The Parallax Brief


Unrepentant Subjectivity on Economics, Politics, Defence, Foreign Policy, and Russia

The Fed’s Ten Trillion Dollar Problem

If anyone should have been prepared for the credit crunch it was Federal Reserve chairman Ben Bernanke (pictured right). Much of his academic reputation, which is immense, was built upon his work on the causes of depressions and, specifically, the Great Depression.

Although central bankers and economists assumed that advances in economic understanding — a significant portion of which came from Bernanke — had made depressions avoidable, Japan’s oft-discussed lost decade of deflation raised some uncomfortable questions.

Here was a nation not unlike the US and large Western European countries, with a powerful industrial base, sophisticated financial sector, and a modern, mature economy, which became mired in monetary quicksand, unable to exfiltrate itself from economic stagnation, despite following the playbook economists throught could avoid just such scenarios. Why?
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Filed under: Economics, , , , , , , , , , , , , , , ,

Boris Nemtsov: The Gift to Putin that Keeps on Giving

When Vladimir Putin’s critics craft shrill op-eds about opposition parties being ruthlessly crushed in Russia, they often miss the salient point: really, the opposition in Russia is unsuccessful and unpopular because it isn’t very good and doesn’t have many popular policies.

Of course, it is true that the Russian media and society are not as free as in the West, but more often than not, Russia’s opposition simply does Putin’s job for him. The Parallax Brief is sure that even Robert Amsterdam would agree that Putin and Medvedev are preferable to Vladimir Zhirinovky’s comedy-fascist LDPR, Gennady Zyuganov’s communists, or the array of hapless or nasty nationalists, bolsheviks or white power groups raging at Russia’s political fringes.

But beyond this gallery of unelectable extremist halfwits, even the pro-west, pro-business, supposedly democratically minded group of former Yeltsin era Young Reformers that currently call themselves Solidarity offer little.

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Filed under: Economics, Politics, Russia, , , , , , , , , , , , ,

Ask and Ye Shall Receive

The Parallax Brief argued on these e-pages a couple of days ago that simply because recent recessions have been relatively short and ‘V-shaped’, there is no guarantee that the terrible crisis we’re currently living through will follow the same pattern. Humans are far more likely to base their predictions on recent memory than to delve back far into history or consider the possibility that something new and unseen could occur.

That’s one of the reasons irrational exuberance and panic pervades the markets still.

But actually, as the Parallax Brief argued in his article, we don’t really have to invent a new and cataclysmic economic Black Swan to get an idea of just how bad this recession could get: we simply need to look back further than 1938. Hot on the heels of the Parallax Brief’s article on this matter, Matthew Yglesias argues the same point (better) on his 100% superfly blog:

“Between the end of [the Great Depression] and the beginning of our current troubles, the National Bureau of Economic Research has identified eleven additional recessions, the longest of which (in the mid-seventies and in the early-eighties) lasted 16 months each. NBER doesn’t have data for the first half of the nineteenth century, but in the second half of the nineteenth century there were eleven recessions of which fully seven were longer-lasting than any of our post-Depression recessions.”

Note in particular the so-called “Long Depression” set off by the Panic of 1873. This was a five year, two month recession followed by a 34 month expansion followed by a new 38 month contraction. In other words, we had an eleven plus year span during which the economy was contracting over 75 percent of the time. That’s no good. And in addition to the direct economic harms of that sort of thing, you can have some very nasty political consequences in these situations. But that’s the world of passivity in the face of economic calamity.

Yglesias is far smarter than the Parallax Brief (he has a magna cum laude philosophy degree from Harvard, the Parallax Brief has a certificate of membership for the GI Joe Club), and it is hoped that his argument might be more persuasive than the Parallax Brief’s for those who don’t yet grasp quite how bad this could all get.

Filed under: Economics, , , , , , , , , ,

Krugman Overwhelmed by Stress, Planning to Become Monk?

This internet is surely the biggest leap forward in technology since the eighties invented the electrical carving knife, and the Parallax Brief hopelessly addicted. I can be swept into a trancelike state, slowly hyperlinking from a blog post about social planning, to a look at the pros and cons of America’s F-22 Raptor program, to Counterinsurgency Warfare: the Theory and Practice by David Galula, to the Algerian War of Independence, to Charles De Gaulle, to the Day of the Jackal, and all the way through the infinite degrees of separation.

The internet is nirvana, but one does find some odd things, and gain some interesting insights into people’s lives.

