Tag Archives: Milton Friedman

Investors Should Sue Central Bank of Sweden, Taleb Says

One of the things that makes Nassim Nicholas Taleb one of the most interesting author and thinker of today is his ability to come up with totally different views on the economy  – and life in general. Now, author of the bestseller “The Black Swan” says investors who lost money in the financial crisis should sue the Swedish Central Bank for awarding the Nobel Prize to economists whose theories have brought down the global economy.

“If no one else sues them, I will.”

Nassim Nicolas Taleb

Nassim Nicolas Taleb

The Swedish Central Bank’s Nobel Prize in Economic Sciences was yesterday awarded to Peter A. Diamond (US),  Dale T. Mortensen (US)  and Christopher A. Pissarides (UK) for their “analysis of markets with search frictions”. However, the controversial professor, philosopher and author, Nassim Taleb, is not happy about the whole Nobel-Prize-of-Economics-thing that he believes give legitimacy to useless and invalid economic theories.

“I want to make the Nobel accountable,” Taleb says in an interview with Bloomberg last week.

“Citizens should sue if they lost their job or business owing to the breakdown in the financial system,” he says.

According to Taleb, has the Nobel Prize for Economics conferred legitimacy on risk models that caused investors huge losses and taxpayers billions in bailouts.

The Royal Swedish Academy of Sciences

Sweden’s central bank announced this year’s award, yesterday, October 11th.


The “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel” for 2010 was awarded to Peter A. Diamond, (Massachusetts Institute of Technology, Cambridge, USA), Dale T. Mortensen, (Northwestern University, Evanston, USA) and Christopher A. Pissarides, (London School of Economics and Political Science, UK) for their “analysis of markets with search frictions”.

“Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market,” The Royal Swedish Academy of Sciences writes in the press release.

(More on the Swedish 2010 Prize in Economic Science here).

The Nobel prizes in physics, chemistry, medicine, peace and literature were established in the will of Alfred Nobel, the Swedish inventor of dynamite who died in 1896.

The first awards were handed out 1901.

The Swedish Central Bank founded the economics award in 1968 in memory of Nobel.

Previous winners of that prize include Milton Friedman, Amartya Sen, Paul Krugman, Robert Merton and Myron Scholes, the last two for inventing the option pricing formula, the Black-Sholes model, still used by most derivative traders.

The former derivatives trader, Nassim Taleb, is a professor of risk engineering and advises the California-based fund, Universa Investments LP,  that bets on extreme market moves.

Giving Invalid Legitimacy

Taleb single out the Nobel award to Harry Markowitz, Merton Miller and William Sharpe in 1990 for their work on portfolio theory and asset-pricing models.

“People are using Sharpe theory that vastly underestimates the risks they’re taking and overexpose them to equities,” Taleb says.

“I’m not blaming them for coming up with the idea, but I’m blaming the Nobel Prize for giving them legitimacy, he says.

Adding: “No one would have taken Markowitz seriously without the Nobel stamp.”

“No one would have taken Markowitz seriously without the Nobel stamp.”

William Sharpe

Markowitz, a professor of finance at the Rady School of Management at the University of California, San Diego, didn’t return a phone call seeking comment.

Miller, who was a professor at the University of Chicago, died in 2000 at the age of 77.

“People used the theory and assigned numerical forecasts to the algebra,” says professor of finance William Sharpe at the Graduate School of Business at Stanford University,over the phone.

“But I’m not going to take the blame for the numbers they put in,” he says.


“If no one else sues them, I will”

"The Brown Horse: The Impact of The Highly Impossible"

In his 2007 bestseller “The Black Swan: The Impact of the Highly Improbable,” Taleb described how unforeseen events can roil markets.

He warned then – and he warns now – that bankers are relying too much on the probability models, and disregarding the potential for unexpected catastrophes.

“If no one else sues them, I will,” Taleb says, but declined to say where or on what basis a lawsuit could be brought.


