Posts Tagged ‘Credit’


An illustration of Alan Greenspan
Lunch with the FT: Alan Greenspan
By Alan Beattie
Published: July 30 2010 17:12 | Last updated: July 30 2010 17:12
Escaping the latest of a string of steaming hot summer days, I duck gratefully into the cool interior of Tosca, an Italian restaurant in the lobbyist quarter of Washington DC. From the pavement it is not prepossessing, curtains entirely screening off the interior and presenting a blank face to the world. But the busy, clubby interior hums with power. Situated conveniently between Capitol Hill and the White House, and in the neighbourhood of some of Washington’s most powerful political consultancies, it has a reputation as a location for political deals and power-broking at the highest levels. It was here, legend has it, that Tom Daschle spent a five-hour dinner persuading Barack Obama to run for the US presidency. It is very DC.
Entering a second after me is Alan Greenspan, former chairman of the US Federal Reserve. For nearly two decades he was one of the most powerful people in Washington, and indeed the world, and for many he became a symbol of the global economy in the days before it all went wrong. Greenspan is welcomed at the desk with a smooth greeting of “Hello, Mr Chairman,” the restaurant adhering to the reflexive Washington habit of addressing people by the titles of their offices even years after they have left them.
We are ushered through the buzzy dining room to a relatively secluded table in the corner. The 84-year-old Greenspan, neatly and soberly dressed, speaks softly but rapidly. He chooses a Diet Coke, the default beverage of official Washington. Suppressing a mad urge to call for a large Scotch just to be different, I ask for sparkling water.
I remark on the fame of the restaurant and he looks amused. “My wife suggested it.” He is married to Andrea Mitchell, chief foreign affairs correspondent for NBC television, who by his account is outgoing and sociable and a good foil to his more reserved character. You get the impression that he is very happy to outsource a lot of such decisions to her. He asks if he can pay. I explain that part of the game is for the FT to pick up the bill. He grins. “So there is such a thing as a free lunch.”
It’s not a view you often hear from central bankers. But for much of Greenspan’s tenure at the Fed – he was chairman from just before the 1987 stock market crash until 2006 – it looked as if it were true. The economy grew, the stock market surged, house prices rose and Wall Street kept getting richer. Then, just a year after Greenspan handed over the Fed joystick to Ben Bernanke, a credit crunch began that turned into a global financial crisis, and the entire system of finance capitalism, of which Greenspan had been such a powerful advocate, threatened to eat itself.
Critics who long thought that Greenspan was too enthralled by free enterprise and financial markets have claimed vindication. Typically, he has been ruminating deeply about the implications of what has happened, and synthesising his thoughts into an argument. It is a long habit: before arriving at the Fed he spent three decades running an economic consulting firm in New York, interrupted by a stint as chairman of President Gerald Ford’s council of economic advisers. In preparation for our meeting he sends me a 46-page treatise he has written about the crisis.
. . .
“Do you want to get started?” he says. He means the interview, not lunch. Before we get round to ordering, we’ve gone through the near-impossibility of being able to predict the global financial crisis (which he illustrates by tracing a probability distribution in the air with his finger), the assumptions underlying financial regulation, the parallels with the financial panic of 1907 and the impact of the end of the cold war on global saving rates. I reported on the Federal Reserve early in the 2000s when Greenspan was chairman, and memories of long conversations with him in this professorial style are rapidly coming back to me. He does his research – at one point quoting from a story of mine that appeared in the FT the morning of our lunch – and marshals his arguments.
Though he professes not to speak in complete sentences – unlike his wife, he says, who can talk in perfect paragraphs on any occasion – and enjoins me to clean up the syntax of whatever I quote him saying, it turns out to be unnecessary. His manner is measured, precise and academic, though he makes his points forcefully, gripping the table as he argues. “Remember my premise,” he says, more than once, while going through a logical progression.
He has admitted to having been “30 per cent wrong” in his time as Fed chairman, particularly in assuming that banks and financial institutions would closely monitor the creditworthiness of the people with whom they were doing business. But his present plan for preventing a recurrence of the global financial crisis still shows a predilection for the light touch: make banks hold more capital to back their lending, demand higher collateral that can be seized if financial transactions go wrong, and keep more cash on hand in case of emergencies.
In extremis, he says, banks might have to be broken up by law if they become too big to fail without bringing down the whole financial system. But he makes clear that he regards such an intervention as a last resort. He retains faith in markets and doesn’t even think that US-style finance capitalism will lose ground to the softer, more regulated model of European social democracy, let alone the appeal of a centrally planned economy such as the former Soviet Union. It is a question of making precise technocratic adjustments.
I wonder whether this limited solution is a proportionate response to such an economic cataclysm. Many, including Paul Volcker, his predecessor at the Fed, have urged much tougher constraints on banks. “If you mean is it a proportionate emotional response to the people who have really lost a great deal through no fault of their own, the answer is no,” he says. But in terms of what needs to be done, the solutions can be narrowly focused: revise the likely probability of financial catastrophe in the light of new evidence and make banks behave accordingly. “A necessary condition for my position is that this is a very rare event,” he says. The implosion of the debt bubble that had built up, and the extent to which it almost caused the entire financial system to stop working, was not anticipated by financial regulators.
After 15 minutes we look to our menus. Eschewing elaborate formulations such as black ink tagliatelle with crabmeat ragu, Greenspan opts for a more ascetic dish: grilled swordfish with roasted organic vegetables. Mindful of the difficulties of conducting an interview while slurping pasta, I reluctantly pass up the carrot pappardelle with rabbit and also go for a simple dish: grilled baby octopus with a green salad. The food arrives swiftly and we start eating, Greenspan taking small forkfuls of swordfish dipped in Dijon mustard.
. . .
The other part of his record seized on by critics, especially Democrats, is his support for two rounds of tax cuts. One came in 2001 at the beginning of the administration of President George W Bush and one two years later. The week before we met, with an eye to the US’s huge fiscal deficit, he told an interviewer that he supported reversing those tax cuts, a remark seized on by his detractors to argue that he was irresponsible to have backed them in the first place. Here, too, he has a carefully worked-out response. One, both administration and congressional forecasts back then predicted huge fiscal surpluses, so a tax cut was quite sensible. Two, he argued at the time that a second round of cuts should be made conditional on how the economy and the public finances developed, which they were not. Three, he underestimated how his words would be seized on to justify reducing taxes willy-nilly, and he has already admitted that mistake in his 2007 memoirs, The Age of Turbulence. “Criticisms are wholly deserved when you’ve done something wrong, I grant you,” he says. “But I still prefer when I’m criticised that it be accurate.”