For instance, I read Paul Krugman’s blog religiously: I genuinely believe he is one of the finest minds, and most prescient analysts, of our time. In a short blog post today, he included a link to a book called Culture Made Stupid. I followed the link to the book’s Amazon page, where the top review is by none other than Paul Krugman.  From there, we can click through to Krugman’s personal Amazon page and view his Universal Wish List – a feature on Amazon which helps users keep track of the things they want to buy.

And Krugman’s is instructive. First, he is clearly in a state of high stress, with CDs Shamanic Dream, Zen Relaxation, Sleep Deeply, Natural Stress Relief: Dan Gibson’s Solitudes, Echoes of Nature: Rainforest, Evening Crickets (Nature Sounds Only Version), and Soothing Sea populating the top half of Krugman’s wish list.

Even more concerning is the second half of the list, which suggests the Nobel Laureate is so troubled about the parlous state of the world economy that he preparing to quit his positions as professor of economics and international affairs at Princeton Universit and New York Times op-ed columnist for a life of chastity, poverty and piety as a Monk. According to his wish list, Krugman is planning to read Finding Sanctuary: Monastic Steps for Everyday Life, by Abbot Christopher Jamison, and An Infinity of Little Hours: Five Young Men and Their Trial of Faith in the Western World’s Most Austere Monastic Order by Nancy Klein Maguire .

I think we should all be very worried.

Filed under: Economics, , , , ,

Why It Could All Go L-Shaped

When not writing this blog, the Parallax Brief posts on a couple of superb Russia-based forums aimed at Expats, and uses them to shamelessly promote the content of these electronic pages. However, after linking to his most recent post, on the events likeliest to precipitate a Great Depression of the Twenty Tens, the Parallax Brief took a little heat for his pessimistic views.

Of course, it can be debated ad nauseum just how bad this recession is, but the Parallax Brief’s attention was caught by one post on the forum which was strongly representative of a view held by pundits and analysts from across the political spectrum:

“It’s a recession. It shall take its course…But then the global economy will start to recover and we shall be, once again, in the “7 years of plenty” stage… until the next recession.”

There is something deeply comforting and commonsensical about this idea that the economy mirrors the waxing and waning of the seasons; the idea that no matter how miserable your life is trudging through streets of slush and treacherous ice in the Moscow winter, eventually summer will return, and those streets will be bounteously filled with Russian girls in (very little) warm weather clothing.

One reason for this is that reality has more of less mirrored this model as far back as we can remember. Recessions in the last sixty years have not reached depression levels, and have usually worked their course in relatively quick order, in the classic V-shape.

Unfortunately, just because we have grown accustomed to this kind of recession in the last sixty years, doesn’t mean this crisis will follow the pattern, and, in fact, things weren’t always as they have been since the end of the war.

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Filed under: Economics, , , , , ,

The Next Shoe to Drop on the Road to financial Armageddon?

In an enlightening speech to the American press club on December 8th, Paul Krugman was asked if there were “any more shoes to drop?” He responded that “in this kind of crisis, anything that can go wrong usually does go wrong.”

Certainly, a little over two months after the conference, the situation has worsened considerably.

But what other shoes are likeliest to drop? Well, as Krugman said, everything, but the Parallax Brief has two main contenders.

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Filed under: Economics, , , , , , , , , , ,

Medvedev’s Visit to FDR Fireside Bodes Well for Russia

There are many reasons to believe the Kremlin’s policy to publicly obfuscate the severity and implications of the crisis afflicting the Russian economy is counterproductive.

First, denying the existence of the obvious doesn’t fool any of the people any of the time, and cultivates distrust. When officials do eventually need to appeal for calm, they will find they have diminished authority.

Second, a limited understanding of a situation enfeebles the population’s ability to make rational decisions and plans, leaving it likely to move in irrational, dramatic lurches rather than manageable shifts. Finally, news does not sit still simply because the Kremlin decides it won’t contribute. Refusing to admit the problem, simply allowes other, less responsible sources shape opinion and understanding.

However, it appears the Kremlin may be arriving at the conclusion that continuing on this track is inadvisable, and President Dmitry Medvedev’s television address Sunday was an important part of that process. Taking a leaf from Franklin D. Roosevelt’s now famous fireside chats, which acted as a reassuring, calming influence on the US populace during the Great Depression and Second World War, Medvedev appeared on national television to “speak the truth” and explain the economic problems “that the entire world is living through, and that our country is living through.”

According to Reuters, Medvedev said:

“I consider that the authorities are obliged to speak about this (crisis) frankly and directly, to speak about the decisions which the authorities are taking to overcome the crisis and about the difficulties with which we are faced… The forecasts really don’t make anyone happy… [and] We should expect our development to undergo a pretty tough scenario.”