(h/t: The Collector)


Related by the Econotwist’s:

China To Invest In Nassim Taleb’s Bear Fund

Global Economy On Fast Track To Disaster

Nassim Taleb’s Favorite Books

New Testimony From Taleb

Mother Earth On Crack

China: “Mother of All Black Swans”

2010 Analysis: “11 Black Swans”

2010 Analysis: The Road to Disaster



Filed under International Econnomic Politics, National Economic Politics

Helicopter Ben; Cleared For Take Off

Chairman of Federal Reserve Ben Bernanke, appointed “Man of the Year”  by Time Magazine in 2009 and as “Helicopter Pilot of the Year” by the Econotwist’s Blog in 2008, is ready for take off again.  Ladies and Gentlemen; the QE 2 is now boarding. Take your seats, and get ready for another trillion dollar money dropping round of bailouts and economic stimulus.

“In what may be preparatory  step for a major shift in the U.S. monetary policy, St. Louis Federal Reserve Bank President James Bullard warned the US is closer to succumbing to a Japanese-style deflation than any recent time.”


Chairman Ben Bernanke - Helicopter Pilot of the Year 2008

The prestigious business magazine Barron’s have made a full analysis of an recent article written by St. Louis Federal Reserve Bank President James Bullard, in St. Louis Fed’s Review. Barron’s do not believe it’s a coincidence that the article is coming out right now –  a week-and-a-half before the next meeting of the policy-setting Federal Open Market Committee, of which Bullard is a voting member.

According to Barron’s, the St. Louis FED President James Bullard warns that the US is closer to succumbing to a Japanese-style deflation than any recent time, which he urged be countered with “quantitative easing.”

Quantitative easing, or QE, is economists’ jargon to describe the experimental monetary policy to massively inject money in the financial system, so that it – in theory – starts to flow natural by it self.

In practice, we have so far seen the  FED’s massive purchases of $1.7 trillion in Treasury, agency and mortgage-backed securities, a program that started in March 2009 and ended a year later.

The purchases were part of the doubling of the size of the central bank’s balance sheet as the key component of the FED’s efforts to prevent the meltdown of the financial system in late 2008 and early 2009.

And now the economy is recovering.

Excuse Me!

Most politicians and economists are saying the economy is recovering – although not as fast as they first thought…

The US have spent about 3,7 trillion dollars on bailouts and heaps of different economic stimulus programs, including giving the banks money for free (zero interest rate), and at the same time raised the national debt by an almost equal amount.

Something’s gotta be working, right?

Is it really necessary to do the whole dance over again?

Well, according the the influential FED-fellow in St. Louis, it is.

Suddenly, Deflation Is The Problem

James Bullard

Bullard’s article for the St. Louis Fed’s Review follows FED chairman’s Ben Bernanke’s description to Congress of the economic outlook being fraught with “unusual uncertainty.”

And it comes about a week-and-a-half before the next meeting of the policy-setting Federal Open Market Committee, of which Bullard is a voting member, Barron’s points out.

Bullard argues that Japan’s experience suggests persistent rock-bottom policy rates can result in falling inflation and inflation expectations. Every economic setback delays the eventual normalization of interest rates, leading everyone to expect more of the same.

The alternative, argues Bullard, is for US officials to react to negative shocks with quantitative easing by purchasing Treasury securities rather than zero interest rates.

“Whether Bullard’s theory is correct is arguable. What is empirically undeniable is that his worry has switched to deflation from inflation in a matter of months,” Randall W. Forsyth writes.

Does He Know Something?

The odd thing is; James Bullard has been one of Ben Bernankes strongest opponents when it comes to the QE policy.

Bullard has been critical of the FOMC‘s language that it expected to maintain exceptionally low levels of short-term interest rates for “an extended period.”

He have discussed the FOMC’s “extended period” of low rates and suggested that the FED should plan for an exit strategy from the quantitative easing.

“After the meeting, I asked Bullard privately if the expansion of liquidity through quantitative easing posed a threat to future inflation—even though much of it has wound up as $1 trillion of excess reserves just sloshing around the banking system. His answer was yes, it did have the potential to cause inflation,” Forsyth writes.

So, the big question is; what have transformed this one-time inflation hawk into a dove seeking a new round of QE?

What does Bullard know that we don’t?

Mr. Bernanke – You’re Cleared For Take Off

Helicopter Ben

What’s also important about Bullard’s article is that it is the intellectual successor to Bernanke’s famous speech in November, 2002, which earned the then-Fed Governor the nickname of “Helicopter Ben,” Barron’s notes.

In that address, titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” he cited the potential of deflation appearing in Japan affecting the US.

