Because it's Funny

today's Op-Ed cartoon from the Washington Post, and yet another funny piece from the same venue:

For a Bailout, Press 'One' . . . by Alan Neff

Hard to believe but Tom Toles isn't fantasy, have a look at the Wall Street Journal's opinion page which has pieces which actually blame regulation for today's problems ... and warns against a return to it!

And, if you think that folks are angry now ...

Daily Sources 9/18

1. AFP reported that Jacques Diouf, Director General of the UN Food and Agriculture Organization [FAO], told the Italian Parliament that the number of people in the world facing "acute hunger" by the end of 2008 is likely to exceed one billion. So far this year the number globally has risen to 925 million from 850 million. The World Bank estimates that 100 million people have been pushed below the poverty line by risign food prices. The rise in food prices globally are mostly attributed to the rise in oil prices, the dedication of arable land to biofuel production, and the increased consumption of land, food and energy intensive meat in the emerging economies. "Hunger hotspots" identified by the FAO include Ethiopia, Djibouti, Ghana, Guinea, Haiti, Liberia, Mauritania, Mozambique, Nepal, the occupied Palestinian territories, Pakistan, Senegal, Tajikistan, Uganda and Yemen.

2. Dow Jones Newswires reported that Abbas Naki, Secretary General of OAPEC (Organization of Arab Petroleum Exporting Countries), said that Middle Eastern oil producing countries are likely to shelve a number of production boosting projects should the price of oil drop below $80/b.

3. Lyubov Pronina and Greg Walters at Bloomberg report that Alexei Kudrin, Russian Finance Minister, announced today that Russia will reduce its duty on crude exports from $495.90 a tonne to $372 a tonne beginning October 1. (A metric ton of oil roughly equals 7.3 barrels assuming 33 ºAPI. Urals Blend is about 30.9 ºAPI. Various Urals crudes range from 26.69-33.61 ºAPI. i.e. ~ 6 - 7.3 barrels/tonne) The tarrif on light oil products will be cut to $263.10/tonne and the heavy products tarrif will be cut to $141.70/tonne. Light products generally include jet fuel, diesel, and gasoline. Heavy products usually refers to the various varieties of fuel oil, asphalt, etc.

4. Dow Jones reports that the Norwegian Foreign Minister Jonas Gahr Stoere told reporters today that all territorial claims in the Artic must fall, as it has so far, under the international Law of the Sea, following Russian call to formally establish the claims of all bordering countries.

5. Marcin Grajewski at Reuters reports that the European Commission has denied Lithuania's request to keep its Ignalina nuclear power plant open. The Baltic States hope to build a modern nuclear plant to handle energy generation requirements, but one will not be operational until 2015 at the earliest. Under its treaty to join the European Union, Lithuania was obliged to shutter the plant by the end of 2009. There is a question of how the Baltic states are to handle their energy requirements in the interim. Russia is considered especially suspect given Polish control of the Mazeikiai Refinery (in Lithuania and the only refinery in the Baltic) and rumors surrounding a fire that shut the complex down in 2006. Russia stopped all deliveries of crude oil to Lithuania via the Druzhba pipeline system in 2006, apparently in retaliation for selling the Yukos stake in the Mazeikiai to PKN Orlen instead of a Russian company. Druzhba is Russian for "friendship."

6. The Wall Street Journal has an editorial about the "Run on Russia." Though the crowing tone, probable mistaking of correlation with causation, and self-congratulatory bellicose tone is useless, the implied admission of the correlation of Russian interests with Western interests is, at least, useful.

7. Henry A. Kissinger and Martin Feldstein have an interesting op-ed in the Washington Post advocating the establishment of closer cooperation between oil consumers. I think this is a good idea, generally speaking, and have argued as much in the past. The devil is in the details, though. Making coal clean by any environmental standard, for example, would be a neat trick.

8. Chris Buckley at Reuters reported that on Wednesday the People's Daily called for a new world financial order that was not dependent upon the United States. (h/t Jesse's Cafe Americain) Still, Vice Premier Wang Qishan told U.S. trade officials in a meeting in the US on Tuesday, "The Chinese government is well aware of the fact that the United States, which is the world's largest developed country, and China, which is the world's largest developing country, should have constructive and cooperative economic and trade relations."

