Sunday, November 29, 2015

OPEC: Looking into the Abyss

OPEC is in crisis. With Brent crude trading at around $45 a barrel, the price of oil has traded lower and for longer than most analysts anticipated since the oil price collapse that began late last year. The oil price shock has brought the Venezuelan economy to its knees, is threatening Saudi Riyal's peg to the dollar and has put Russian economy into recession. Meantime Saudi Arabia, the Gulf states and Russia are fighting expensive wars in Syria and Lebanon. 

Sooner or later something has to give because if nothing comes out of the OPEC meeting scheduled for this Friday, and nothing is expected, there are more than a few analysts who believe that the oil price could fall into the low $30s or perhaps into the $20s. Although OPEC is nowhere near as strong as it once was it still accounts for about 31 million barrels/day  of output, approximately 1/3 of  global production of about 94 million barrels/day which is about 2 million barrels/day too much. Add in Russia's 11 million barrels/day of output you get to about 45% of global production.

My guess is that the current pain that OPEC and Russia are feeling and the prospect of future pain coming from another break in oil prices is too great. OPEC in concert with Russia will act to reduce output. While there was much press commentary about Syria when Putin met with the Saudi Foreign Minister in Moscow a few weeks ago and again when Putin met with the Ayatollah Khamenei in Tehran last week, there was nary a comment on oil prices. It strains the imagination to think that they did not talk about oil prices. Thus the surprise coming out of the OPEC meeting will be recommended cuts in output with the implicit cooperation of Russia. All it would take would be a 5% drop in the combined output of OPEC and Russia to bring supply and demand into balance.

But you would say I am not taking into account the planned increase in Iranian oil exports. I think that is over-rated because Iranian oil is already finding its way into the market outside of the sanctions regime.

Monday, November 23, 2015

My Amazon Review of Paul Halpern's "Einstein's Dice and Schrodinger's Cat: How Two Great Minds Battled Quantum Randomness to Create a Unified Theory of Physics

Not Physics for Dummies

Physicist Paul Halpern has written and interesting and difficult book about the lives and theories of two of the greatest physicists of the 20th century. His discussion about the lives and philosophies of Einstein and Schrodinger is fascinating. This is especially true when he discusses Einstein’s deity in the context of Baruch Spinoza which leads him to believe that science is deterministic and not probabilistic. Hence Einstein’s aphorism that God does not play dice with the universe.  He also goes into great detail about Schrodinger’s very active sex life with more than a few women all the while being married. He spends more time on this than Schrodinger’s famous cat that is half dead and half alive.

At least for me, where he makes it difficult for the lay reader is his discussion of the science of Einstein and Schrodinger. Before reading this book I would suggest that the lay reader become very acquainted with the equivalent of “quantum mechanics for dummies,” “relativity for dummies,” and “unified field theory” for dummies.” Alas with only one course of college level physics there were many parts of this book where I was lost. The book needs clearer examples of the theories and diagrams would be of great help.

Finally his title is somewhat of a misnomer. Neither Einstein nor Schrodinger, try as they might, never arrived at a unified theory of physics. Even today’s standard model which Halpern acknowledges does not account for the role of gravity while accounting for electromagnetism and weak and strong forces of nuclear interaction. With that last sentence I am way over my head.

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Saturday, November 21, 2015

My Amazon Review of Roger Lowenstein's "America's Bank: The Epic Struggle to Create the Federal Reserve"

The Making of the Fed

The “money question” is as old as the Republic. In “America’s Bank” Roger Lowenstein tells the story as to how the United States in 1913 brought into being its first central bank since 1837. Recall that the Second Bank of the United States came to an end when President Andrew Jackson refused to renew its charter. This triumph of Jacksonian Democracy would come back to haunt the Democrats who supported the creation of the Federal Reserve.  

To be sure there were panics and crashes in those intervening years, but absent a central bank the U.S. still grew to become the largest economy in the world. What triggered the need for a central bank was the Panic of 1907 which nearly brought the economy to its knees and it required the rescue of a bankers syndicate led by one James Pierpont Morgan. In response to the panic, Congress passed the Aldrich-Vreeland Act which authorized the Secretary of the Treasury to issue emergency currency and it established a National Monetary Commission to investigate the causes of the panic and to recommend policy changes. Unlike the 2008 financial crash Congress acted first with the Dodd-Frank Law and then created a financial inquiry commission whose work is already forgotten.

