Let The Show Trial Begin!

Billions upon billions in mortgage losses, and the Feds bust these two poor saps, Matthew Tannin and Ralph R. Cioffi--subprime fund managers at the defunct Bear Stearns....

While the real criminals, Alan Greenspan and Ben Bernanke, get away...


...and the counterfeiting, that will really take out the middle class, goes on to this day!

Last look Bernanke is printing new money (M2NSA) at a 10.0% plus rate...and you wonder why prices are climbing? When the inflation rate hits 20%, and it will, can you imagine the price collusion show trials we will have?

To the execs reading this blog, keep in mind what the show trial expert of all-time, Eliot Spitzer, said, before he got busted for his own (heh, heh) private shows:

Never write when you can talk. Never talk when you can nod. And never put anything in an e-mail.

Obama Comes Out Against Technology,Yet Wants to Manage and Spur On Government Involvement In Technology Research

The man lives in a world of mirrors.

"...the combination of globalization and technology and automation all weaken the position of workers," Barack Obama tells WSJ in an interview.

But, Obama wants to take corporate tax money and have the government invest it in technology:

You might undoubtedly get to a point where the capital gain and dividend taxes are so high that they distort investment decisions and you're weaker economically. But you know if you've got a sensible policy that says, we're going to capture some of the nation's economic growth … and reinvest it in things we know have to be done, like science and technology research or fixing our energy policy, and then that is actually going to be a spur to productivity and not an inhibitor.


Then he just disses free markets and comes out in favor of controlling the investment stream himself by adopting, get this, the "CIA model":

I have identified one gap that I think has to be filled, and that is the step between discovery and commercialization. You have this point in time where things haven't quite taken off yet and still entail huge risks. A lot of ventures may not want to get involved in that middle stage. They like the early stage, but if it doesn't take off right away, then oftentimes, innovation stalls. The model I'm looking at the model the CIA put into place in Quintella. But it basically partnered with the private sector to help subsidize investment in socially productive activities, but with an aim towards commercialization as well.

Obama's desire to subsidize private sector operations in "socially productive activities" is simply and indication that Obama does not understand how free markets work, but, further, his willingness to seek out new technologies seems to fly in the face of his statement that "technology weakens the position of workers." If this is so, why does Obama want to subsidize technological innovation? Me thinks, Obama go round'n circles.

How To Monitor The Economy

This column is not about theory. It is about the practical methods of observing the economy. Obviously, the more you understand correct theory, such as business cycle theory, the more meaningful will be the data you observe.

Data about the economy can be segmented into the three separate categories, market price data, non-price raw data and processed data.

Each of these three categories offers different insights about the economy,some more valuable than others.

The key to understanding an economy is to monitor as much data as possible, not in the sense of creating "economic models" that spit out forecasts that fail to account for the complex ever changing nature of the economy, but by looking at the minutiae of economic data so that you can begin to understand what is really going on.

We have significant disagreements with the theoretical economic beliefs of Alan Greenspan, but he gets it right when he studies the minutiae.

The most valuable information about the economy comes from actual market price data. Market price data is unique in that it is not "assembled" data, but is the data of actual pricing going on in the markets. Watching actual prices results in receiving pure data untouched by human hands.

By watching actual prices, one can often notice trends in the economy that are not broadly acknowledged. For example, the price of the dollar vis a vis other currencies is for all practical purposes in an early stage free fall. Over the last five years the dollar is down against most currencies by greater than 30%. There is scant media coverage of this free fall, but by watching actual prices, this trend becomes obvious. Likewise, watching actual prices will clue the individual watching the economy to, for example, the current rising costs of many goods including wheat, gold and oil.

Watching interest rates can also clue the observer in, as to when the Fed is in a easing mode. If short-term interest rates are lower than long-term rates, then the Fed is in an accommodative mode because banks can profitably borrow short-term and lend long-term.

The more prices you watch, the more you will understand about the economy.

After market prices, the best source for information about the economy is raw data. In the raw data camp, we put such items as auto sales, newspaper advertising, money supply numbers etc. This information, often on an industry by industry basis, or better yet when it is obtained on a company by company basis, generally is private sector data.