9. Dealbook writes that the rumor mill now floats the story that Goldman Sachs and Morgan Stanley, the two remaining investment banks, are not long for this earth. Yesterday, Morgan Stanley and Goldman Sachs were down 24% and 14%, respectively. Brad Setser's Follow the Money has a response to the news that the Chinese Investment Company is being asked if it would be interested in acquiring 49% of Morgan Stanley by executives there. I can only begin to imagine the political storm that would take place if that happened. Remember Unocal?

10. The Associated Press reported that the British Financial Authority has banned all short selling until January 16, 2009, as per Jesse's Cafe Americain.

11. The Global Director of Market Pricing at Platts, Jorge Montepeque, told a Standard & Poor's commodity investing conference today in London that oil companies are unwilling to trade with their banks, according to Chanyaporn Chanjaroen, Alaric Nightingale and Lars Paulsson at Bloomberg. Nonetheless, E.ON Energy Trading said the had not seen liquidity drying up in any of the energy markets.

12. Patricia Lui and Wes Goodman at Bloomberg report that central bankers in South Korea, the Philippines, India and Thailand are stopping using their currency reserves to defend their currencies for now, accepting lower rates versus the dollar. South Korea's cash reserves dropped 8% in the last five months to $243.2 billion. India's dropped 7.4% this quarter to $280 billion. Thailand's dropped 5% to $101 billion. "Barclays Plc, the third-biggest currency trader, predicts the won will fall to 1,200 by year-end, the baht to 37 and the rupiah to 9,450 and is now revising those forecasts lower."

13. Platts reports that the Nigerian government has been forced to use proceeds from crude export sales to pay for the subsidies on oil product imports, as the cost has exceeded the budgeted amount. The cost of subsidies this year are expected to exceed 1 trillion Naira, or about $8.6 billion.

Because it's Funny

Barney Frank Celebrates Free Market Day

Daily Sources 9/17

1. Andrew E. Kramer at the New York Times reports that trading was halted on the Russian stock market for the second time this week. The market has dropped by more than 25% this week and is off 57% since its peak in May. The Russian Central Bank and regulators also announced a 4% reduction in bank reserve requirements today, which the central bank’s chairman, Sergei Ignatyev, said would free up $11.76 billion. The Russian finance minister, Aleksei L. Kudrin, also announced he would free up about $44 billion by increasing the repayment time of state loans to state banks from one week to three months. Kudrin also said that the discussed measure of having Russia's Sovereign Wealth Fund invest in the market has, for now, been deemed unnecessary.

2. The Moscow Times reports that UBS analysts have said that the price of crude has dropped so much that a barrel is now worth less than the cost of transport and Russian taxes. If you are a pure crude exporter--and don't have a refinery from which you then sell products--you are losing money. (Evidently the mandated prices of transportation fuels in Russia now would not be counted as subsidies.)

3. Margarita Antidze and Matt Robinson at Reuters report that Russia has signed treaties with Abkhazia and South Ossetia which formally commits Moscow to coming to their defense should they be attacked. In 19th century gunboat diplomatic terms, you would call it a "guarantee of independence."

4. AP reports the US Embassy in Yemen was assaulted with a car suicide bomb, rocket-propelled grenades, and automatic weapons today. At least 16 are dead, although apparently no Americans were hurt. President Bush used the incident to say that the attack is a "reminder" that we are "at war with extremists." Officials believe it is likely an al-Qaeda attack. Non-essential personnel were just allowed back into the facility last month.

5. MEND's oil war continues to heat up in Nigeria, as per Ibanga Isine and Victor Sam at the Punch. The "oil war" is also referred to by MEND as "Operation Hurricane Barbarossa"--which is probably meant to evoke the Turkish privateer "Redbeard" who put an end to the damage the Knights of Saint John were doing to Ottoman shipping and eventually became the Fleet Admiral of the Ottoman Navy(a) and not Hitler's "Operation Barbarossa" (or the code name for the invasion plan of the Soviet Union.) The Hurricane part I understand ... and so far many of the attacks seem to have come via speed boats.

It is in this environment that the Nigerian Senate is considering an anti-terrorism bill reports John Alechenu at the Punch. Yet another foreign political utilization of the Bush Administration's "War on Terror" (by the way, just yesterday Putin referred to the Georgian terrorist situation)--and it is worth remembering that America remains very popular in Nigeria.(b) "If passed, the attorney-general will be empowered to detain persons for up to 60 days where he has reasonable grounds to 'believe or suspect' that 'the entity knowingly committed; attempted to commit, participate in committing; or facilitated the commission of terrorist acts.'" I think that such broad language tends to erode the rule of law, and this would be in a country where the rule of law is not particularly strong to begin with.

