like yours one day, but that was a bugger to write, wasn't it? (Also I basically have just written a book, in the sense of a 60,000 word document over the last month and am feeling a bit burned out)


Posted by: dsquared | Link to this comment | 06- 5-08 1:27 PM
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It could be a collection of aphorisms and satires. Basically, though, I've also taken you to be a smartmouth socialist of some sort, but then you come along with all that stuff about the wonderfulness of the MBA and finance.


Posted by: John Emerson | Link to this comment | 06- 5-08 1:30 PM
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"I've alwasy [wrongly?] taken you to be a smartmouth generic socialist of some sort"


Posted by: John Emerson | Link to this comment | 06- 5-08 1:31 PM
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There are all sorts of intrinsic instabilities in the system and it might indeed all fall down around our ears one day, but the lack of a central counterparty is not an important problem. The information can be and is shared when it's neeed, and nobody needs the bureaucratic overhead. Derivatives settlement is actually a very efficient and well-organised function IMO - this is a red herring, it's got nothing to do with the real risk.

So all these people worrying about the credit derivatives confirmation backlog, like Gerald Corrigan and CRMPG II - just being silly? Losing risk transparency through bilateral (rather than trilateral) novation was never a real problem? All the worry over subprime securitisation meaning that no one had enough knowledge of their real exposure to subprime mortgages - that was just a lot of fuss about nothing? Come to that, why were Clearing Corporation and all those banks going to all that trouble to set up a central counterparty for CDS if it's unnecessary bureaucratic overhead?

You're taking something of a minority position here, dsquared.

If we were talking about trucking, or vacum cleaner manufacturing, the question "how can we regulate this industry to make sure none of the incumbent payers can possibly ever go bankrupt", this question would seem as daft as it actually is.

ANALOGY BAN!

Also, there is a huge difference between the vacuum cleaner business and the finance business. The difference is that the different players in the vacuum cleaner market aren't as interdependent as banks are. If Hoover made fans and sold them to Dyson, and Dyson made bags and sold them to Electrolux, and Electrolux made nozzles for everyone, then, yes, it might be rather important that none of them went out of business. That, and, as pointed out, the economy doesn't plunge into depression if there is a temporary interruption in vacuum cleaner supply.


Posted by: ajay | Link to this comment | 06- 5-08 1:32 PM
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... no more amenable to exchange trading than any other kind of insurance.

I'm likeing this. It might be the answer to the health insurance mess.

We take all those health insurance policies and separate the income stream from the obligation to pay. We lump all the income streams together, stir well, and slice them into truncheons. We sell the truncheons to investors, and use the sales proceeds to fund the payment obligations. Payments would be handled by insurance servicing firms, which would get rich off the late fees, etc.

I think there's a fortune to be made here. I can see making money from the commissions on selling health insurance to old fat diabetics - the subprime insurance market.


Posted by: Michael H Schneider | Link to this comment | 06- 5-08 1:36 PM
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98/99: Take George Bernard Shaw's "Everybody's Political What's What" as a model for your book, dsquared.


Posted by: Fatman | Link to this comment | 06- 5-08 1:38 PM
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christ I am like the Bizarro world Woody Allen - every time I try to break out and do sex jokes, all the audience wants is long and serious political statements.

The MBA point is actually tied into socialism in my mind. Any society which has a role in it for a state sector has to have a function within that state sector that carries out planning and administration, in the absence of the market's self-organising mechanism. Anyone claiming that scientific management, etc, aren't possible, is basically asserting the impossibility of efficient centrally planned services. Any future society which isn't organised on market lines is going to need an administrative function, and that's going to involve people who learn basically the same skills that MBAs learn today, minus the ideological indoctrination which is obviously a massive part of the curriculum.


Posted by: dsquared | Link to this comment | 06- 5-08 1:38 PM
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We sell the truncheons to investors, and use the sales proceeds to fund the payment obligations.

If the patients demand too many medical services, we beat them to death with the truncheons.

IT JUST MIGHT WORK.


Posted by: PGD | Link to this comment | 06- 5-08 1:42 PM
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Taking things itemically:

So all these people worrying about the credit derivatives confirmation backlog, like Gerald Corrigan and CRMPG II - just being silly?