If one watches the data minutiae in news releases by various corporations,one will began to understand what is occurring in the economy: if sales of autos are up or down, if layoff announcements are spreading across a broad spectrum of industries, or are limited to a specific sector such as the subprime industry, if money raised in the securities markets is increasing or decreasing.

The more raw data you watch, the more you will understand about the economy.

But, because this data is assembled data, there is the possibility of human error or distortion. A particular industry group may have incentive to assemble data in a way that benefits its agenda. Thus this data is not as pure as market price data and the more "assembled" it is, the more one has to be careful for distortions.

Government data and industry association data both have the potential to be finessed. Specific company data may sometimes be finessed but because there are so many separate data points when looking at a multitude of individual company pieces of data, an outlier piece of data will be more quickly spotted. With association and government data, the data is already assembled so even that check of looking at individual pieces of data is gone.

Money supply data assembled by the Federal Reserve appears to be data that is fairly accurate, but the further one travels from the United States the more one has to be careful of even central bank data.

In his book, The Age of Turbulence, Greenspan relates this story about the
Fed's dealing with the Asian currency crisis of 1997:

Korea's central bank was sitting on $25 billion in dollar reserves--ample protection against the Asian contagion, or so we thought.

What we didn't know, but soon discovered, was that the government had played games with those reserves. It had quietly sold or lent most of the dollars to South Korean commercial banks, which in turn had used them to shore up bad loans. So when Charlie Siegman, one of our top international economists, phoned a Korean central banker on Thanksgving weekend and asked, "Why don't you release more reserves?" the banker answered, "We don't have any." What they'd published as reserves has already been
spoken for.

The third category of data is processed data, this is data that is not only assembled, but assumptions are added because of lack of raw data. Most often this data comes from government and includes such data as price indexes, unemployment figures, gross domestic product numbers and productivity numbers. In addition to being extremely dangerous data because of assumptions that are made to create the data, there is also, for some of the data, political pressure to finesse the data. Of all the data, we find the processed data to be the least useful data in getting a true grip on the economy. Unfortunately, it is some of the most widely followed data,
which thus causes it to be important data in the sense that markets will react to it on a short-term basis--even though it is probably the least reliable information about the economy.

In most situations, this data is skewed to a positive reading on the economy, but during a period of the 1990's productivity numbers were actually skewed dramatically negative. This probably happened because not as many eyes are focused on productivity numbers as they are on, say,inflation numbers or employment numbers. No one put pressure on the productivity people to make them more positive--or, for that matter, to notice how out of whack they were with true productivity gains in the
economy.

Greenspan, however, spotted the inaccuracies in the numbers. He caught this because of his detailed studies of economic numbers. He tells the story in his book:

The data we were getting from the Commerce and Labor departments showed that productivity (measured as output per hour worked) was virtually flat in spite of the long-running trend toward computerization. Icould not imagine how that could be. Year in and year out, business had been pouring vast amounts of money into desktop computers, servers,networks. software, and other high-tech gear...This became evident as early as 1993 when new orders for high-tech capital began to accelerate after a protracted period of sluggish growth. The surge continued into 1994suggesting that the early profit experience with the new equipment had been positive.

There were other, even more persuasive indications that the official productivity numbers were awry. Most companies were reporting rising profit margins. Yet few had raised prices. That meant their costs per unit of output were contained or even falling. Most consolidated costs (that is, for business considered as a whole) are labor costs. So if labor costs per unit of output were flat or declining, and the rate of growth of average hourly compensation was rising, it was an arithmetical certainty, that if these data were accurate, the growth of output per hour must be on the rise; productivity was truly accelerating.

Bottom line, the statistics gatherers and econometricians at the Commerce and Labor departments missed the productivity gains of the personal computer!

Recent examples of problems with processed government data include consumer price index data and unemployment data.

Bloomberg's John F. Wasik had this to say about CPI numbers:

The U.S. consumer price index continues to be a testament to the art of economic spin.

Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.

Yet your real cost of living -- what you keep after taxes, medical bills, college expenses and other household costs -- is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.... The single-largest expense for most Americans is housing, accounting for as much as a third of household outlays. Yet the Labor Department's Bureau of Labor Statistics only tracks ``owner's equivalent rent,'' or what a home would yield if it was rented out. Rental units and homes are two very different animals, though, and the government casts a
blind eye to total home ownership expenses.

