The sooner we shed our illusion that people end up financially where they deserve to, the faster we’ll fix the economy.
Yes, it should have been obvious before, but now that a seemingly endless parade of bankers have made fortunes while gutting their institutions and sinking the economy, we’re finally having our eureka moment.
Wealth in America increasingly comes not as the proverbial reward of the “free market,” but from rigged compensation systems that reward mediocrity or outright failure. This is causing a brain burp among many professionals — a group I call the Lower Upper Class – because it’s an affront to an idea they’ve cherished since they first started bringing home A’s from school and acing their SATs. [continued…]
U.S. clears path to bank takeovers
The Obama administration yesterday revamped the terms of its emergency aid to troubled financial firms, setting a course that could culminate with the government nationalizing some of the country’s largest banks by taking a controlling ownership stake.
Administration officials said the change, which allows banks to repay the government with common stock rather than cash, is intended to give banks more capital to withstand a continued deterioration of the economy, and not to nationalize the banking system.
But in seeking to bolster investor confidence in troubled companies such as Citigroup, the government said it is willing to acquire large chunks of their shares. [continued…]
Recipe for disaster: the formula that killed Wall Street
A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li’s work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li’s formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li’s formula hadn’t expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system’s foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril. [continued…]
Road map for financial recovery: radical transparency now!
… it’s not enough to simply give the SEC—or any of its sister regulators—more authority; we need to rethink our entire philosophy of regulation. Instead of assigning oversight responsibility to a finite group of bureaucrats, we should enable every investor to act as a citizen-regulator. We should tap into the massive parallel processing power of people around the world by giving everyone the tools to track, analyze, and publicize financial machinations. The result would be a wave of decentralized innovation that can keep pace with Wall Street and allow the market to regulate itself—naturally punishing companies and investments that don’t measure up—more efficiently than the regulators ever could.
The revolution will be powered by data, which should be unshackled from the pages of regulatory filings and made more flexible and useful. We must require public companies and all financial firms to report more granular data online—and in real time, not just quarterly—uniformly tagged and exportable into any spreadsheet, database, widget, or Web page. The era of sunlight has to give way to the era of pixelization; only when we give everyone the tools to see each point of data will the picture become clear. Just as epidemiologists crunch massive data sets to predict disease outbreaks, so will investors parse the trove of publicly available financial information to foresee the next economic disasters and opportunities.
The time to act is now. An exhaustive study by the Transparency Policy Project at Harvard University’s John F. Kennedy School of Government—analyzing disclosure rules for everything from restaurant cleanliness to SUV rollover risk—found that there’s a very brief window after any calamity for government to institute changes. (Wait too long and the special interests start regaining their confidence and pushing back.) In the financial world, the old order is still trying to find its new shape. So the window is, briefly, cracked. Caveat vendor. [continued…]
U.S. to give $900 million in Gaza aid, officials say
The Obama administration intends to provide some $900 million to help rebuild Gaza after the Israeli incursion that ended last month, administration officials said Monday.
In an early sign of how the administration plans to deal with Hamas, the militant Islamist group that controls Gaza, an official said that the aid would not go to Hamas but that it would be funneled through nongovernmental organizations.
By seeking to aid Gazans but not Hamas, the administration is following the lead of the Bush administration, which sent money to Gaza through nongovernmental organizations. In December, it said it would give $85 million to the United Nations agency that provides aid to Palestinian refugees in the West Bank, Gaza, Jordan, Lebanon and Syria. [continued…]
Editor’s Comment — Here’s a simple and utterly obvious way of making the political moment and the economic moment dovetail together: deduct the $900 million aid for Gaza from US aid to Israel. Unless that happens, not only will Israel pay nothing for the damage it did — it will actually profit through the sale of materials used for Gaza’s reconstruction. As things stand right now, American taxpayers will have paid for the weapons Israel used to destroy Gaza and will now effectively pay Israel to help reconstruct Gaza — once it decides to reopen the crossings.
Israel’s Gaza gamble may blow up in everyone’s face
Hamas took a calculated gamble last November when it escalated its rocket attacks on southern Israel, hoping that the resulting crisis would result in ceasefire terms that finally lifted the crippling economic siege of Gaza. The truce that Egypt believed it had brokered between the two sides last week would have realized that goal, albeit at terrible human cost to Gazans. After weeks of shuttling back and forth to Cairo, Hamas and Israel had agreed to a halt in hostilities – a source of considerable relief to the international community, which was ready to get on with the business of rebuilding Gaza, reconciling the Palestinian factions and looking for new pathways out of the impasse that has frozen the peace process for the past eight years.
Then, at the 11th hour, the Israelis backed out. There could be no Gaza truce, they said, until Hamas agreed to release Corporal Gilad Shalit, the Israeli soldier held prisoner in Gaza since the summer of 2006. President Hosni Mubarak was livid: Shalit’s release was being negotiated by the two sides on a parallel track, and it was expected to come soon after a ceasefire agreement, in exchange for Israel freeing a large number of Palestinian prisoners. [continued…]
Israel PM suspends Hamas ceasefire negotiator
The Israeli prime minister, Ehud Olmert, has suspended the principal negotiator involved in trying to broker a ceasefire with the Palestinian Islamist movement Hamas.
Amos Gilad, a civil servant who heads the defence ministry’s political bureau, has spent weeks travelling between Jerusalem and Cairo trying to negotiate an Egyptian-mediated truce and with it the release of an Israeli soldier captured near Gaza nearly three years ago.
The move comes after Gilad was quoted in an Israeli newspaper last week making unusually frank criticisms of the Israeli government’s attitude to negotiating with Egypt and its apparent delays on agreeing a prisoner release that would see Hamas hand over the captured soldier, Gilad Shalit, who is believed to be still alive somewhere in Gaza. [continued…]
Dennis Ross a fair trade for Chas Freeman
Tonight, State Department Acting Spokesman Robert Wood issued a statement that Dennis Ross was now officially “Special Advisor for The Gulf and Southwest Asia.”
This is amazing news given early world and rumor from quite solid sources that Ambassador Ross, a very distinguished diplomat who promotes a hawkish posture on Iran, was going to be not only the President’s special envoy to Iran but also basically a super envoy ranking above others for the entire Middle East region.
Without going into deep detail, this came “undone”.
Zbigniew Brzezinski and I have both been suggesting that Ross, who served as Bill Clinton’s deal maker in a number of rounds of Middle East peace efforts, not be made envoy on Iran as it would provide too much fodder for the populist campaign of President Ahmadinejad who is up for election in June and be seen by Iran as a sign that Obama was not serious about a strategic leap out of the current US-Iran relations mess into a different arrangement. [continued…]