This more honest approach will pay dividends by avoiding the issues outlined above; however, honesty in an unpleasent and politically difficult situation should not be seen as a sign of weakness. When Winston Churchill took over from Neville Chamberlain in the darkest hours of World War II, he did not gloss over the problems or tell the nation that victory was close. Instead, he painted a bleak picture:

“I have nothing to offer but blood, toil, tears and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many long months of struggle and of suffering.”

By doing so, he gained respect. And stoicism in the face of suffering is something Russians admire.

Of course, Medvedev as Churchill is quite a step,  and whether Medvedev’s fireside chat was simply part of the wider propaganda mechanism (first, deny; second, claim only decadent, rotten Western economies will be affected; third, admit Russia will be affected, but blame the decadent, rotten US; fourth (now) admit the truth but reassure), or a genuine change in direction remains to be seen, but at first glance, it appears the Kremlin has finally accepted its role as a positive, reasurring and honest intermediary between the crisis and Ivan public.

Filed under: Economics, Politics, Russia, , , , , , ,

Barclays Beggars Belief

Barclays have officially entered ga-ga land. Desperation and efforts to bolster the balance sheet have overridden common sense.

From Willem Buiter’s Maverecon blog on the Financial Times website:

In its report today on Barclays’ Annual results for 2008, the Financial Times writes:

“The bank confirmed it had written down its exposures to complex debt instruments by £8bn in 2008, though the impact was reduced by a £1.66bn gain it booked from the reduced value of its own debt.”

My immediate thought was: surely that report cannot be true. When your market-traded debt becomes worth less because the market considers you less creditworthy than before, and prices your debt to reflect that perception of increased default risk, this does not add to your profits – it simply makes you a worse credit risk.

This is mark-to-market gone mad.

Of course, as Willem points out exasperatedly, this does have a certain basis in real life — a real life scam. A company can make a pretty packet from the bond market by issuing bonds, spending the cash, and then persuading the market that it is highly unlikely to pay back the bonds. The value of the bonds plummets and the company then buys back the (by now valued as next to worthless) bonds for a nominal sum. Hey presto! Free money.

But to imagine that one’s declining credit risk — and therefore declining value of debt — counts as a mark-to-market profit is truly absurd. Barclays still has to pay back the full amount, if it wants to maintain its good reputation and wants access to reasonably priced debt in the future — quite important for a bank, I would imagine. So when will these ‘profits’ be realized? Never. The real value of Barclays’ debt is the same as it was; only its credit worthiness has gone down.

Who does Barclays’ accounting? Arthur Anderson?

And we wonder why it went so wrong.

Filed under: Economics, , , , , , , , , , ,

Financial Crisis Poetry Corner

A blog post by Paul Krugman has inspired me to write a Haiku.

Loan-Shark Enforcer in the World of Modern Debt Financing

With these credit-default swaps,

I never know whose legs,

I’m supposed to break.

So, Nobel Prize on the way? Oh, come on! Surely at least a Pulitser.

Filed under: Economics, , , , , , ,

Russian Bank Sector Debt Scare Story Sends Euro Down

The euro lost nearly 1% against the dollar at one stage of trading today after news broke that Russian banks may seek to restructure over USD400 bn in debt (much held in euros) with foreign creditors.

According to Bloomberg, Anatoly Aksakov, Duma deputy and the head of the Association of Russian Banks, told Japanese paper Nikkei that Russian banks may try to restructure debt, leading to speculation that European banks may face heavy losses on their Russian exposure.

The news pushed the euro down at one stage against 12 of the 16 most traded currencies in the world.

The Parallax Brief believes this is nothing more than a storm in a teacup.

Although there are plenty of other reasons to be terrified about European banks, the euro, and the Russian banking system, this isn’t one of them.

First, Russian banks don’t owe USD400 bn between them. This is the approximate figure for all Russian corporates and financial institutions in total. Second, the majority of that debt comes from investment grade companies like Gazprom, TNK-BP and VTB, not from heavily leveraged oligarch projects on the brink of extinction.

Third, it was the European banks which initiated the process, not Russian banks desperate to restructure debt. Finally, the idea of impartial arbitration seems now to have been nothing more than a potentially helpful proposal from the Russian Association of Regional Banks in the event restructering by an individual bank was required, rather than the response to events it was reported as.

It is indicative of just how jittery the market is when it can be spooked by garbled quotes and misunderstood journalism into a micro-run on the euro, but the Parallax Brief expects this to come to nought, and sure enough, Bloomberg’s most recent update (Update 3) of its article on the matter (linked above) is far less sensationalistic in its tone.

Filed under: Economics, Russia, , , , , , , , , , ,