Most recently, CPI numbers have been declining, because of lower energy costs over the past three months. Anyone watching real price data knows this won't last given that oil is trading at all-time highs! But the CPI distortions continue.

As far as unemployment numbers, on September 7 we commented on the much weaker than expected payroll numbers released at the time:

An odd outlier was employment in local government education which fell by 32,000 in August, as seasonal hiring was less than usual. This unusual education jobs number accounted for approximately 30% of the difference between consensus forecasts and the actual payroll number. This would be the first time in history that a recession was led by summer school teachers!

Almost a month later, with the masses looking for the next distorted piece of government data, WSJ comments on the outlier we discussed on the day of the release:

Many economists suspect the drop in August payrolls was exaggerated by a fluky fall in local government payrolls, and new data from the Bureau of Labor Statistics supports that.

On Tuesday the BLS released state payroll data for August. If you sum up the changes across the 50 states and the District of Columbia, the total rose 159,000, compared to the decline of 4,000 in the national data.

That doesn’t mean the national tally is wrong; sum-of-the-states data are hampered by differing response rates by states and the fact the BLS seasonally adjusts each state separately, notes Ray Stone of Stone&
McCarthy Research Associates.

That said, he says the difference is unusually large. In part that may simply be catchup, since the sum of the states total has lagged the national total for some time. But he says the principal source of divergence in August appears to be in government payrolls. The national tally of government jobs fell 28,000, while the sum-of-the-states tally rose 88,000.

Mr. Stone takes this as evidence that the national data have been distorted by quirky seasonal adjustment, which is made difficult by “the timing issues
surrounding academic years, and the inconsistency in how teachers are paid over the summer. Some get paid on a 12-month basis, others on a 9- or 10- month basis. Any shift from year to year in the relative incidence of “months-paid” will play havoc with the seasonally adjusted teacher payrolls.”

In short, prices are prices, they are the most accurate data out there. Raw data is the second most valuable data, the closer to the source the better. Government processed data not only suffers from political pressures but also faces the difficulty of being assembled data where assumptions are made about all sorts of things, from the quality of product from period to period, to estimates on data not yet received, to seasonal adjustment factors which can greatly impact final data.

The fact that the media, investors and traders focus on the processed data provides an edge to any trader or businessman willing to do the work and look at real prices and raw data. The real prices, raw data minutiae observations, we'll call it the Greenspan Approach, is conducted in depth by very few. There are literally millions of prices and raw data out there that no one is looking at from an analytical perspective. There is room for industry specific analytical economists to do this work and also for economists at the national and international macro-economic level to do so. All that needs to be done is for economists to throw away their near useless processing equations, take a look at the economy from a non-processed framework, and use the Greenspan Approach of just looking at and studying the
minutiae.

In The Age of Turbulence, Greenspan explains the philosophy of the
approach this way:

I have always argued that an up-to-date set of the most detailed estimates for the latest available quarter is far more useful for forecasting accuracy than a more sophisticated model structure.

The fact that this, Greenspan Approach, is not being used, and that most economists tend to build forecasting model structures which suck the life out of data, indicates that true analytical work on the economy is still in its infancy.

Barack Obama Site Puts Michelle Obama at the Scene of the "Crime"

Barack Obama has set up a web site, Fight the Smears, in an attempt to discredit various rumors circulating on the internet about Obama. One of the rumors circulating is that, in a rant, Michelle Obama in the summer of 2004 used the word 'whitey' and blamed the ills of African-Americans on 'whitey'.

In an attempt, at his Fight the Smears web site, to refute the 'whitey' charge, Barack Obama may have inadvertently provided a bit more evidence to prove the case by putting Michelle at the scene of the "crime".

At his, Fight the Smears, web site Obama charges that the following statement is a lie:


The Michelle Obama Rant Tape was filmed between June 26th - July 1st 2004in Chicago, IL at the Rainbow/PUSH Coalition Conference at Trinity United Church:
specifically the Women’s Event


Indeed, the event was held at the Chicago Sheraton, not at Trinity United Church.