The plates are cleared and we move on to coffee. He orders a cappuccino, I an Americano. The formal business of the symposium having been concluded, I move on to more personal matters. When he was Fed chairman, he had dozens of the smartest economists in the world as a resource and endless conversations with brilliant colleagues and counterparts around the world. For him, personally, how much of a wrench was it to leave it all?
The answer, it turns out, is not a huge one. He does hanker for the regular free-form meetings he used to have with Fed officials, sitting round for hours and talking about whatever interested him that day. Rather wistfully, he says he also misses the regular breakfasts he had with Larry Summers, then in the Treasury under the Clinton administration and now President Barack Obama’s chief economic adviser. Many colleagues regard Summers as abrasive, but Greenspan sounds affectionate. “We had a wonderful time,” he says. “I know the guy has a lot of people thinking he’s a little rough sometimes, but he is smart. Larry is really smart.”
But aside from the odd vacation playing golf or tennis in Aspen or Jackson Hole, Wyoming, where he stays on a ranch owned by longstanding friend and former World Bank president James Wolfensohn, Greenspan has plenty of work to keep him busy. Before joining the Fed, he ran his own economic consultancy and developed a phenomenal knowledge of abstruse data series and statistics. Even when he was Fed chairman, he still spent at least half his day in personal study. Now, with his central banking career over, he has gone straight back to what he did before, running a research operation with a handful of employees. This time he is aided by the power of modern computing and video conferencing, technologies of which he speaks almost reverently.
“People think, ‘How can you go from being a leading figure in an international financial system back to your desk?’” he says. “My answer is, ‘I love it.’ I’m going back to my roots.” His work involves data-mining of the most precise kind.
He speaks excitedly of constructing a data series that will allow him to monitor the month-to-month profitability of US non-financial corporations. “That’s the type of thing I’ve been doing for generations,” he says, and the reference to time served is not hyperbole.
. . .
Recently, for another piece of research, Greenspan was searching for the definition of what constitutes an aircraft wing in the US. He looked out some work he himself had done in his twenties on the aircraft requirements for the Korean war, which was going on at the time. And, he says proudly, the research showed that his style of thinking was the same back then. “It’s the conceptualisation, the statistical detail, the syllogisms, the algebra”.
When he gets on the theme of statistics and research, Greenspan relaxes and becomes almost expansive. I get the sense that, though he loved the Fed job, a more private and introspective life fits his personality rather better. “I’m still introverted,” he says. “By psychology I’m more an aide than a policymaker.” During his short early career as a professional jazz musician, for example, he says: “I was a good sideman, as they call it, but I didn’t like to be a soloist.” Indeed, much though I try, I find it hard to envisage him playing clarinet in the smoky jazz clubs of his native New York in the 1940s. It’s easier to imagine him junking the jazz to go to college and become an economist.
And while he clearly does care about his legacy, there does seem some truth to his protestations that other people spend a lot more time concerning themselves about his record than he does. “I’m so obsessed doing what I’m doing, I don’t think I have time to worry about it,” he says. “Let others worry about it. I’m busy.”
As the restaurant empties, we move on to current events, talking at length about China and his faith that the market economy will prevail there, however weakened its appeal might look right now and however slowly economic reform might be progressing. He worries that the current leadership, Hu Jintao and Wen Jiabao, are less keen on liberalisation than their predecessors Jiang Zemin and Zhu Rongji. But he does not seriously fear the country going into reverse and heading back towards central planning. “When I go to China, I haven’t heard anybody argue in favour of Karl Marx’s Das Kapital and the conceptual framework that it is about in years.”
His approach to everything is the same. Look at the data; calculate the probabilities; make a dispassionate calibrated decision. Just before we leave, he bemoans the calls on “poor Obama” to be seen to be caring more about the oil spill in the Gulf of Mexico. “I complained when people were saying he’s not showing enough empathy,” he says. “I said, ‘That’s not what I want to see.’ I want to see cold, cool, deliberative action. Empathy is not going to solve this problem.”
I settle up and we pick our way back through the dining room, which at 2.30pm is almost deserted. Few people in this town have the time or inclination for leisurely lunches. I decline the polite offer of a ride. Alan Greenspan is driven off through the muggy afternoon, back to descend into the depths of his beloved data mines.
Alan Beattie is the FT’s international economy editor
Table 50, 1112 F St NW, Washington DC
Insalata mista $8.00
Grilled octopus $24.00
Grilled swordfish $24.00
Diet Coke $2.50
Bottle sparkling water $7.00
Americano coffee $3.50
Cappuccino $4.00
Total (including tax) $80.30
Alan Greenspan: the pre-Fed years
By Victoria Maw
1926: Born March 6 in the Washington Heights area of New York, the only child of a stock market analyst father and music-loving mother. His parents divorce when he is five years old.
1935: His father Herbert publishes Recovery Ahead!, a book about President Roosevelt’s New Deal spending plans. Greenspan Sr’s inscription to his son hopes “that at your maturity you may look back and endeavour to interpret the reasoning behind these logical forecasts and begin a like work of your own.’’
1943: Graduates from George Washington High School, excelling in mathematics and music.
1944: An accomplished clarinet and saxophone player, he joins Henry Jerome’s travelling big band. Also keeps the band’s accounts.
1948: Graduates in economics from New York University. In his memoir The Age of Turbulence (2007), he recalls: “I preferred to focus on technical challenges and did not have a macro view.”
1950: Gains a Masters in economics from New York University. Begins postgraduate studies at Columbia but drops out and accepts job at National Industrial Conference Board.
1952: Marries Joan Mitchell but obtains annulment after 10 months. Mitchell had introduced him to the work of writer and philosopher Ayn Rand: “I was intellectually limited until I met her,” he later wrote.
1954: Partners bond trader William Townsend to become chairman and president of Townsend-Greenspan & Co, a consulting business that makes economic forecasts.
1967: Advises Richard Nixon before 1968 presidential election. Turns down permanent position in Nixon administration but, in his memoirs, describes Clinton and Nixon as “by far the smartest presidents I’ve worked with”.
1974: Works for President Gerald Ford as chairman of Council of Economic Advisers.
1976: Guests at his 50th birthday party include Estée Lauder, Brooke Astor, Oscar de la Renta and Henry Kissinger.
1987: Appointed by Ronald Reagan as Federal Reserve chairman. In 1996 he proposes to Andrea Mitchell, an NBC correspondent he had been seeing for 12 years. Delays honeymoon for two months because of work: “I studied my calendar and suggested adding a honeymoon to the tail-end of an international monetary conference in Switzerland.”
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High Frequency Trading – HFT – OR THE SCAM IN THE MARKET….

