The Big Picture

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• Soros: ECB Rate Hike “Inappropriate” in Debt Crisis
• Angry Tweeter
• Succinct Summation of Week’s Events (4.8.11)
• Steven Levitt Analyzes Crack Economics
• How to Sell a Home
• Detailed Map of the History of Science Fiction
• A Brief History of Banking Regulations
• The Impact of Algorithmic Trading
• The New Bank Robbery
• QOTD: US Corporate Tax Rate 35% ?

Soros: ECB Rate Hike “Inappropriate” in Debt Crisis Posted: 09 Apr 2011 01:30 AM PDT Bloomberg Television’s Sara Eisen and Michael McKee spoke to billionaire investor George Soros today at the Bretton Woods conference in New Hampshire. Soros called the ECB interest rate “inappropriate” and criticized U.S. efforts to cut debt during a recession. Soros also addressed the risk of wage inflation in China and how some developing countries, like Brazil, are imitating China’s efforts to curtail capital inflows. BLOOMBERG TELEVISION Highlights after the jump On stimulus vs. austerity and whether U.S. debt impacts the world: “If you have a growing economy, you can tolerate a higher level of debt. And if you have too much debt and you have a recession, you get into what they called debt check. This is the big issue. ” “I am afraid it is overshadowed by political considerations. You have a financial crisis in Europe. There is the pressure of Spain and Portugal and so on. But debt is a different problem. Those countries are part of the European bloc and they are not in a position to issue their own currency. We can issue our own currency. In fact, the dollar is quite strong. It is really a matter of political judgment. That is where you have different opinions." “There is very a strong push to tighten the budget as a way to reduce government spending. It’s a resistance to any kind of tax increase and tightening, particularly the budget of the states. The [U.S.] states cannot issue their own currency. They are in a similar situation to Spain and Portugal. There is a danger that by pushing this too far, you could abort the very fragile economic recovery that you are currently enjoying and push the economy once again into a slowdown or a recession.” “I rather fear these political forces will push it into a recession. In my opinion, the country could actually absorb some more debt in order to get the economy going." On the ECB vs. the Fed – who is doing it right?: “Two different directives govern the European Central bank and the U.S. Federal Reserve. In the case of Europe, it’s a one-sided directive. Their only job is to prevent inflation, and in the case of the U.S., it is more balanced, to maintain employment and financial stability.” On whether the U.S. dollar is still a safe asset: “There’s a big question is whether the U.S. dollar should be the main reserve currency and in fact it no longer is because it maybe accounts for two-thirds of the monetary reserves. The euro is an alternative and there’s a lot of diversification into other currencies and even more into commodities. Not only gold, but actually oil is now an asset class for investors. That has put some upward pressure on the commodities.” On whether the sovereign debt crisis has diminished euro’s chances of becoming a reserve currency: “The euro is under a cloud, but that is exactly because there are some inflationary pressures from the price of commodities, particularly now oil and also food prices have risen. That is what has induced the European Central Bank to raise interest rates at a time which is, in my opinion, quite inappropriate…It is not appropriate in current circumstances when you have a number of countries that are suffering from too much debt and high interest rates that they have to pay.” On China’s economy: “China has really stimulated its economy full force very successfully and now it is trying to rein in the rate of growth, and is exercising very strong constraints on the banking system. But because of that constraint, and because of the big demand for money, a shadow banking system has arisen and is growing very rapidly. So while the big banks under direct central control are in fact refusing to lend, there is a shadow banking system that is growing out of control. There is a real danger there of wage price inflation because prices have gone up, particularly real estate prices have gone up because there was a real estate boom.” “Therefore, wage demands have risen, and we now have 20%, 30% wage increases. The Chinese government has made a mistake not allowing its currency to appreciate, which would have controlled the price of inflation. Instead of that, we now have this wage pressure, which is a little bit out of their control.” On the Chinese economic approach and whether they did something right: “[The Chinese] were the major beneficiaries of globalization. They were the big winners in the financial crash because their economy was largely isolated because they have capital controls on their currency. They have a two-tiered currency system, whereas the rest of the world allows free movement for capital, and you had a runaway expansion of credit and leverage which then resulted in the financial crash, and China was largely immune. So, they benefited tremendously.” “Their system, which really stands in contrast to the international system, international capitalism with free movement of capital, and then there is a system where the state controls the economy. That system actually has performed significantly better than the international system. So now it is beginning to be imitated by others, but I think it is a tremendous mistake, because that was just one particular set of circumstances when it worked better. They had an advantage because they were the only ones that were controlling capital flows. So as a result, they not only control their own currency, they effectively controlled the world currency system. Now other countries, defensively, are beginning to follow them. For instance, Brazil just doubled the surcharge on capital inflows. That is not good for Brazil, and it is not good for the global economy.” 