BUT, the site goes on to say:


Michelle Obama was not on a panel... at the Sheraton.


It then links to a schedule of the event that shows Michelle Obama WAS on a panel at the event, or at least a "special guest” which certainly suggests the possibility of a speaking role, especially since two television personalities are MC’s. What are they Master of Ceremonies of ?...

From the schedule on Monday June 28:

12:00p.m ~ 2:00p.m.SHERATON BALLROOM 1-7


Womans Luncheon

M.C.’s: Cheryl Burton and Karen Jordan, ABC 7

Keynote Speaker: Reverend Jesse L. Jackson,
Sr.

Special Guests:
Shoshana Johnson, Retired United States Military

Michelle Obama, University of Chicago

Obama Names Jason Furman As Economic Policy Director

Barack Obama today named Jason Furman as economic policy director, in an annoucement coming from the campaign.

A quick perusal of his writings, and you can only reach the conclusion that Furman doesn’t have a clue. There is no indication he understands business cycle theory or fears inflation. In fact, it appears he believes the economy can be micromanaged by government, while at the same time he is a Keynesian and an inflationary monetarist.

In the following quote, Furman manages to come off as a Keynesian and inflationary monetarist in the same sentence!

The good news is that the rate cuts will have a big effect on the economy — leading economic forecasters are predicting that the rebate checks and other stimulus measures will add about 0.7% to real GDP.

And once the fiscal and monetary madness makes everything fine, according to Furman, he is going to solve all the rest of government created problems with more government programs:

When the economy does start growing more strongly again, we should use that as an opportunity to focus on some of the long-run growth issues…We should also focus on reforming unemployment insurance, health insurance and taxation in ways that automatically reduce the severity of business cycles and, more important, cushion families from some of the worst downsides of those business cycles.

"Reforming unemployment and health insurance …in ways that can reduce the severity of business cycles” is a new one for me. What does health insurance have to do with the business cycle?

The man doesn’t have a clue, except when it come to understanding the con. He gets that:

…policymakers from both political parties have also been attracted to using the tax code for health reform because of the perception that the public prefers measures described as “tax cuts” to substantively similar measures that are treated in budgetary conventions as “spending increases.”

So Just How Did ‘Core Inflation’ Come About?

‘Core inflation’ takes food and energy out of the inflation index. Many mainstream economists and Fed members pray at the ‘core inflation’ altar. So what economist came up with the wacky notion. Was it some Einstein type creating a concept that few other earthlings can understand? No.

‘Core inflation’ was created at the behest of Tricky Dick, himself, Richard Nixon.

Kevin Phillips, a political and economic commentator for more than three decades and onetime Nixon strategist, reports that President Richard Nixon asked his Federal Reserve chairman, Arthur Burns, to concoct a new inflation number that would be split off from traditional headline CPI, dubbed “core” inflation—and thus make inflation look less threatening.

Writes Phillips:

Richard Nixon, besides continuing the unified budget, developed his own taste for statistical improvement. He proposed albeit unsuccessfully—that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns,to develop what became an ultimately famous division between "core" inflation and headline inflation. It the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of "volatility," categories that happened to he troublesome: at that time, food and energy. Core inflation could be spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called "inflation ex-inflation"—i.e., inflation after the inflation has been excluded.)

But, they all mess around with the numbers

In 1983, Phillips says the Reagan administration monkeyed around even more with inflation data, when the Bureau of Labor Statistics decided that housing, too, was overstating CPI.

Phillips says in the 1990s, the CPI has been subjected to three other adjustments, all delivering a downward bias and all dubious:

*Product substitution: If flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon, he says;

*Geometric weighting: Goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption

*And, most strangely, hedonic adjustment: An unusual bit of monkeyshines by which the government says that product improvements in things like computers, cell phones or television actually amount to a reduction in price, so a $2000 laptop with a built in camera is less expensive than a $1500 laptop without one.

Under Bill Clinton, Phillips says, the nation’s employment figures were massaged.

In 1994, the Bureau of Labor Statistics redefined the work force to include only that small percentage of what it called “discouraged workers” who had been seeking work for less than a year, Phillips says. The longer-term “discouraged”-some 4m U.S. adults who simply are not working-fell out of the main monthly tally. Some now call them the “hidden unemployed.”