“It’s Not A Market, It’s An HFT ‘Crop Circle’ Crime Scene” 

Further Evidence Of Quote Stuffing Manipulation By HFT

“It’s Not A Market, It’s An HFT ‘Crop Circle’ Crime Scene” – Further Evidence Of Quote Stuffing Manipulation By HFT | zero hedge

The MasterBlog

Eleven Banks Will Fail EU Stress Tests: Strategist

Posted By: Robin Knight | CNBC Associate Web Producer
| 14 Jul 2010 | 08:20 AM ET
Eleven banks including Germany’s Commerzbank and Italy’s Banco Popolare will fail the European Union’s stress tests, Alessandro Roccati, director at Macquarie Securities, told CNBC Wednesday.
“We identify a handful of banks which would need more capital in a base case stress scenario; these are: all Greek banks, Bankinter, Postbank, Banco Popolare, BCP, Commerzbank andSabadell,” a report from Macquarie Securities said.
Even though the number of banks likely to fail the test is relatively small, it may not allay fears onthe health of the overall European banking sector, the note said.
Of the 46 listed banks being tested by the EU, only eleven will have insufficient capital, but of the total 91 banks, including non-listed banks, the number will be greater, Roccati said.
“The key concern and the key differentiating factor is actually the cost of credit and not the decrease in revenues due to a slowdown of the economy,” he said.
European banks may need a minimum of 6 percent tier-1 capital ratio in order to pass the stress tests, according to a Dow Jones report Wednesday. Roccati pointed out that the current regulations require a 4 percent tier-1 capital ratio.
Banks that do fail the stress tests may have some breathing space in which to raise capital as they are unlikely to need to issue debt in the very short term, according to Roccati.
If the troubled banks can’t recapitalized themselves or be funded by their sovereign governments, it will fall to the EU’s central backstop fund to bail them out, he said.
Given the concerns over the sector, Macquarie said he favors BNP Paribas, UBS, SEB, DnB NOR, Nordea, and Erste Bank. Macquarie recommended caution on Iberian and Greek banks.
– Watch the full interview with Alessandro Roccati above.

© 2010

Defending the franc doesn’t come cheap…

Swiss central bank faces €7.5bn loss
By Haig Simonian in Zurich

Published: July 8 2010 21:11 | Last updated: July 8 2010 21:11

The Swiss National Bank may have suffered paper losses of up to SFr10bn (€7.5bn) from huge interventions in the currency markets to restrain the value of the franc.

The central bank is expected by market observers to report a big loss when it publishes second-quarter accounts in mid-August. Economists cannot make a precise forecast, as the SNB does not reveal when, or at what rates, it has sold francs and bought other currencies – mainly euros – in recent months. However, Martin Neff, chief economist of Credit Suisse, said: “It’s certain there will be a big loss.”

Felix Brill at Wellershoff & Partners, an economics consultancy, said: “There must be very substantial losses.”

An indirect acknowledgement of the potential pain came last month, when the SNB did a U-turn and said it was suspending interventions.

The bank attributed the move to declining concerns about the deflationary risks of a rising franc to the domestic economy. However, outsiders saw the step as an acknowledgement that intervention had failed.

The SNB’s foreign exchange reserves have more than quadrupled to SFr230bn since the financial crisis, with the total increasing by SFr135bn since December 2009. During that period, the franc climbed from SFr1.50 against the euro to about SFr1.33, and, recently, has briefly surged higher.