Angry Tweeter Posted: 08 Apr 2011 04:00 PM PDT I have to stop myself from using Twitter to fire off angry 140 character spasms of annoyance — but I cannot seem to help myself. http://twitter.com/#!/ritholtz/status/50390166619160576 http://twitter.com/#!/ritholtz/status/50501240941051904

Succinct Summation of Week’s Events (4.8.11) Posted: 08 Apr 2011 12:00 PM PDT Succinct summation of week’s events: Positives: 1) Retail sales in March were solid 2) 4 week avg in Initial Claims falls back to 390k 3) Nikkei closes at highest level since initial selloff after earthquake 4) ECB and PBOC both raise rates to fight rising commodity prices and normalize rates 5) German factory orders in Feb surprise to upside Negatives: 1) Gasoline prices rise another .10 according to AAA to $3.74 2) Implied inflation rates in both the 5 yr and 10 yr TIPS rise to the highest in 5 years 3) ECB and PBOC both raise rates, can economic growth handle it? 4) Portugal goes hat in hand to the EU/IMF and chooses to pile more debt onto too much debt 5) US ISM services index falls 2.4 pts from Feb, Japanese supply disruptions and higher commodity prices are cited 6) II says “scary levels” as Bulls rise to 57.3 from 51.6 and Bears plummet to 15.7 from 23.1 with the spread between the two at the most since Oct ’07.

Steven Levitt Analyzes Crack Economics Posted: 08 Apr 2011 12:00 PM PDT Freakonomics author Steven Levitt presents new data on the finances of drug dealing. Contrary to popular myth, he says, being a street-corner crack dealer isn't lucrative: It pays below minimum wage. And your boss can kill you. Recorded Feb 2004 Posted Sep 2006

How to Sell a Home Posted: 08 Apr 2011 11:00 AM PDT Its April, and a weekend is coming up — and that means, its open house season in America! > Click for ginormous frickin’ graphic Provided by Mint.com

Detailed Map of the History of Science Fiction Posted: 08 Apr 2011 10:00 AM PDT Wondrous, detailed map of the history of science fiction (via boingboing) > click for larger map