-RW

Can You Know an Economist By The Redistributionist Commies He Supports For President?

The following is a list compiled by Economists for Obama, of Obama supporters:

Economic policy advisors:

Austan Goolsbee (chief advisor), University of Chicago tax policy expert
Karen Kornbluh (policy director)
Jeff Liebman, Harvard welfare expert
David Cutler, Harvard health policy expert
Michael Froman, Citigroup executive
David Romer, Berkeley macroeconomist
Christina Romer, Berkeley economic historian
Richard Thaler, University of Chicago behavioral finance expert

Other economists who support Obama:

Paul Volcker, Chairman of the Federal Reserve 1979-1987
Brad Delong, Berkeley macroeconomist
Joseph Stiglitz, 2001 Nobel laureate
Edmund Phelps, 2006 Nobel laureate
Ray Fair, Yale macroeconomist

Prominent finance people who support Obama:

(not technically economists)
William Donaldson, Securities and Exchange Commission (SEC) Chair 2003-05
Arthur Levitt, SEC chair 1993-2001
David Ruder, SEC chair 1987-1989

The heavy Berkeley influence doesn’t come as any surprise, but what is a Citigroup exec doing on the list? Et tu, Paul Volcker?

Tons of SEC chairmen are big Obama supporters. SEC chairmen who have increased securities regulation from chairman to chairman but never managed to nip an Enron or a housing securitization crisis,before they exploded into national crises.Strikes me a lot as to what an Obama Administration might look like: Lots of regulation and no success at solving any problems.

Bernanke Tells Harvard: Things Are Different This Time

Federal Reserve Chairman Ben Bernanke ’75 spoke to Harvard College’s graduating class today in Tercentanary Theatre at Harvard.

Bernanke spoke to the class about the year 1975, the year he graduated from Harvard. He told the class:

Then as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth. But I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities.

Oh yeah, they are different alright.

Bernanke again:

Economists generally agree that monetary policy performed poorly during this period. In part, this was because policymakers, in choosing what they believed to be the appropriate setting for monetary policy…

Sure, it is real different this time, for the worse. In 1975 money supply (M2) grew at 8.0%, today it is growing at 10.2%.

Bernanke again:

For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980.

The inflation rate in 1975 was 9.0%. According to John Williams at Shadow Government Statistics, if you calculated the inflation rate now, the same way it was calculated in 1975, the CPI is near 12% this year.

Bernanke then had the chutzpah to add:

The Federal Reserve and other central banks have learned the lessons of the 1970s… as a central banker, I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance.

QUESTIONS FOR BLOGGER COURSE

Enter questions below.

Freakonomics Author on Lying Statistics

Steven D. Levitt, co-author of the best selling book, Freakonomics, pulled some doozy statistical magic tricks to reach some of the conclusions in his book.

Turns out, though, he doesn’t trust statistics either, when it comes to his health:

I never trust statistics I get from people in the field of medicine, ever.

We anxiously await Dr. Levitt’s paper explaining why statistics don’t work in medicine, but work in economics, given that there are a lot more variables to contend with in economics, much more difficulty in measuring and observing in economics and, the piece de resistance, there are no constants in economics–--making a lot of economic equations look rather silly. (Levitt’s included).

Carlyle Group's Plan to Takeover the Banking Industry

So what’s Treasury Secretary Henry Paulson’s call for changes in regulation of the financial markets all about? A clue may have been revealed today by Randal Quarles, former Under Secretary of the Treasury who led the Treasury Department’s effort in the coordination of the President’s Working Group on Financial Markets and is a current Managing Director at Carlyle Group.

Quarles spoke at a luncheon meeting of the Washington DC-based National Economists Club. His topic: “Restructuring Financial Regulation”. Quarles told the luncheon group that he chose the topic in January. Hmmm. Didn’t Treasury Paulson just make the proposal to restructure the financial regulatory agencies last week? How did Quarles pick this topic back in January? Short-answer, Quarles is a major insider and his comments should be monitored to get a sense for what insiders are thinking.