The appreciation has stemmed from fears about eurozone recovery prospects and the risk of a sovereign debt default, compared with Switzerland’s traditional haven status.

The franc has also gained from the relative strength of the Swiss economy. Growth is rising, while domestic consumption has remained robust. Last month, the SNB raised its 2010 growth forecast from 1.5 per cent to 2 per cent.

The prospect of a big loss has caused little concern in Switzerland, a situation all the more striking given the SNB’s unusual status among central banks of being a quoted company.

While 61 per cent of its shares are owned by Switzerland’s cantonal banks, the remainder are in private hands and the SNB has no explicit guarantee from the Swiss Confederation.

Economists attribute the relative calm to shareholders’ understanding for the SNB’s long-term thinking: a rising euro could even lead to profits on the reserves one day.

“A central bank doesn’t have to worry about showing nice profits every quarter or about a downgrade from a rating agency. So there’s no drama,” said Mr Neff.

Other economists added that past losses on currency intervention had sometimes been compensated by windfalls on gold, given that the price of gold has tended to rise during crises.

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© Copyright The Financial Times Ltd 2010. / Currencies – Swiss central bank faces €7.5bn loss

They Did Their Homework (800 Years of It)

THE advertisement warns of speculative financial bubbles. It mocks a group of gullible Frenchmen seduced into a silly, 18th-century investment scheme, noting that the modern shareholder, armed with superior information, can avoid the pitfalls of the past. “How different the position of the investor today!” the ad enthuses.
It ran in The Saturday Evening Post on Sept. 14, 1929. A month later, the stock market crashed.
“Everyone wants to think they’re smarter than the poor souls in developing countries, and smarter than their predecessors,” says Carmen M. Reinhart, an economist at the University of Maryland. “They’re wrong. And we can prove it.”
Like a pair of financial sleuths, Ms. Reinhart and her collaborator from HarvardKenneth S. Rogoff, have spent years investigating wreckage scattered across documents from nearly a millennium of economic crises and collapses. They have wandered the basements of rare-book libraries, riffled through monks’ yellowed journals and begged central banks worldwide for centuries-old debt records. And they have manually entered their findings, digit by digit, into one of the biggest spreadsheets you’ve ever seen.
Their handiwork is contained in their recent best seller, “This Time Is Different,” a quantitative reconstruction of hundreds of historical episodes in which perfectly smart people made perfectly disastrous decisions. It is a panoramic opus, both geographically and temporally, covering crises from 66 countries over the last 800 years.
The book, and Ms. Reinhart’s and Mr. Rogoff’s own professional journeys as economists, zero in on some of the broader shortcomings of their trade — thrown into harsh relief by economists’ widespread failure to anticipate or address the financial crisis that began in 2007.
“The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.”
“People almost pride themselves on not paying attention to current events,” he says.
In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor.
Much of that theory-driven work, critics say, is built on the same disassembled and reassembled sets of data points — generally from just the last 25 years or so and from the same handful of rich countries — that quants have whisked into ever more dazzling and complicated mathematical formations.
But in the wake of the recent crisis, a few economists — like Professors Reinhart and Rogoff, and other like-minded colleagues like Barry Eichengreen and Alan Taylor — have been encouraging others in their field to look beyond hermetically sealed theoretical models and into the historical record.
“There is so much inbredness in this profession,” says Ms. Reinhart. “They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.”
ONE of Ken Rogoff’s favorite economics jokes — yes, there are economics jokes — is “the one about the lamppost”: A drunk on his way home from a bar one night realizes that he has dropped his keys. He gets down on his hands and knees and starts groping around beneath a lamppost. A policeman asks what he’s doing.
“I lost my keys in the park,” says the drunk.
“Then why are you looking for them under the lamppost?” asks the puzzled cop.
“Because,” says the drunk, “that’s where the light is.”
Mr. Rogoff, 57, has spent a lifetime exploring places and ideas off the beaten track. Tall, thin and bespectacled, he grew up in Rochester. There, he attended a “tough inner-city school,” where his “true liberal parents” — a radiologist and a librarian — sent him so he would be exposed to students from a variety of social and economic classes.
He received a chess set for his 13th birthday, and he quickly discovered that he was something of a prodigy, a fact he decided to hide so he wouldn’t get beaten up in the lunchroom.
“I think chess may be a relatively cool thing for kids to do now, on par with soccer or other sports,” he says. “It really wasn’t then.”
Soon, he began traveling alone to competitions around the United States, paying his way with his prize winnings. He earned the rank of American “master” by the age of 14, was a New York State Open champion and soon became a “senior master,” the highest national title.
When he was 16, he left home against his parents’ wishes to become a professional chess player in Europe. He enrolled fleetingly in high schools in London and Sarajevo, Yugoslavia, but rarely attended. “I wasn’t quite sure what I was supposed to be doing,” he recalls.
He spent the next 18 months or so wandering to competitions around Europe, supporting himself with winnings and by participating in exhibitions in which he played dozens of opponents simultaneously, sometimes while wearing a blindfold.
Occasionally, he slept in five-star hotels, but other nights, when his prize winnings thinned, he crashed in grimy train stations. He had few friends, and spent most of his time alone, studying chess and analyzing previous games. Clean-cut and favoring a coat and tie these days, he described himself as a ragged “hippie” during his time in Europe. He also found life in Eastern Europe friendly but strained, he says, throttled by black markets, scarcity and unmet government promises.
After much hand-wringing, he decided to return to the United States to attend Yale, which overlooked his threadbare high school transcript. He considered majoring in Russian until Jeremy Bulow, a classmate who is now an economics professor at Stanford, began evangelizing about economics.
Mr. Rogoff took an econometrics course, reveling in its precision and rigor, and went on to focus on comparative economic systems. He interrupted a brief stint in a graduate program in economics at the Massachusetts Institute of Technology to prepare for the world chess championships, which were held only every three years.
After becoming an “international grandmaster,” the highest title awarded in chess, when he was 25, he decided to quit chess entirely and to return to M.I.T. He did so because he had snared the grandmaster title and because he realized that he would probably never be ranked No. 1.
He says it took him a long time to get over the game, and the euphoric, almost omnipotent highs of his past victories.
“To this day I get letters, maybe every two years, from top players asking me: ‘How do I quit? I want to quit like you did, and I can’t figure out how to do it,’ ” he says. “I tell them that it’s hard to go from being at the top of a field, because you really feel that way when you’re playing chess and winning, to being at the bottom — and they need to prepare themselves for that.”
He returned to M.I.T., rushed through what he acknowledges was a mediocre doctoral dissertation, and then became a researcher at theFederal Reserve — where he said he had good role models who taught him how to be, at last, “professional” and “serious.”
Teaching stints followed, before the International Monetary Fund chose him as its chief economist in 2001. It was at the I.M.F. that he began collaborating with a relatively unfamiliar economist named Carmen Reinhart, whom he appointed as his deputy after admiring her work from afar.
MS. REINHART, 54, is hardly a household name. And, unlike Mr. Rogoff, she has never been hired by an Ivy League school. But measured by how often her work is cited by colleagues and others, this woman whom several colleagues describe as a “firecracker” is, by a long shot, the most influential female economist in the world.
Like Mr. Rogoff, she took a circuitous route to her present position.
Born in Havana as Carmen Castellanos, she is quick-witted and favors bright, boldly printed blouses and blazers. As a girl, she memorized the lore of pirates and their trade routes, which she says was her first exposure to the idea that economic fortunes — and state revenue in particular — “can suddenly disappear without warning.”
She also lived with more personal financial and social instability. After her family fled Havana for the United States with just three suitcases when she was 10, her father traded a comfortable living as an accountant for long, less lucrative hours as a carpenter. Her mother, who had never worked outside the home before, became a seamstress.