It here where we begin to see the leading players involved in the creation of the Fed. First and foremost is Rhode Island Senator Nelson Aldrich who chairs the commission, studies European central banks and becomes convinced of the need for a central bank in the U.S. Next is Paul Warburg, a German immigrant and scion of the Warburg banking family who worked for their U.S. affiliate Kuhn Loeb. He is rightfully called by most historians and Lowenstein as the father of the Federal Reserve as he becomes the most knowledgeable and tireless advocate for a central bank.  It is Warburg and Aldrich who organize the famous Jekyll Island bankers’ retreat where all of the essential elements of the Federal Reserve Act are written in secret. Sometimes transparency isn’t such a good idea.

After the Democrats sweep the 1912 elections Republican Aldrich is moved to the sidelines and the new key players are President Wilson who deftly works around his party’s Jacksonian traditions and Representative Carter Glass of Richmond, Virginia, who though a Jacksonian becomes the leading advocate for a central bank. Glass would later as a Senator, be the coauthor of the Glass-Steagall Act separating commercial banking from investment banking. Lowenstein spends a great deal of time dealing with both Wilson’s and Glass’ maneuverings to bring about passage of the act. He tells a good story especially in regard to how the U.S., in deference to its Jacksonian traditions, doesn’t have one central bank but rather a national board with 12 district banks.

I have a few quibbles with this otherwise wonderful book. First he doesn’t’ really tell us why there is a district bank in Richmond, Virginia, perhaps it is Carter Glass’ hometown or why there are two district banks in Missouri. Is it because the Speaker of the House Champ Clark was from Missouri or was it out of concern with supplying credit to agriculture in the Midwest? Finally, although he mentions it in passing, he doesn’t really go into how successful the pre-Fed Aldrich Vreeland Act was in the summer of 1914 in supplying needed cash to the banking system after the outbreak of World War 1. Remember although enacted in 1913, the Fed did not open its doors until December 1914. Friedman and Schwartz note in their “Monetary History…” that the use of Aldrich-Vreeland money in 1914 did a far better job in protecting the banking system than what the Fed did in 1930-31. 

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Friday, November 20, 2015

The French Lion and the American Poodle

It has been five days since the horrific terrorist attacks in Paris. During that interval we have learned much about the character of the President of France and the President of the United States. It is clear that French President Hollande is a decisive leader ready and willing to act to defend his country. In contrast President Obama, of the squishy red-line, appears to be more hostile towards his domestic opponents than ISIS. With his typical debating style he argues he doesn't allow for a middle ground between an all-out intervention and doing nothing. 

Perhaps he should talk to his former Secretary of State who is now advocating a no-fly zone and committing considerably more special operations forces. Mrs. Clinton is obviously way more clear eyed than her former boss. For whatever reason President Obama has become the American poodle to the French lion. 

Monday, November 16, 2015

My Amazon Review of Ivan Maisky's and Gabriel Gorodetsky's (Ed.) "The Maisky Diaries: Red Ambassador in the Court of St. James 1932-1943"

Stalin’s Ambassador to London

Gabriel Gorodetsky has done an enormous public service in editing the diaries of Ivan Maisky, Stalin’s ambassador to London from 1932-43. The diaries bring to life the interwar diplomacy of Britain and Russia as they attempt to deal with the rise of Nazi Germany. It will be referenced in all future books on foreign policy of the interwar years. However, for the lay reader it a very long book (633 pages in the print edition).

Maisky working under Soviet Foreign Minister Maxim Litvinov became one of the architects of Moscow’s policy of “collective security” to contain the Nazi menace. Unfortunately that policy failed and after Munich when Stalin turned towards Germany to make is separate peace. He highlights the degree of mistrust both Russia and Britain had for each other. Each feared, correctly as it turned out, that the other would make a separate deal with Hitler.

What the diaries highlight is that Maisky was among the first of the modern ambassadors who dealt with more than official government to government relations. He established a broad range of contacts outside official channels. He was very close to the then back bencher Winston Churchill and Lord Beaverbrook. Those two contacts would become extremely important after the Nazi invasion of Russia in June 1940. He was also close to such Bloomsbury group personages as Sidney and Beatrice Webb, the Shaws and H.G. Wells. On an official basis he was very close to Foreign Secretary Anthony Eden, perhaps too close in the sense he probably learned stuff that would normally have been more secure.