In his talk, Quarles said that estimates go into the hundreds of billions in terms of capital that will be required by the financial industry because of losses sustained as a result of the current crisis. He said there will be more financial institutions that will go under in coming months.

He said that public markets will not supply the necessary funds because they don’t have the capabilities to study in detail the risks and potential rewards of the complex financials of financial institutions. He said private equity firms have the capabilities to do so and to supply the necessary funds. (N.B. Carlyle Group is a private equity firm).

Quarles stated that some changes in the structure of regulations that Paulson proposed were necessary but would take time to develop. He specifically stated that one regulation that needed to be changed is the limitation on the size of positions that non-banks can take in banks. (Note: Limitations in the size of non-banks positions in banks now limits Carlyle Group from taking large positions in banks).

During the Q & A session, one questioner summarized Quarles talk this way:

So what you said here today is that you would like to see regulatory changes to make it easier for private equity to take major positions in banks? And private equity, through various entities on and offshore gets its money from banks. So what you want is an environment where private equity can borrow from banks to takeover banks?

In response, Quarles laughed.

We might add this private equity acquisition of financial institutions will go on as the general public is scared off from investing in the financial institutions by scare headlines, or as Quarles would put it, “Public markets just don’t have the capabilities to judge the risks and rewards of the various financial institutions.” Translation: The public is not clued in on which firms the insiders have decided to let survive, like JPMorgan, and which they are going to takedown, like Bear Stearns

The Series Is Back: Notorious Economic Students

Barack Obama's father was a Harvard trained economist. The school's influence was interesting. He came out of Harvard and ended up advocating the communal ownership of land.

He advocated dramatically increasing taxation on "the rich" even up to the 100% level . And in Kenya, he advocated the nationalization of "European" and "Asian" owned enterprises, including hotels, with the control of these operations handed over to the "indigenous" black population.

Freakonomics Author On Lying Statistics

Steven D. Levitt, co-author of the best selling book, Freakonomics, pulled some doozy statistical magic tricks to reach some of the conclusions in his book.

Turns out, though, he doesn't trust statistics either, when it comes to his health:

I never trust statistics I get from people in the field of medicine, ever.

We anxiously await Dr. Levitt's paper explaining why statistics don't work in medicine, but work in economics, given that there are a lot more variables to contend with in economics, much more difficulty in measuring and observing in economics and, the piece de resistance, there are no constants in economics--making a lot of economic equations look rather silly. (Levitt's included.)

Mad Money Mankiw?

Isn't Jim Cramer as a source for mad money investment ideas enough? It appears not. Mad money investment ideas are apparently a type of disease that spreads and has reached the campus of Harvard University. Greg Mankiw, professor of economics at Harvard and author of best selling economic texts, is all hot about Carry Trade investing.

Writes Mankiw:

It is rare that I leave an economics conference with information that will change my personal financial decision making. But I was close yesterday. A fascinating discussion of a paper on the carry trade made me wonder whether I should put a little money there.

The carry trade refers to the act of borrowing from countries with low interest rates, lending to countries with high interest rates, and profiting from the interest rate differential. It is based on the hope that exchange rates will not move too much against you to wipe out the profit. In other words, it is gambling that a condition known as uncovered interest parity will not hold. In the past, this strategy has been a money-maker.

Duh! "In the past this strategy has been a money-maker." There is no dumber reason to get into an investment then because it worked in the past. Long Term Capital Management was all about trading based on things that worked in the past. It was a great strategy until things didn't work like in the past and LTCM blew up. The subprime mortgage crisis is all about default rates that didn't work like they did in the past.

Curiously, even the paper that Mankiw sites, suggests the strategy has not been a money-maker in the past:

This paper provides evidence of a strong link between currency carry and currency crash risk: investing in high interest-rate currencies while borrowing in low interest rate currencies delivers negatively skewed returns.

This certainly is downright Crameresque madness on Mankiw's part.

Oh and, by the way, given the weakness in the dollar and our expectation that the weakness will accelerate, betting against the Carry Trade by investing in the Swiss franc and the Japanese yen is the way to go.