Bernanke didn’t think deflation was a threat because “the US government has a technology, called a printing press, (or, today, its electronic equivalent), that it allows it to produce as many US dollars as it wishes at essentially no cost.” By buying Treasury securities issued to finance a fiscal deficit, the FED was—to use Milton Friedman‘s metaphor—effectively dropping dollar bills from helicopters.

The US quantitative easing measures are unprecedented in history. Some calls it an unprecedented experiment with the global economy.

And it don’t seem to work very well.

Monster Helicopter Under Way?

In the article, Bullard ignores the concept both Friedman and his St. Louis FED are most identified—the money supply.

The M2 measure of the money stock, which consists of currency, checking, savings and consumer money-market accounts, has slowed to a crawl, only about 2% year-over-year.

The broader M3, which the FED no longer publishes but is estimated by Shadow Government Statistics, is shrinking at a stunning 6% annual rate.

According to Shadow Stats’ chief, John Williams, whenever real (inflation-adjusted) year-on-year M3 turns negative, the economy has always fallen into recession (or if it’s already in a slump, the downturn intensifies) six-to-nine months later.

Shadow Stats’ M3 dropped below the zero line last December, it’s not surprising that any number of indicators are faltering, including the ECRI leading indicator.

Last month, the London Telegraph reported the Royal Bank of Scotland was advising clients that a “monster” QE was likely from the FED because the global banking system and the global economy teetered on a “cliff-edge.”

“Think the unthinkable,” Andrew Roberts, RBS’s chief of credit wrote.

After Bullard’s article was published Thursday, QE2 no longer is rumor, gossip or loose talk.

It may, in fact, have been chairman Ben Bernanke’s signal to be ready for take off – again.


Read the Barron’s article at Yahoo Finance.

Related by the Econotwist:

US Congress Question Morals of Monetary Policy

The Failure Of A Culture

EU: Trading Bailouts For Weapons

Jim Rogers Says CNBC Is A PR Agency

Fitch: Banks Need More Capital Than Stress Test Shows


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Filed under International Econnomic Politics, National Economic Politics

Is Mark-To-Market Accounting Coming To An End?

Mark-to-market accounting needs to die. It should be stabbed in the heart with a cedar stake, shot through the temple with a silver bullet and then buried under six feet of garlic powder. Like the evil killer in a horror flick, we need to make sure it never gets up off the floor ever again,” Brian Wesbury and Robert Stein at The Institutional Risk Analyst writes in a commentary.

“While we do not agree with everything Ben Bernanke is doing these days, his comments, which finger the impact of accounting rules and conventions on the economy, are right on the money.”

Institutional Risk Analyst

“Commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value.”

Ben S. Bernanke

(February 24, 2010)

It would have been much better for the economy if Chairman Bernanke had been this clear about mark-to-market accounting back in 2008. If he had been, the US might have avoided the Panic of 2008. But it’s never too late, and now that mark-to-market ideology is affecting the ability of the Federal Reserve to exit its quantitative easing, he’s finally onboard.

In November 2007, FASB reinstated mark-to-market accounting for the first time since 1938. This rule uses bids (exit prices) to value assets. So far, so good. However, in 2008, the market for asset-backed securities dried up. The prices of bonds that were still paying in full fell by 60% or 70%, and those losses were often driven through the income statement. This wiped out regulatory capital, caused bankruptcies and created a vicious downward spiral in the economy. In retrospect, it is clear that this accounting rule was a potent pro-cyclical force behind the Panic of 2008.

Finally, on April 2, 2009, FASB allowed banks to use “cash flow” to value bonds when the market was illiquid – exactly like Bernanke said last week. This fixed the immediate problems in the system, and the economy and financial markets have been on the mend ever since. In fact, the stock market bottomed on March 9, 2009 – the very day markets found out that Representatives Barney Frank and Paul Kanjorski would hold a hearing to force FASB to change the misguided accounting policy.

However, over-zealous bank regulators are now enforcing their own version of mark-to-market accounting by using the appraisal process. Regulators are forcing banks to write down loan values and increase loan-loss reserves by using appraiser-driven valuations. Yes, that’s right; these are the same appraisers who over-valued properties five years ago. Now, because they often use foreclosures and distressed sales as comparable recent transactions, they undervalue properties.