A Brief History of Banking Regulations Posted: 08 Apr 2011 09:36 AM PDT In response to this Pulitzer prize winning WSJ series, What's Wrong? The Deregulators, regular TBP reader Fred C Dobbs gives us the historical overview of how Banks first became regulated post-Depression, and then radically deregulated. ~~~ The conflict between the fed government intervening in the banking business vs. the fed government staying out of the banking business actually was fought out first when Andrew Jackson (the founder of the Democrat Party) was elected president in 1830. He terminated the fed government sponsored US Bank, and resolved the conflict. The fed government basically stayed out of the banking business until the '30s, when FDR took office, and the fed government intervened deeply into the 'banking business,' which was defined by the IRS, FDIC, Comptroller of the Currency, SEC (if public-owned), and State Bank Supervisors etc. By defining what the 'business of banking's was the statutes, regulations, and enforcement personnel administering these laws, bankers were boxed into doing business as defined by state and federal governments. It stayed this way until rules and interpretations were eroded gradually. The first step, was allowing 'one-bank' holding comings, allowing one company to hold a bank and another company, such as an insurance company, which would produce greater profits as a whole, for the holding company, than either company could produce independently. The breakthrough was made by Bank of America in the mid-60s. All of the too big to fail banks today are held by holding companies. The next break through was termination of the rule against solvent bank mergers. From the '30s until 1969, two healthy banks could not merge; mergers were permitted through regulatory forbearance when one healthy bank absorbed a unhealthy bank. All of the too big to fail banks are the result of numerous mergers between healthy banks. The definition of banking was enlarged to allow banks to issue credit cards along the way. The Bank of America created Visa and Wells Fargo created Mastercard. Finally, the doors blew open when the Fed under Carter gave Merrill Lynch authority to acquire a 'captive bank' as part of its introduction of the Cash Management Account. Merrill's bank grew in about 18 months to one of the nation's 5 largest banks. So, by the time Reagan took office in 1981, the generational memory of those who had fought over the beneficial effect of governments, fed and state, in the '30s, and developed a system in which the government acted as cops, giving tickets for speeding etc., that worked, was missing. [If you were 20 in l931, you were 70, and retired by 1981, and no one listened to anything you said.] The rest is history. The ignoramuses that now controlled the US, the smug governing elite, without any experience, study or generational memory, disregarded human nature that tells us that people will not repay debts they incur if they don't have the income or resources to repay. And, that in making residential real estate loans on the security of the residence, borrowers will not throw good money after bad to pay the mortgage on an underwater security, but will stay until evicted in an effort to recapture the money they invested in buying the property. The banking industry has, year in and year out, the most powerful lobby in DC, as their results indicate, and, in an effort to boost their compensation to the same as executives of industrial companies that actually make things (such as DuPont, Exxon, etc.) they just took advantage of the ignorant and stupid regulators, congressional staffers, and politicians who had no generational memory and were not interested in getting the input of those regulators and bankers who had been active from the '30s. The episode merely illustrates one of the defects of our government system. We elect people like Zoe Lofgren, a Welfare Mother, to Congress and ask them to cast intelligent votes on subjects they know nothing about, through study or experience, but, because they have been elected (by Democrat Party inside selection, e.g. Pelosi), they foolishly assume they now know something about subjects they never knew before and are competent to make reasoned decisions on these subjects, when they were incompetent before. No wonder they don't read the legislation they vote on, they wouldn't understand it if they did. The Media does it's best to create an illusion that the politicians in DC know what they are doing when they don't. The US badly needs someone to show the kind and type of leadership it needs to get rid of the box it finds itself in, but Obama is not the leader, the polls show. Sad. But, in the meantime, Obama should take the too big to fail banks to the woodshed, and force them to sell off their non-bank subsidiaries, take their losses, and reveal their true condition, restore confidence in the banking system and the US. In other words, show Obama can get one thing done, rather than nothing. ~~~~ Great stuff Fred, Thanks . .  .

The Impact of Algorithmic Trading Posted: 08 Apr 2011 08:45 AM PDT Yan Ohayon demystifies and shares his experience with algorithmic trading and its impact on markets, our lives, and everything in between. In the spirit of ideas worth spreading, TEDx is a program of local, self-organized events that bring people together to share a TED-like experience. At a TEDx event, TEDTalks video and live speakers combine to spark deep discussion and connection in a small group. These local, self-organized events are branded TEDx, where x = independently organized TED event. The TED Conference provides general guidance for the TEDx program, but individual TEDx events are self-organized.

The New Bank Robbery Posted: 08 Apr 2011 08:39 AM PDT

QOTD: US Corporate Tax Rate 35% ? Posted: 08 Apr 2011 07:30 AM PDT Today’s quote: “If you’re a major American company and you’re paying a 35 percent corporate tax rate, you need to fire your CFO (chief financial officer),” -Senator Mark Warner,  Virginia Via Forbes Senators pitch debt reduction to business elite

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