UPDATE: Mankiw has now modified a bit the second paragraph that I quoted from his blog. But here's the real kicker, he has added to his post a chart of a "simulation" showing the Carry Trade position to work. He also added to his comment: "The above chart is a simulated past performance from the ETF's website. It is similar to some of the results shown by the discussants at the conference."

Since he still does not address the researchers (Markus K. Brunnermeier,
Stefan Nagel and Lasse H. Pedersen) findings (From the paper he sites!) that Carry Trade positions deliver "negatively skewed returns", he's just very sloppy or damn deceiving with his simulation chart.

Former Treasury Department Coordinator for President's Working Group Denies Working Group Manipulates Markets

Randal Quarles, former Under Secretary of the Treasury who led the Treasury Department's effort in the coordination of the President's Working Group on Financial Markets, and who is now a managing director at the Carlyle Group, has denied the Working Group manipulates the gold market or stock market.

Quarles spoke at a luncheon today at the Washington DC National Economists Club. During the question and answer period I asked him this question:

There have been rumors on the internet and a bit in mainstream media that the President's Working Group manipulates the gold market and stock market. Has the Working Group ever done so and do they have the funds available to do so? Secondly, have members of the Working Group ever contacted market participants to co-ordinate buying or selling in any markets?

Quarles replied "The short answer is no. No to all of it."

He then went on to state that the Working Group does not even have enough funds to buy notepads. "I had some notepads made that said President's Working Group on Financial Markets, but I paid for them with my own money."

After the Q&A session, I managed to corner him and again asked him if Working Group members ever made calls to co-ordinate market buying or selling. He said definitely not. He said that calls may be made to market participants to get market intelligence but that was it. He then went on to suggest in a casual off the cuff way that the Working Group was just various members of different regulatory agencies getting together to keep informed on markets. I then said to him that, yesterday, in questioning about the Working Group by Congressman Ron Paul, Fed chairman Ben Bernanke seemed to answer the question in the exact same casual way as though to imply that the Working Group was nothing more than some sort of collegiate-type discussion group. He laughed and said, "Yeah, that's what we are co-ordinating these days [Our responses]."

For full coverage of Quarles speech see Carlyle Group's Plan to Takeover the Banking System.

Does Goldman Sachs Run the World?

Not completely, but it doesn't mean they aren't trying. It seems that, literally, only flesh eating bacteria can stop these guys.

The Canadian dollar breaks above parity and, lo and behold, last Thursday, a Goldman managing director, Mark Carney is named governor of the Bank of Canada.

Mario Draghi, governor of the Bank of Italy, is also a former Goldman managing director.

Then, of course, there is U.S. Treasury Secretary, Hank Paulson, who was Chairman and Chief Executive Officer of Goldman.

Goldman did have a man at the Bank of England, but their presence there has gone astray for the time being. Goldman man David Walton was on the Bank of England's Monetary Policy Committee from July 2005 until June 2006 when he died at the age of 43 from necrotizing fasciitis, i.e., flesh eating bacteria.

Unimpeded here by flesh eating bacteria, Goldman's presence in United States government financial power circles remains very strong. Prior to Paulson, during Bill Clinton's second administration, Robert Rubin served as Treasury Secretary. Rubin was Vice Chairman and Co-Chief Operating Officer at Goldman from 1987 to 1990. From the end of 1990 to 1992, Rubin served as Co-Chairman and Co-Senior Partner at Goldman. And, Robert Zoellick, new head of the World Bank after Paul Wolfowitz was booted, was a managing director and chairman of the Goldman's International Advisors department.

How do they use these positions? Who knows all the details? But, at a regularly scheduled Fed monetary policy meeting on August 7, the Fed failed to cut interest rates. Records, obtained through a Freedom of Information Act request by Kenneth H. Thomas, a lecturer at the University of Pennsylvania's Wharton School, show that the next day Rubin called Fed chairman Bernanke. Bernanke cut the discount rate 10 days later. Rubin says he called Bernanke to tell him he was doing a good job.

With the sub-prime crisis making markets extremely volatile, it was a difficult period for most investment banking firms, but not for Goldman.