6. Juan Forero at the Washington Post has an important report on a witness in ongoing trials in Colombia linking Gen. Mario Montoya to death squads in Medellin. Montoya is apparently well-known in Washington and was one of the generals involved in orchestrating the spectacular rescue of hostage Ingrid Betancourt from FARC. The State Department stood behind Montoya today in interviews. Should these allegations prove true, they will likely be very damaging to the Uribe Administration as well as further undermine the American image in South America.

7. Thom Shanker at the New York Times reports that Defense Secretary Gates has apologized for the deaths of non-combatants in recent strikes in Afghanistan. I think that--though it might stick in the craw a little--this was a very wise move.

8. Xinhua reports that China will allow local governments to raise the cost of heating in response to the increased costs of coal.

9. Tom Doggett at Reuters reports that Sam Bodman, Secretary of Energy, told reporters that the Administration is considering asking the IEA for some of its gasoline reserves.

10. Edmund L. Andrews, Michael J. de la Merced and Mary Williams Walsh at the New York Times report that The Federal Reserve Bank has agreed to lend AIG $85 billion for a majority equity stake in the company.

11. David Cho at the Washington Post reports that the Federal Reserve has asked the Treasury for a $40 billion deposit.

12. Brain Setser at Follow the Money yesterday had a blog entry which partially answered my question regarding where foreign banks were going to put their money, following the Treasury's release of the Treasury International Capital data for July (TIC.) Answer: fleeing the US, and insofar as they are investing in the US, investing in the safest possible instrument, Treasuries. To paraphrase:

Before the crisis, foreigners bought roughly:

- $205b of long-term Treasury bonds
- reduced their holdings of bills by $10b
- $285b of long-term Agencies
- $540b of long-term corporate bonds
- $210b of US equity.
or about $1,230 billion per month.

After the crisis:
- $350b of long-term US treasury bonds
- $125b of short-term bills
- $150b in Agency bonds
- $210b of corporate bonds
- $55b of US equity
or about $890 billion per month.

Today the yield on the 3 month Treasury bill went to zero. That suggests to me that the market believes that the dollar will be worth more tomorrow, versus a basket of goods, than it is today. By basket of goods, I mean basket of currencies and securities because commodities appear to have rebounded recently. (Gold for December went up, if I understand correctly, $70 today! h/t Jesse's Cafe Americain) So, does this mean that foreign central banks will now be forced to sell dollars in order to defend their currencies or that they will be forced to buy dollars in order to defend their exports? I dunno.

(a) Wikipedia: Hayreddin Barbarossa
(b) Pew's 47-Nation Global Attitudes Study of 2007 has 70% of Nigerians having favorable views of the United States. Table: "Favorable Views of the U.S.", page 17. You also might want to check out my blog entry from March: The Geopolitical Consequences of the Candidates.

Daily Sources 9/16

1. The Federal Reserve announces it will keep the Federal Funds Rate at 2%. Given the financial environment, probably the most significant news today. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth." "The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

My sense is that this provides little support to the dollar, the consequences / desirability of which I am still thinking on. Paul Krugman mentions the strong v weak dollar debate in a recent blog post, and refers to how a weak dollar strengthens the American balance sheet vis-a-vis foreign governments and provides impetus to US exports, but ignores the savings of the elderly (and most unsophisticated--read not wealthy--investors who quite rationally tend to choose "safer" "fixed income" investments like Treasuries). My question is whether or not a weak dollar policy forces export-based economies in Asia to pursue a strong dollar policy by purchasing more US debt? If the Asian tigers (and the EU) begin to avoid US debt, who will they sell to? I dunno; I'm not an economist. I do know something about the oil markets, though, and I can tell you that the notion of 25% of your customer base all of a sudden going broke is likely not viewed as good news in the Middle East, even if their Sovereign Wealth Funds can go bottom fishing.

From a geopolitical perspective, the consequences of a worldwide financial system breakdown are ... um ... not good. The most famous antecedent of course is the Great Depression, on which many blame WWII. The comparison, on the face of it, is alarming to say the least. Joseph Stiglitz, Economics Professor at Columbia, appears, given his piece in the Guardian, to think the comparison to the Great Depression relatively apt. (I am not sure of the helpfulness of Stiglitz's arguments here, but liked the way he pointed out once upon a time that the neo-liberals were, in large part, responsible for the mess Russia got into as a result of its transition from communism.)