Through his Marxist eyes he sees the rot of the British upper classes and their infatuation with appeasement and the Nazi sympathizers among more than a few of them. However, he fails to see the contradiction of his high living and numerous shopping trips when compared to the privation the Russian people were going through in 1930s Russia.

Although not directly mentioned in the diaries, he must have been living under constant stress as Stalin’s purge enveloped all of the “old Bolsheviks”   and Mensheviks who were in positions of authority. This was exacerbated by the replacement of Litvinov with Molotov in 1939 which completely recast the Soviet diplomacy that was in place since 1920. Simply put the professional diplomats were moved out and replaced with party apparatchiks.

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Thursday, October 29, 2015

Housing is Back II, UCLA Economic Letter, October 2015

This post is an updated version of an earlier post with same title. However the link below contains all of the charts that were omitted.

Saturday, October 24, 2015

My Amazon Review of Ben S. Bernanke's "The Courage to Act: A Memoir of a Crisis and its Aftermath"

Only in America*

This is an American story about the rise of the son of a Jewish druggist from the backwater town to Dillon, South Carolina to the commanding heights of the global economy. When he is writing about his boyhood and personal life Bernanke writing shows the benefits of the creative writing course he took in his freshman year at Harvard. Unfortunately when he writes about policy making the writing becomes more guarded and academic. Nevertheless it remains a very lucid account of the financial crisis and its aftermath.

He chronicles his early life in the segregated South to his working construction and as waiter at the very touristy South of the Border rest stop off I-95 to his arrival at Harvard and graduate school at MIT. From there he goes on to teach at Stanford and Princeton establishing his reputation as a leading scholar of the depression (See his “Essays on the Great Depression”)

He leaves academia first to become appointed a Governor on the Federal Reserve Board by President George W. Bush, to the chairmanship of the Council of Economic and then in early 2006 to the chairmanship of the Federal Reserve Board. To my mind the Fed including Bernanke and other regulators flunked in failing to see the onset of the financial crisis brought about by reckless lending not only in the housing markets but through the creation of an array of toxic financial products. However with the onset of the financial crisis in August 2007 through mid-2009 the Fed and others did indeed have the courage to act. Here Bernanke and crew get an A in throwing everything but the kitchen sink at the crisis. In my mind their actions avoided the Great Depression 2.0.

Bernanke argues, correctly in my opinion, that Lehman Brothers, my former employer, could not have been saved. At the time it looked Lehman’s balance sheet was too toxic for any private sector party to handle. It is easy to second guess, but you have to put yourself in the shoes of the decision makers when they made the decision. However, while spending quite a bit of time on Lehman, Bernanke gives short shrift to the two wards of the Fed, Citi and Bank of America/Merrill Lynch. Were they just as insolvent as Lehman, who knows, but Bernanke doesn’t tell.

With the high drama of the financial over Bernanke covers his defense of the Fed in the writing of the Dodd-Frank Financial Reform Act and his growing friendship with Democrat Barney Frank, the Chair of the House Financial Services Committee. He also highlights his growing dislike of what I call the “wrecker caucus” within the Republican Party. This animosity causes him to leave the Republican Party. Who can blame him?

He then goes on to discuss the very sluggish recovery and the very low rate of inflation. He brings the reader into the internal Fed debate involving the policy choices to expand the Fed’s balance sheet with QE2 and QE3 and the continuation of the Zero Interest Rate Policy throughout his entire term and beyond.  As a result the Fed’s balance sheet quintuples during his tenure in office. He gives himself high marks in promulgating these policies. Further he contrasts the relative success of the U.S. economy when compared to Europe and Japan where more orthodox monetary and fiscal policies were followed.

In this judgement Bernanke is premature. It is far too early to judge how the 8 year policy of zero rates and the explosion of the Fed’s balance sheet will look to a future Ben Bernanke writing in 2025. Remember in 2005 Alan Greenspan looked like a genius and three years later not so much.

*-With apologies to another Jewish South Carolinian, Harry Golden.

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