On September 20, Goldman reported much better than expected 3rd quarter results. Analyst Glenn Schorr at UBS AG writes the earnings demonstrate Goldman's "ability to not only navigate choppy waters, but make a ton of money doing so." Better at navigating choppy waters? Do you think your local investment club would show a better performance if your club members managed to get positions running the U.S.Treasury, the central bank of Canada, the central bank of Italy and the World Bank? And if this isn't enough, wouldn't it be great to get Ben Bernanke to take your call in the middle of the sub-prime crisis?

So what are the Goldman boys up to now? Columnist and political insider, Robert Novak is reporting that the Goldman boys are getting ready for Hillary to move into the White House. Despite Treasury Secretary Paulson working for a Republican Administration, Novak reports:

Eyebrows at the Treasury were raised last Tuesday when Secretary Henry M. Paulson Jr. named a major Democratic fundraiser to an important advisory role. The next day, eyebrows were still elevated when Undersecretary Robert K. Steel participated in an event spearheaded by Bill Clinton's two Treasury secretaries.

Oh yeah, Steel also happens to be a retired Goldman Sachs vice chairman who worked at the firm with Rubin and Paulson.

Here's more from Novak, obviously scratching his head at Paulson's moves:

A longtime Republican officeholder now in the Bush administration noted these developments and e-mailed a fellow Republican outside the government: "This leads some to wonder whether this Treasury has become the pre-placed Hillary Clinton team." ...the former Goldman Sachs chief executive does not act or sound much like a conservative Republican to the GOP remnant at the Treasury. "It's not in Hank Paulson's DNA," one official told me. Is he loyal to Bush? "Hank is for Hank," the official replied.

UPDATE 7-2-08: Hillary Clinton is slipping in the polls, will this be a problem for Goldman? What do you think? Here's an update on Goldman Sachs and their latest power move, the infiltration of the Barack Obama campaign.

The infiltration is led, of course, by Robert Rubin, former Co-Chairman of Goldman Sachs, and who is now advising Obama.

Further, Obama has named Jason Furman, his top economic adviser. Furman was an aide in the Clinton White House, and worked there directly under Rubin. He is also a close associate of Rubin through their work together on the Hamilton Project.

Which doesn't mean that current Goldman employees aren't paying attention to Obama. David Brooks of NYT reports that:

When you break it out by individual companies, you find that employees of Goldman Sachs gave more to Obama than workers of any other employer...Over the past few years, people from Goldman Sachs have assumed control over large parts of the federal government. Over the next few they might just take over the whole darn thing.

UPDATE 7-21-08 Goldman's most senior financial-institutions banker, Ken Wilson, is temporarily leaving the firm to advise Treasury Secretary Henry Paulson on how to resolve the country's banking crisis...Also, I just became aware this weekend via an NYT profile of CNBC's Erin Burnett that she worked for Goldman for a year.

UPDATE 9-22-08 Goldman is going to become a bank holding company and former Goldman CEO Paulson is about to become an American oligarch. Details here.

UPDATE 10-2008 Goldman Sachs becomes bank holding company on September 21. On October 6, Treasury Secretary and former Goldman head signs tax rule changes giving huge tax benefits to bank holding companies.

UPDATE 10-2008-Neel Kashkari named Treasury Interim Assistant Secretary for Financial Stability is a former Goldman Sachs man.

UPDATE 12-04-2008-Word has leaked that Gerald Corriagan, the former head of the Federal Reserve Bank of New York, is being tapped by Goldman Sachs as chairman of its newly created bank holding company.

UPDATE 1-18-2009 President-elect Barack Obama announces that his choice the head the CFTC is former Goldman exec. Gary Gensler.

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Robert Wenzel is Editor & Publisher of EconomicPolicyJournal.com and author of The Fed Flunks: My Speech at the New York Federal Reserve Bank.

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Gordon Gekko Is Back

Rupert Murdoch's 20th Century Fox plans to prodouce a sequel to the movie "Wall Street".

According to the New York Times, "Edward R. Pressman, who produced the original movie...reached an agreement with Fox this week to develop a sequel in which Mr. Douglas will resume his machinations on a global scale in the hedge-fund era. Mr. Pressman declined to say more about the plot. But the title, he said, will be Money Never Sleeps, after one of Gekko’s guiding principles in the first film, written by Stanley Weiser and Mr. Stone."