That this is big is indisputable, Bred Setser points out that in terms of sheer size, Lehman's bankruptcy is larger than Argentina's default of 2001. He also mentions that a large percentage of those being burned just now are financiers in Asia. Michael Lewis also thinks American financial credibility, and likability, in Asia is approaching zero.

Ralph Atkins and Chris Giles at the Financial Times report that on Tuesday the Bank of Japan injected $24 billion into the international money markets, the New York Federal Reserve Bank $50 billion, the European Central Bank €70 billion (~ $100 billion), the Bank of England £20 billion (~ $36 billion). In the meantime, the Associated Press writes that the Labor Department reported Tuesday that consumer prices were down 0.1% in August.

2. Reuters reports that OPEC cut its forecast for oil demand growth in 2008 to 880 kb/d in its Monthly Oil Market Report for September. That is 120 kb/d less than its previous forecast. In the meantime, according to Ayesha Daya and Maher Chmaytelli at Bloomberg, the OPEC governors from Libya and Iran both said today that an emergency OPEC meeting was not warranted by the current situation. But the chief economist at the British Saudi Bank said in an interview with Juan Pablo Spinetto and Grant Smith at Bloomberg that Saudi Arabia would likely cut production in advance of the December OPEC meeting. (Saudi Arabia is currently producing more than its quota. Just how much more is a subject of much debate.)

Meanwhile, Austin Ekeinde at Reuters reports that the Nigerian "oil war" by MEND continues to heat up, with several facilities coming under attack. Over the last four days, the militants have shut in as much as 110 kb/d. Also, Alexander Kwiatkowski at Bloomberg reports that Angola will cut its crude oil exports by 10% in November. Moreover, AP reports that Brazil has turned down the offer of OPEC membership.

Deisy Buitrago at Reuters also reports that Hugo Chavez said today that oil will settle at $90-100/b. This comes on top of news that Chavez is planning to visit China next month and renewed alarms about China becoming the destination for Venezuelan oil. And as part of the poisonous rhetorical mix, it is worth having a look at Maria O'Grady's opinion piece in the Wall Street Journal yesterday which argues that Chavez's dalliance with Russia is a good sign of his difficulties.

3. Dan Bilefsky and Stephen Castle at the New York Times report that the US Ambassador to NATO is arguing that Georgia's conflict with Russia regarding Abkhazia and South Ossetia should not prevent Georgia from becoming a NATO member. Also, Free Exchange at the economist has a little piece on how the Georgia conflict has punished Russia's economy. Given the fall in the price of oil, this is a double whammy.

All that aside, William Schomberg at Reuters reports that the EU has approved the purchase of an Italian electric energy producer by a unit of Gazprom. And the AP reports that the governing (pro-Western) coalition in Ukraine collapsed today. President Viktor Yushchenko accused Russia of attempting to destabilize the Ukraine by encouraging ethnic Russian separatists in the Crimean peninsula.

4. Esteban Israel at Reuters reports that Cuba has conditionally accepted the resumption of a formal political dialogue with the EU this month. This comes on top of the interesting news reported by Karen DeYoung at the Washington Post that the Bush Administration has asked Cuba to reconsider its rejection of aid the US has proposed in response to Hurricanes Ike and Gustav's devastation of that country. Cuba has rejected aid via an airlift by commercial aircraft, but asked the United States to temporarily drop certain provisions of the embargo which prevent it from purchasing reconstruction materials on credit. (Credit? If Lehman can't get any, ... .) The US has rejected this counter-proposal.

5. Stephen Graham at the Associated Press reports that Pakistan has authorized its troops to fire on coalition forces should they cross over into Pakistan from Afghanistan.

6. Jeff Wilson at Bloomberg reports that corn and soybeans fell precipitously on the CBOT today. This comes on top of a study that argues high grain prices are here to stay from the University of Illinois at Urbana-Champaign.

7. If you wanted to quantify--outside of the difference between eating well and starvation--what pollination is worth, the Helmholtz Association of German Research Centres released a study today which posits that the worldwide economic value of pollination is €153 billion (~$220 billion). I would think this is a ginormous underestimation.