“Most kids don’t grow up with that kind of real economic shock,” she says. “But I learned the value of scarcity, and even the sort of tensions between East and West. And at a very early age that had an imprint on me.”
With a passion for art and literature — even today, her academic papers pun on the writings of Gabriel García Márquez — she enrolled in a two-year college in Miami, intending to study fashion merchandising. Then, on a whim, she took an economics course and got hooked.
When she went to Florida International University to study economics, she met Peter Montiel, an M.I.T. graduate who was teaching there. Recognizing her talent, he helped her apply to a top-tier graduate program in economics, at Columbia University.
At Columbia, she met her future husband, Vincent Reinhart, who is now an occasional co-author with her. They married while in graduate school, and she quit school before writing her dissertation to try to make some money on Wall Street.
“We were newlyweds, and neither of us had a penny to our name,” she says. She left school so that they “could have nice things and a house, the kind of things I imagined a family should have.”
She spent a few years at Bear Stearns, including one as chief economist, before deciding to finish her graduate work at Columbia and return to her true love: data mining. “I have a talent for rounding up data like cattle, all over the plain,” she says.
After earning her doctorate in 1988, Ms. Reinhart started work at the I.M.F.
“Carmen in many ways pioneered a bigger segment in economics, this push to look at history more,” says Mr. Rogoff, explaining why he chose her. “She was just so ahead of the curve.”
She honed her knack for economic archaeology at the I.M.F., spending several years performing “checkups” on member countries to make sure they were in good economic health.
While at the fund, she teamed up with Graciela Kaminsky, another member of that exceptionally rare species — the female economist — to write their seminal paper, “The Twin Crises.”
The article looked at the interaction between banking and currency crises, and why contemporary theory couldn’t explain why those ugly events usually happened together. The paper bore one of Ms. Reinhart’s hallmarks: a vast web of data, compiled from 20 countries over several decades.
In digging through old records and piecing together a vast puzzle of disconnected data points, her ultimate goal, in that paper and others, has always been “to see the forest,” she says, “and explain it.”
Ms. Reinhart has bounced back and forth across the Beltway: she left the I.M.F. in Washington and began teaching in 1996 at the University of Maryland, from which Mr. Rogoff recruited her when he needed a deputy at the I.M.F. in 2001. When she left that post, she returned to the university.
Despite the large following that her work has drawn, she says she feels that the heavyweights of her profession have looked down upon her research as useful but too simplistic.
“You know, everything is simple when it’s clearly explained,” she contends. “It’s like with Sherlock Holmes. He goes through this incredible deductive process from Point A to Point B, and by the time he explains everything, it makes so much sense that it sounds obvious and simple. It doesn’t sound clever anymore.”
But, she says, “economists love being clever.”
“THIS TIME IS DIFFERENT” was published last September, just as the nation was coming to grips with a financial crisis that had nearly spiraled out of control and a job market that lay in tatters. Despite bailout after bailout, stimulus after stimulus, economic armageddon still seemed nigh.
Given this backdrop, it’s perhaps not surprising that a book arguing that the crisis was a rerun, and not a wholly novel catastrophe, managed to become a best seller. So far, nearly 100,000 copies have been sold, according to its publisher, the Princeton University Press.
Still, its authors laugh when asked about the book’s opportune timing.
“We didn’t start the book thinking that, ‘Oh, in exactly seven years there will be a housing bust leading to a global financial crisis that will be the perfect environment in which to sell this giant book,’ ” says Mr. Rogoff. “But I suppose the way things work, we expected that whenever the book came out there would probably be some crisis or other to peg it to.”
They began the book around 2003, not long after Mr. Rogoff lured Ms. Reinhart back to the I.M.F. to serve as his deputy. The pair had already been collaborating fruitfully, finding that her dogged pursuit of data and his more theoretical public policy eye were well matched.
Although their book is studiously nonideological, and is more focused on patterns than on policy recommendations, it has become fodder for the highly charged debate over the recent growth in government debt.
To bolster their calls for tightened government spending, budget hawks have cited the book’s warnings about the perils of escalating public and private debt. Left-leaning analysts have been quick to take issue with that argument, saying that fiscal austerity perpetuates joblessness, and have been attacking economists associated with it.
Mr. Rogoff, because of his time at the I.M.F., has also come under fire.
In the years before and during Mr. Rogoff’s tenure, critics including the prominent economist Joseph Stiglitz accused the I.M.F. of having a cold-hearted, doctrinaire approach to its work in poorer countries. Some of that criticism still clings to Mr. Rogoff. For his part, he contends that the I.M.F. did what it could for countries with intractable problems, and that the critics’ approaches would have made troubled economies even weaker.
Perhaps because “This Time Is Different” is empirical rather than proscriptive, it has defied categorization.
The New York Times Op-Ed columnist David Brooks, for example, praised the book as “the best explanation of the crisis” but referred to it as a history book, rather than a work of economic analysis, since it is “almost entirely devoid of theory.” (The implication being, of course, that genuine “economic analysis” must be hypertheoretical.)
Of course, it’s not as if history is an entirely new ingredient in economic study. There have been other vibrant historical recountings of financial crises, including “Manias, Panics and Crashes,” the 1978 book by Charles Kindleberger. Such books have typically been narrative, though, unlike the data-intensive “This Time Is Different.”
But even in its quantitative perspective and breadth, the book still stands on the shoulders of an economic classic, “A Monetary History of the United States: 1867-1960,” written by another great male-and-female pair of economists, Milton Friedman and Anna Jacobson Schwartz.
“What Friedman and Schwartz did for the U.S. was heroic,” says Ms. Reinhart. “Ken and I have benefited from the use of the Internet to track down books, sources and experts to help us with our work. Friedman and Schwartz did not.”
While Professors Reinhart and Rogoff may have had technological advantages in their research, they weren’t able to outsource much of the number-crunching to graduate students — in part because they wanted to be able to stay close to the data themselves, but also because few students are interested in or trained for that kind of work.
The economics profession generally began turning away from empirical work in the early 1970s. Around that time, economists fell in love with theoretical constructs, a shift that has no single explanation. Some analysts say it may reflect economists’ desire to be seen as scientists who describe and discover universal laws of nature.
“Economists have physics envy,” says Richard Sylla, a financial historian at the Stern School of Business at New York University. He argues that Paul Samuelson, the Nobel laureate whom many credit with endowing economists with a mathematical tool kit, “showed that a lot of physical theories and concepts had economic analogs.”
Since that time, he says, “economists like to think that there is some physical, stable state of the world if they get the model right.” But, he adds, “there is really no such thing as a stable state for the economy.”
Others suggest that incentives for young economists to publish in journals and gain tenure predispose them to pursue technical wizardry over deep empirical research and to choose narrow slices of topics. Historians, on the other hand, are more likely to focus on more comprehensive subjects — that is, the material for books — that reflect a deeply experienced, broadly informed sense of judgment.
“They say historians peak in their 50s, once they’ve accumulated enough knowledge and wisdom to know what to look for,” says Mr. Rogoff. “By contrast, economists seem to peak much earlier. It’s hard to find an important paper written by an economist after 40.”
MICROECONOMICS — the field that focuses on smaller units like households and workers, as opposed to big-picture questions about how national economies function — has embraced real-world data-mining. (Think “Freakonomics.”)
Macroeconomics has been slower to change, but the popular success of “This Time Is Different” and related work seems to be changing how macro practitioners approach their craft.
It has also changed how policy makers think about their own mission.
Mr. Rogoff says a senior official in the Japanese finance ministry was offended at the suggestion in “This Time Is Different” that Japan had once defaulted on its debt and sent him an angry letter demanding a retraction.
Mr. Rogoff sent him a 1942 front-page article in The Times documenting the forgotten default. “Thank you,” the official wrote in apology, “for teaching the Japanese something about our own country.”