Yes, windbags to a man. Corrigan has done a lot of good things in his life but is dead wrong on this one.

Losing risk transparency through bilateral (rather than trilateral) novation was never a real problem?

Problem in theory but not in practice. Tell me one major bank in the world that can't give you its bilateral counterparty exposure at the drop of a hat.

All the worry over subprime securitisation meaning that no one had enough knowledge of their real exposure to subprime mortgages - that was just a lot of fuss about nothing?

Yup. Everyone knew their exposure to subprime mortgages down to the last decimal place; they knew exactly how much money they'd lost. The problem wasn't knowing the exposure; it was grossly misestimating the risk of that exposure.

Come to that, why were Clearing Corporation and all those banks going to all that trouble to set up a central counterparty for CDS if it's unnecessary bureaucratic overhead?

To try and get some more price competition between the IDBs. To turn it back, given that they're going to set up CCC, why aren't they going the extra mile to set up centralised trading and an exchange? Cos they don't want to, that's why.

That, and, as pointed out, the economy doesn't plunge into depression if there is a temporary interruption in vacuum cleaner supply.

I'm not some kind of free banking nut here. I was a bank regulator myself once. I just don't think that the US bank examiner model (that notorious paragon of efficiency) is a sensible route for investment banking regulation to go down.


Posted by: dsquared | Link to this comment | 06- 5-08 1:44 PM
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Every single time the system has been put to the test, including LTCM itself, it has actually worked just fine because everyone has had common sense and worked together.

Enough people had the sense to work together, but not everybody. Bear Stearns took a different lesson away from the Tragedy of the Commons: Utility is maximized by the most selfish possible behavior.

Your faith in your fellow man, even to act in his own best interests, is touching.

incredibly smooth and seamless takeovers of failing organisations

I share your apparent admiration for the Fed's management of the Bear Stearns bailout/takeover, but your description here seems like a rather rosy contrarian view. You don't think this situation represented an unusual and dire threat to the financial system ?

Bush's appointment of Bernanke does seem to back up your view that big financial interests are smart/powerful enough to look after themselves, even if the rest of the world goes to hell.


Posted by: politicalfootball | Link to this comment | 06- 5-08 1:45 PM
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Taking things itemically

That's "itemim".


Posted by: ben w-lfs-n | Link to this comment | 06- 5-08 1:45 PM
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further to 106, I note that we've had countless major events of default on CDOs which had lots of CDS protection written on them, and the notorious CDS confirmation backlog! oh noes! caused precisely jack to the power of shit actual problems.


Posted by: dsquared | Link to this comment | 06- 5-08 1:46 PM
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Don't back down from D^2 now, boys - if he were really certain he was right, he'd be calling more people cunts.

108 is a good start, Ben.


Posted by: JRoth | Link to this comment | 06- 5-08 1:52 PM
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slice them into truncheons with which to beat the tranches.


Posted by: Bave Dee | Link to this comment | 06- 5-08 2:02 PM
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D^2, I just read about hedge funds buying farmland and grain elevators directly, rather than the futures. As a former farmer, I am not sure this is a net gain. But if you know some hedgies who want some help with this, have them call me. I can be bought cheap.


Posted by: Tassled Loafered Leech | Link to this comment | 06- 5-08 2:14 PM
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107: just on this question, can I have a quick show of hands lads, for whom here is this the first financial crisis of their professional life? Because AFAICT it's not as serious as savings & loans, not as serious as the Spanish or Nordic crises, not as serious as the Credit Lyonnais, not as serious as Asia/Russia 1998, probably not as serious as Mexico 1995 and arguably not as serious as the NASDAQ bust. Sense of proportion here.


Posted by: dsquared | Link to this comment | 06- 5-08 2:20 PM
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113: I was around for the U.S. S&L crisis. That played an important role in causing the early 90s recession, which was quite disruptive to millions of people. I think part of the issue is the rampant catastrophism out there, where unless something is the next Great Depression it hardly counts.


Posted by: PGD | Link to this comment | 06- 5-08 2:23 PM
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it was grossly misestimating the risk of that exposure.

