Original Face

Carbon, dated

    Tim Yeo, the British Member of Parliament, has been ridiculed this past week for his suggestion that every British subject be given a "carbon rationing card" delimiting the amount of a carbon footprint they may have.  To Britons the idea conjures up memories of post-WWII food rationing and so was promptly hooted off the political landscape without any consideration of its economic merits.
    In addition to being a public relations disaster such a scheme would be impossible to establish and regulate.  It would require an intrusion into each person's personal life in ways that would even make social conservatives or communists shudder.
    Yet, if the idea gets shifted from the nonsensical microeconomic sphere to the macroeconomic sphere, there may be something to the notion.  My friend, Thomas Barnet-Lamb, has thought of such a scheme for allocating carbon usage among countries.  While almost all analysts recommend the change-over from carbon to non carbon based societies, the devil has been, as it almost always is, in the profound disruption which will occur during the transitional period.  This is especially the case in the developing world.
    The use of macro-economic carbon credits could provide a solution to ease the transition.  By making it allocated on a strict per capita basis, it would provide developing countries the needed economic capital to raise their standards of living without requiring the use of additional carbon in the world's atmosphere as the Kyoto Accords accept as inevitable, thus making the Accords in reality more an income transfer rather than a "global warming" treaty.
    How so?  By creating incentives for developed countries to either buy carbon credits from countries without much carbon-based infrastructure these societies will have the money necessary to promote growth.  The developed world, not wishing to purchase continually such credits would have the incentive to create alternative fuels/efficient technologies.  Once such technologies are developed, the cost of the credits would fall proportionately. 
    What about the continued use of carbon by the third world as they grow?  As the industrialized nations switch away from a carbon based economy the costs of these credits would become close to zero.  Thereby allowing these non-developed nations to have the ability to "purchase" as large a supply of carbon credits as they would require for their economies prosper.  As the non-carbon based technology becomes widely spread, the cost of that technology would  fall to a level that would permit the less-developed nations to purchase and use it.  At such a point the transition period would be over.
    Alas, Barnet-Lamb's idea is so compelling that it will never be taken seriously.

The subprime mess

    Finally an article that explains how something seemingly as isolated as subprime mortgages could make the entire financial structure shudder. 

http://www.nytimes.com/2008/03/19/business/19leonhardt.html?em&ex=1
206072000&en=ab4caf3befa3e1c9&ei=5087%0A

What is the take away message?  Our economy, like any economy, like all economics, is based upon the belief that everyone will stand behind their promises or commitments, come what may and that there will be someone/thing that will guarantee the whole mess won't topple over.  In the end economics is a theology in some sense...it is the holding--without proof-- that all will be right, that people have good will and will also believe and act in that belief in the economic enterprise.  If that confidence is rattled, the whole thing goes to shit, very very quickly.  Right now there are a whole lot of economic agnostics out there and that is not a good thing. Not good at all.

Schadenfreude Rally

    So it took a bit longer than I expected yesterday, but no one can tell me that today's rally in the stock market wasn't influenced with the fall from grace and power of Elliot "Ness" Spitzer.  The more than 400 point gain in the Dow Jones Industrial Average is the largest in nearly six years.  Sure, the Fed said that there was $200 billion in extra credit for financial institutions and that it would extend which securities, including mortgage backed notes, it would accept as collateral for this money; that is all well and good.  However, traders came to their trading desks with a spring in their steps and whistling happy tunes this morning.  The bears, who have killed all recent rallies and have driven the Dow down 900 points in just a few days, were no where to be seen.
    Why?  'Cause, like in Munchkin-land, all is Technicolor and sweet songs.  Sing it out: Ding-dong, the sanctimonious, narcissistic, petty tyrant and prosecutorial bully Spitzer is dead!

Please don't step on my blu-ray disc

    Toshiba has all but hoisted the white flag.  The long battle between HD-DVD and blu-ray as the dominant format for high definition DVDs is just about over.  The deciding factor was the decision of the company for which Hillary Clinton was a director, Wal-Mart.  This week the giant box retailer decided that it will only sell blu-ray machines and discs from now on.  The company has such power in the marketplace that Toshiba, which had been fighting Sony's technology, has come to realize that there is little point in continuing the war.
    I don't have a dog in this fight.  Unlike the VHS vs. Beta-max contretemps in the 1970s, there is no one clearly better technology.  Both blu-ray and HD-DVD are equal in that regard.  But, one had to fall.  Retailers were getting tired of having to carry both brands and consumers were staying away until a winner was chosen. 
    Now if they could get on with the satellite radio merger.

Oh yeah, that's believable

    The management of the French bank, Societe Generale, wants everyone to believe that a single junior employee made trades that lost the bank $7 billion dollars--that's $7,000,000,000.00 folks, without anyone else in the bank knowing anything about it.  Oh, and this junior banker did it without a personal profit motive.  What sort of chumps do they take us for?
    If, and I mean if, this is true then this bank is in even worse shape than if there was massive fraud.  How can an international bank have so few checks in place to not create a series of warning signals to management?  How can a single person get the ability to destroy two full year's of this bank's profits without coming to anyone attention?
    Aside from the enormity of the loss to this financial institution, the management of the Societe Generale, when it unwound its trading positions early this week, increased significantly the volatility in the markets, causing traders throughout the world to believe that massive dumping of stock in response to the sub-prime crisis was occurring.  This lead to even more panic selling.  How many more billions of dollars were cumulatively lost in the capital markets because of this bank's incredible misfeasance?  While the SG will have to seek $7 billion in capital just to replace its direct losses, it could, and indeed should, be brought into bankruptcy by potential lawsuits, as well as facing significant problems from global financial regulators.
    The one bright spot in all of this is that the Fed, spooked by the world markets' crashing Monday and Tuesday, dropped the discount rate by 75 basis points, thereby lowering everyone's adjustable mortgages and other variable rate loans.  Thank you, Societe Generale. 
    As John Houseman might have said in a commercial: You lost money the old fashioned way. You blew it.

I'll cry if I want to...

When I was a trainee at Goldman, Sachs one summer during college, I spent some time on the trading desk with the legendary trader, Bob Mnookin.  One day Bob's instincts told him to short the market.  Unfortunately, the market did not go the way he expected and he was losing money by the minute.  Finally, he turned to no one in particular and said, "OK, let's pack it in, ya can never fight the tape."

That is what makes the correlation between economic data and the stock market hazy at best.  Although the real economic data, as confirmed by glowing earnings reports, are sound, there is a skittishness in the marketplace that has more to do with psychology--and mass psychology at that--than with econometrics.  The fear of a credit crunch, despite both real information and the comments by Fed governors, has had a dampening effect on the equity markets over the past several months.

However, just as Mnookin was much more frequently right than wrong with the direction of the "tape," at some point even the stock market will have to cast off its overblown, if real, concerns regarding the mortgage problem and will again tract economic activity.  At least, until, the next irrational fear or greediness takes hold of investors.