Economists Who Did Their Homework (800 Years of It) –

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Greek Default-Swap Costs Only Beaten by Venezuela: Chart of the Day

The cost of insuring Greek government debt is now second only to that of Venezuela, where President Hugo Chavez has declared “economic war” against the “bourgeoisie.”
The CHART OF THE DAY shows that credit-default swaps on Greek government bonds, in red, have overtaken Argentina, which failed to pay more than $80 billion in December 2001. The Latin American nation still has more than $6 billion of defaulted securities outstanding after its second attempt to restructure.
“Greece isn’t Argentina,” said Niels Jensen, a portfolio manager at London-based investment firm Absolute Return Partners LLP, which oversees more than $300 million. “From an economist’s point of view, there’s no question that it’s much, much worse.”
Greece’s debt burden last year was equivalent to about 115 percent of gross domestic product, compared with a level of about 60 percent for Argentina when it defaulted. Credit swaps signal there’s a more than 67 percent chance the southern European nation won’t meet its commitments within the next five years.
Venezuela’s Chavez, a 55-year-old former army paratrooper who champions a socialist ideology, oversees an economy that may contract 2.5 percent this year, according to Bank of America Corp.
“You’ve declared an economic war against me, so I accept your challenge, stateless bourgeoisie,” Chavez said June 2 after business chambers criticized his handling of the economy. “I’m declaring an economic war with the help of the people and workers.”
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to its debt agreements.
(To save a copy of this chart, click here.)
To contact the reporter on this story: John Glover in London at

Greek Default-Swap Costs Only Beaten by Venezuela: Chart of the Day – Bloomberg

June 4, 2010

Debtors’ Prism: Who Has Europe’s Loans?