This is of course the actual problem. As far as I can see it's innate to the financial sector as we know it, though. Not that I know much about it, but every one of the few times I've talked to people who work in these areas, I've come away with the impression that they strongly overestimate the capabilities of the models and analytic tools they have.


Posted by: soup biscuit | Link to this comment | 06- 5-08 2:24 PM
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I also hear that Russia '98 and Mexico '95 were no picnic if you were, you know, Russian or Mexican.

Seven years later, inflation-adjusted U.S. family income has still not recovered the peak it reached before the recession triggered by the dot-com crash.

Downturns are easy to dismiss if you're doing well.


Posted by: PGD | Link to this comment | 06- 5-08 2:26 PM
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107: just on this question, can I have a quick show of hands lads, for whom here is this the first financial crisis of their professional life?

Not even my first as a professional - I'm just an amateur. As I said in 107, I don't have any problem at all with your apparent contention that the Fed moved wisely to avert a crisis.


Posted by: politicalfootball | Link to this comment | 06- 5-08 2:38 PM
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This is not my first financial crisis. I remember all of the crises you mention.

I am not nearly as expert as D2, but as far as I can tell, investment banks are full of incredibly smart, incredibly confident people (some fraction of which are con artists), who make large sums of money bearing risk, partially bearing risk with other people's money. LTCM and Bear Stearns were both staffed with incredibly smart, incredibly confident people who thought they were on top of the situation, which contributed to their demise. Both led to considerable government solicitude for the well-being of financial markets, solicitude that the government rarely shows for failing vacuum-cleaner manufacturers. You don't see the government rushing to lend money to everyone who does business with the failing vacuum-cleaner manufacturer. The system is set up to engender periodic crises in a way the manufacturing sector is not.

Also, I suspect the reason that the investment banks don't set up an exchange is because it's not in their financial interest to do so, which is why it requires regulation.


Posted by: Walt Someguy | Link to this comment | 06- 5-08 2:42 PM
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I should know better than to respond to any post that includes the phrase "Via Kaus," but I am compelled. The line in there from his correspondent that "Barney Frank didn't even bother to try to get the tax on 'captured interest' increased" is wrong on several levels. First, taxes are handled in Charlie Rangel's Ways and Means Committee, not Frank's Financial Services Committee. Second, last fall the House not only bothered to try, but actually passed a bill that would have taxed carried interest as ordinary income. No, the bill didn't become law, and yes, there's bipartisan support for plenty of industry positions, but come on. The bill passed by a margin of 216-193; of those who voted, every Republican voted against, and every Democrat save 8 voted for. Other than those pesky facts, I'm sure Emailer Z knows a lot about Congress.


Posted by: BDM | Link to this comment | 06- 5-08 2:48 PM
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I suspected as much, Mr. or Ms. B.D. Masochism.


Posted by: John Emerson | Link to this comment | 06- 5-08 2:52 PM
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119: House and Senate, totally different. The Senate is where Wall Street took its stand.

Pelosi is a really fucking good Speaker, and she takes too much shit on left-wing blogs.


Posted by: PGD | Link to this comment | 06- 5-08 5:43 PM
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113:If the current situation is not a serious crisis, then the likes of Brad DeLong and Krugman are exaggerating the threat for whatever purposes, and justifying what appears to be some unprecedented Fed intervention.

I read dsquared, not understanding an acronym, but I also read many other economic and trading sites, not understanding a word, and prefer to derive my ignorance from a full spectrum of sources.


Posted by: bob mcmanus | Link to this comment | 06- 5-08 8:53 PM
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The MBA point is actually tied into socialism in my mind. Any society which has a role in it for a state sector has to have a function within that state sector that carries out planning and administration, in the absence of the market's self-organising mechanism. Anyone claiming that scientific management, etc, aren't possible, is basically asserting the impossibility of efficient centrally planned services. Any future society which isn't organised on market lines is going to need an administrative function, and that's going to involve people who learn basically the same skills that MBAs learn today, minus the ideological indoctrination which is obviously a massive part of the curriculum.

While I have no informed opinion about the merits of this idea, boy, does "socialism as managed by MBAs" sound like a hard sell. "Bigger pies and shorter hours" is going to be much more popular.


Posted by: LizardBreath | Link to this comment | 06- 6-08 7:42 AM
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