To the regulators, it does not matter if the loan is still being paid on time. And it does not matter if the lower valuation of the collateral will force an already stressed borrower to come up with more cash. Regulators have decided that they want banks better capitalized and the way they can do that is to reduce the value of a bank’s assets and then force these banks to raise money from shareholders.

This, in turn, is undermining bank lending, hurting small business and making it more difficult to reduce unemployment. The worst part is that it is not necessary. Banks are better capitalized today than they were in the early 1980s when banking losses were significantly worse. Back then, we did not have mark-to-market rules forcing banks out of business; instead we allowed the actual performance of loans to determine the viability of these institutions.

Banks could not “make-up” loan values in the 1980s and 1990s. In fact, more than 2,700 banks and S&L’s eventually failed even though we did not have mark-to-market accounting. Mark-to-market accounting does not solve problems, it creates them by acting as a pro-cyclical force. Milton Friedman understood this and wrote about the devastating link between mark-to-market accounting and Great Depression bank failures. Franklin Delano Roosevelt finally figured this out in 1938 and suspended the rule. The Depression ended soon after. Coincidence: We think not.

Similarly, in 2009 with mark-to-market rules in place, two stimulus bills totaling over $1 trillion, a $700 billion TARP, zero percent interest rates, and trillions in other Fed and Treasury actions did not turn the market around. Private money did not flow into the banking system until FASB finally allowed cash flows to be used to value assets (when markets were illiquid).

Once the rule was changed, banks were able to raise $100 billion in private capital. And since then, TARP has been repaid by institutions that were forced to take it, while PPIP never got off the ground. It was mark-to-market accounting that created the Panic of 2008, not a failure of the capitalist system.

But these overly strict accounting rules still have many adherents, bank regulators among them. And as long as it remains a threat to the system, the system will not fully heal. For example, a viable market for the securitization of asset-backed loans is highly unlikely to reappear until mark-to-market accounting is dead and buried. Why would anyone buy asset-backed securities when there is the potential (readily witnessed over the past few years) for market-driven declines in value to undermine the ability of the financial system to hold them even if cash flows are not impeded?

If you don’t believe this, read the following exchange from last week (February 24th) between Fed Chairman Ben Bernanke and Congressman Kanjorski (D-PA).

Rep. Kanjorski: I’m particularly interested in the commercial real estate problem. Could you give us your assessment of that problem and if there’s any action we in the Congress should take.

Chairman Bernanke: Congressman, it remains probably the biggest credit issue that we still have. Yesterday, Chairman Baird talked about the increase in the number of problem banks. A great number of those banks are in trouble because of their commercial real estate positions. The Fed has done a couple of things here. We have issued guidance on commercial real estate, which gives a number of ways of helping, for example instructing banks to try to restructure troubled commercial real estate loans, and making the point that commercial real estate loans should not be marked down because the collateral value has declined. It depends on the income from the property, not the collateral value. We’ve also, as you know, had this TALF program which has been trying to restart the CMBS – commercial mortgage-backed securities – market with limited success in quantities. But we have brought down the spreads and the financing situation is a bit better. So we are seeing a few rays of light in this area, but it does remain a very difficult category of credit, particularly for the small and medium sized banks in our country. [Our emphasis added.]

While Mr. Bernanke did not directly link accounting rules with his attempt to “restart” the CMBS market, it is clear that if mark-to-market accounting remains alive, this market will not be resurrected easily. No matter how much money the Federal Reserve throws at the market for securitized assets, the private sector will remain skittish if there is the potential for an accounting rule to wreck the market again.

This is very important for the Fed’s exit strategy and for the growth of the loan market in the years ahead. Without securitization, bank lending will continue to drag and the Fed will be worried about its withdrawal of support for the system. The US needs a viable securitization marketplace and mark-to-market accounting remains a stumbling block.

Mark-to-market accounting needs to die. It should be stabbed in the heart with a cedar stake, shot through the temple with a silver bullet and then buried under six feet of garlic powder. Like the evil killer in a horror flick, we need to make sure it never gets up off the floor ever again. While we do not agree with everything Ben Bernanke is doing these days, his comments, which finger the impact of accounting rules and conventions on the economy, are right on the money.

Hopefully, the SEC, Treasury, the FDIC, Congress, and FASB were listening.

By Brian Wesbury and Robert Stein

The Institutional Risk Analyst

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Filed under International Econnomic Politics, National Economic Politics