IT’S a $2.6 trillion mystery.
That’s the amount that foreign banks and other financial companies have lent to public and private institutions in Greece, Spain and Portugal, three countries so mired in economic troubles that analysts and investors assume that a significant portion of that mountain of debt may never be repaid.
The problem is, alas, that no one — not investors, not regulators, not even bankers themselves — knows exactly which banks are sitting on the biggest stockpiles of rotting loans within that pile. And doubt, as it always does during economic crises, has made Europe’s already vulnerable financial system occasionally appear to seize up. Early last month, in an indication of just how dangerous the situation had become, European banks — which appear to hold more than half of that $2.6 trillion in debt — nearly stopped lending money to one another.
Now, with government resources strained and confidence in European economies eroding, some analysts say the Continent’s banks have to come clean with a transparent and rigorous accounting of their woes. Until then, they say, nobody will be able to wrestle effectively with Europe’s mounting problems.
“The marketplace knows very little about where the real risks are parked,” says Nicolas Véron, an economist at Bruegel, a research organization in Brussels. “That is exactly the problem. As long as there is no semblance of clarity, trust will not return to the banking system.”
Limited disclosure and possibly spotty accounting have been long-voiced concerns of analysts who follow European banks. Though most large publicly listed banks have offered information about their exposure — Deutsche Bank in Frankfurt says it holds 500 million euros in Greek government bonds and no Spanish or Portuguese sovereign debt — there has been little disclosure from the hundreds of smaller mortgage lenders, state-owned banks and thrift institutions that dominate banking in countries like Germany and Spain.
Depfa, a German bank that is now based in Dublin, is one of the few second-tier European banking institutions that have offered detailed disclosures about their financial wherewithal, and its stark troubles may be emblematic of those still hidden on other banks’ books.
Despite boasting as recently as two years ago of its “very conservative lending practices,” Depfa, which caters primarily to governments, has flirted with disaster. It narrowly avoided collapsing in late 2008 until the German government bailed it out, and today its books are still laden with risk.
DEPFA and its parent, Hypo Real Estate Holding, a property lender outside Munich, have 80.4 billion euros in public-sector debt from Greece, Spain, Portugal, Ireland and Italy. The amount was first disclosed in March but did not draw much attention outside Germany until last month, when investors decided to finally try to tally how much cross-border lending had gone on in Europe.
Before Greece’s problems spilled into the open this year, investors paid little heed to how much lending European banks had done outside their own countries — so it came as a surprise how vulnerable they were to economies as weak as those of Greece and Portugal.
“Everybody knew there was a lot of debt out there,” said Nick Matthews, senior European economist at Royal Bank of Scotland and one of the authors of the report that tallied up Greek, Spanish and Portuguese debt. “But I think the extent of the exposure was a lot higher than most people had originally thought.”
Concern has quickly spread beyond just the sovereign bonds issued by the three countries as well as by Italy and Ireland, which are also seriously indebted. Private-sector debt in the troubled countries is also becoming an issue, because when governments pay more for financing, so do their domestic companies. Recession, along with higher interest payments, could lead to a surge in corporate defaults, the European Central Bank warned in a report on May 31.
Hypo Real Estate has hundreds of millions in shaky real estate loans on its books, as well as toxic assets linked to the subprime crisis in the United States. In the first quarter, it set aside an additional 260 million euros to cover potential loan losses, bringing the total to 3.9 billion euros. But that amount is a drop in the bucket, a mere 1.6 percent of Hypo’s total loan portfolio. Hypo has not yet set aside anything for money lent to governments in Greece and other troubled countries, arguing that the European Union rescue plan makes defaults unlikely.
The European Central Bank estimates that the Continent’s largest banks will book 123 billion euros ($150 billion) for bad loans this year, and an additional 105 billion euros next year, though the sums will be partly offset by gains in other holdings.
Analysts at the Royal Bank of Scotland estimate that of the 2.2 trillion euros that European banks and other institutions outside Greece, Spain and Portugal may have lent to those countries, about 567 billion euros is government debt, about 534 billion euros are loans to nonbanking companies in the private sector, and about 1 trillion euros are loans to other banks. While the crisis originated in Greece, much more was borrowed by Spain and its private sector — 1.5 trillion euros, compared with Greece’s 338 billion.
Beyond such sweeping estimates, however, little other detailed information is publicly known about those loans, which are equivalent to 22 percent of European G.D.P. And the inscrutability of the problem, as serious as it is, is spawning spoofs, at least outside the euro zone. A pair of popular Australian comedians, John Clarke and Bryan Dawe, who have created a series of sketches about various aspects of the financial crisis, recently turned their attention to the bad-debt problem in Europe. After grilling Mr. Clarke about the debt crisis in a mock quiz show, Mr. Dawe tells Mr. Clarke that his prize is that he has lost a million dollars. “Well done,” says Mr. Dawe. “That’s an extraordinary performance.”
On a more serious front, Timothy F. Geithner, the United States Treasury secretary, visited Europe at the end of May and called on European leaders to review their banks’ portfolios, as American regulators did last year, to separate healthy banks from those that need intensive care.
Others say that if such reviews do not occur, the banking sector in Europe could be crippled and the broader economy — dependent on loans for business expansions and job growth — could stall. And if that happens, says Edward Yardeni, president of Yardeni Research, the Continent’s banks could find themselves sinking even further because “European governments won’t be in a position to help them again.”
LENDING practices at Depfa may have seemed conservative before its 2008 meltdown, but its business model had always been based on a precarious assumption: borrowing at short-term rates to finance long-term lending, often for huge infrastructure projects.
From its base in Dublin, where it moved from Germany in 2002 for tax reasons, Depfa helped raise money for the Millau Viaduct, the huge bridge in France; for refinancing the Eurotunnel between France and Britain; and for an expansion of the Capital Beltway in suburban Virginia. Depfa was also a big player in the United States in other ways, like lending to theMetropolitan Transportation Authority in New York and to schools in Wisconsin.
Before the current crisis, Depfa was proud of its engagement in Mediterranean Europe. In its 2007 annual report, the company boasted of helping to raise 200 million euros for Portugal’s public water supplier and 100 million euros for public transit in the city of Porto. In Spain, it helped cities such as Jerez refinance their debt and helped raise money for public television stations in Valencia and Catalonia as well as raise 90 million euros for a toll road in Galicia. And in Greece, Depfa raised 265 million euros for the government-owned railway and in 2007 told shareholders of a newly won mandate: providing credit advice to the city of Athens.
Depfa said it performed a rigorous analysis of the creditworthiness of its customers, including a 22-grade internal rating system in addition to outside ratings. More than a third of its buyers earned the top AAA rating, the bank said in 2008, while more than 90 percent were A or better.
The public infrastructure projects in which Depfa specialized were considered low-risk, and typically generated low interest payments. Yet because long-term interest rates were typically higher than short-term rates, Depfa could collect the difference, however modest, in profit.
To outsiders, Depfa still looked like a growth story even after the subprime crisis began in the United States. Hypo Real Estate, which focused on real estate lending, acquired Depfa in 2007. After the acquisition, Depfa kept its name and its base in Dublin.
But when the United States economy reached the precipice in September 2008, banks suddenly refused to make short-term loans to one another, blowing a hole in Depfa’s financing and leaving it with a loss for the year of 5.5 billion euros and dependent on the German government for a bailout.
As Hypo’s 2008 annual report said of Depfa: “The business model has proved not to be robust in a crisis.”
Even with Depfa’s myriad travails, most investors weren’t aware of the extent of its cross-border problems until it disclosed them this year.
The question now hanging over Europe is how many other banks have problems similar to Depfa’s, but haven’t disclosed them.
On May 7, the cost of insuring against credit losses on European banks reached levels higher than in the aftermath of theLehman Brothers collapse in the United States. Officials at the European Central Bank warned that risk premiums were soaring to levels that threatened their ability to carry out their fundamental role of controlling interest rates.
Three days later, European Union governments joined with the International Monetary Fund to offer nearly $1 trillion in loan guarantees to Europe’s banks. At the same time, the European Central Bank began buying government bonds for the first time ever to prevent a sell-off of Greek, Spanish and other sovereign debt.
The measures, widely regarded as a de facto bank rescue, restored some calm to the markets, but critics said that the aid merely bought time without reducing overall debt load. Europe’s major stock indexes and the euro have continued to fall as investors remain dubious about the ability of Greece and perhaps other countries to repay their debts.
Even so, figuring out which banks may be most exposed to those countries largely remains a guessing game.
Regulators in each country know what assets their domestic banks hold, but have been reluctant to share that information across borders. Lucas D. Papademos, vice president of the European Central Bank, which gets an indication of banks’ health based on which ones draw heavily on its emergency credit lines, said at a news conference Monday that a small number of banks were “overreliant” on that funding.
But Mr. Papademos, who retired last Tuesday at the end of his term, wouldn’t be more specific. He said European banks would undertake a vigorous round of stress tests by July.
It’s obvious that Greek and Spanish banks hold large amounts of their own government’s bonds. Spanish banks hold 120 billion euros in sovereign debt, according to the Spanish central bank. But a central bank spokesman said that those holdings were not a problem because, thanks to the European Union’s rescue plan, the prices of Spanish bonds have recovered.
Guessing also falls heavily on public and quasipublic institutions like the German Landesbanks, which are owned by German states sometimes in conjunction with local savings banks. Five of Germany’s nine Landesbanks required federal or state government support after they loaded up on assets that later turned radioactive, ranging from subprime loans in the United States to investments in Icelandic banks that failed.
According to the Royal Bank of Scotland study, banks in France have the largest exposure to debt from Greece, Spain and Portugal, with 229 billion euros; German banks are second, with 226 billion euros. British and Dutch banks are next, at about 100 billion euros each, with American banks at 54 billion euros and Italian banks at 31 billion euros.
“Banks continue to not trust each other,” says Jörg Rocholl, a professor at the European School of Management and Technology in Berlin. “They know other banks are sick, but they don’t know which ones.”
DEPFA and Hypo Real Estate, meanwhile, face continued setbacks as they try to steer back to health. Hypo reported a pretax loss for the group of 324 million euros in the first quarter, down from 406 million euros a year earlier.
At the end of May, the German government raised its guarantees for Hypo to 103.5 billion euros from 93.4 billion. Some analysts say they think the bank may need more aid in the future.
“I don’t think it’s over yet,” says Robert Mazzuoli, an analyst at Landesbank Baden-Württemberg in Stuttgart.

Raphael Minder contributed reporting from Madrid.

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