financial meltdown

With the release of 2012 today, we're now at the peak of the apocalyptic movie season.  Soon to come will be the big-screen adaptation of The Road, which looks like yet another barrel of laughs.  This comes on the heels of animated apocalypse movies like 9 and WALL*E. 

This raises an interesting cultural question -- is the obsession with disaster/apocalypse films correlated with the economic downturn? 

I'm not sure the answer is yes. Roland Emmerich, the director of 2012, is just a disaster porn fetishist who likes to destroy the world every time he commits anything to celluloid (except mosques, apparently).  His first disaster flick, Independence Day, was released in 1996 -- not exactly the peak of anxiety about the state of the world.  Deep Impact and Armageddon were also released during the boom times of the last decade.  Furthermore, during the Great Depression, Hollywood responded by instituting the Hays Code and releasing films about "high society" that allowed the downtrodden American to fantasize about The Good Life (a fact that Woody Allen ruthlessly exploited in his best and darkest film, The Purple Rose of Cairo). 

Still, the last time I can remember a spate of disaster flicks being released in such a fast and furious fashion was in the 1970's, another period of economic and political upheaval.  Films like the Airport series, Poseidon Adventure, Towering Inferno, Meteor, and Virus were not pieces of great cinema, but they all seemed to hit some taproot of anxiety that caused people to flock to the movies.

So... a question to the pop culture mavens here at foreignpolicy.com -- do down times lead to more disaster flicks, or is this just a trick of the light? 

Over at Politico, Eamon Javers notes an odd trend in the Drudge Report: 

On Tuesday, Matt Drudge ran a headline about the weakening U.S. dollar on his website, Drudgereport.com. In and of itself, that would be unremarkable, except that it was the 18th time Drudge had posted a link to a story about the weak dollar this month.

And October was only 20 days old.

Clearly, Matt Drudge has developed a fascination with the declining U.S. dollar.

“He’s fixated on it,” said Tom Rosenstiel, director of the Pew Research Center’s Project for Excellence in Journalism. “There’s no question that Drudge can alter what people are paying attention to.”

Market watchers say it’s unlikely that Drudge is actually moving the currency markets with his relentless attention.

“I don’t think that anyone who seriously trades currencies reads The Drudge Report before making important buy or sell decisions,” said Chris Roush, a professor of business journalism at the University of North Carolina at Chapel Hill. (emphasis added... because that's a priceless quote)

Drudge isn't the only one obsessed about the dollar.  Last week, James Pethokoukis blogged the following for Reuters: 

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

OK, let's be as plain as possible about this - as a reserve currency, the dollar is not going anywhere.  Really. 

The dollar's slide in value has been predictable, as the need for a financial safe haven has abated.  By and large, a depreciating dollar helps the U.S. trade balance (though it would help much more if the Chinese renminbi got in on the appreciation).   

Even the Chinese, who have spoken like they want an alternative to the dollar as a reserve currency, are in point of fact not doing much to alter the status quo.  Why?  To paraphrase Winston Churchill, the dollar is a lousy, rotten reserve currency - until one contemplates the alternatives. 

Because all of the alternatives have serious problems.  The euro, the only truly viable substitute for the dollar, is not located in the region responsible for the largest surge of growth.  It would be unlikely for the ASEAN +3 countries to agree to switch from the dollar to a new currency over which regional actors have no influence (the Europeans wouldn't be thrilled either, as it would lead to an even greater appreciation of the currency).  Oh, and the European Union has no consolidated sovereign debt market.  The euro is worth watching, but it's not going to replace the dollar anytime soon.  

The other alternatives are even less attractive.  Most other national currencies beyond the euro - the yen, pound, Swiss franc, Australian dollar - are based in markets too small to sustain the inflows that would come from reserve currency status.  The renminbi remains inconvertible.  A return to the gold standard in this day and age would be infeasible - the liquidity constraints and vagaries of supply would be too powerful.  There's the using-the-Special-Drawing-Right-as-a-template-for-a-super-sovereign currency idea, but this is an implausible solution.  As it currently stands, the SDR is not a currency so much as a unit of account.  Even after the recent IMF authorizations, there are less than $400 billion SDR-denominated assets in the world, which is far too small for a proper reserve currency. 

So, what's really going on here with the dollar obsession?  I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks.  The dollar looks like it's going to be declining for a while, so why not that?  Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now. 

The thing is, I'm not sure this gambit is going to work.  People who already think Obama is a socialist will go for it, sure, but that's only rallying the base.  I'm not sure how much fence-sitters care about a strong dollar, however.  If anything, populist movements tend to favor a debasing of the currency rather than a strengthening of it. 

Still, I'm just a political scientist -- I'm sure that, "theories on political behavior are best left to CNN, pollsters, pundits, historians, candidates, political parties, and the voters." 

So, have at it, readers!  Will the falling dollar be a source of populist outrage if Drudge links to it enough? 

UPDATE:  contrasting takes from Kevin Drum and Megan McArdle. 

Everyone and their mother is linking to this Calvin Trillin op-ed from a few days ago, in which a martini-swilling guy "in a sparsely populated Midtown bar" volunteers his explanation to Trillin of why the financial crisis took place:  "The financial system nearly collapsed because smart guys had started working on Wall Street." 

OK, I'll take the bait... I find this to be a pretty stupid argument. 

The alleged nub of the argument is what happened when the smart guys started displacing the schleps who used to be traders on Wall Street:

"When the smart guys started this business of securitizing things that didn’t even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the class! Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that. All of that easy money had eaten away at their sense of enoughness."

“So having smart guys there almost caused Wall Street to collapse.”

“You got it,” he said. “It took you awhile, but you got it.”

The theory sounded too simple to be true, but right offhand I couldn’t find any flaws in it. I found myself contemplating the sort of havoc a horde of smart guys could wreak in other industries. I saw those industries falling one by one, done in by superior intelligence. “I think I need a drink,” I said.

This has led to many nodding heads in the blogosphere about how smart people can be so dumb and greedy, etc. 

Except that, if one takes Trillin's tale at face value, the problem isn't the smart guys -- it's the fact that the dumb guys are supervising the smart guys.  They're no less greedy than the smart guys... just less intelligent.  Even if one takes Trillin's model as sound, it's the combination of smart and stupid that's the problem. 

Now, there are two directions one can go from that conclusion.  One could fire the smart guys so the dumb guys don't get put in that position ever again... or one could hire smart guys for both management and operations. 

You make the call. 

As previously noted, the G-20 has done a much better job than I would have thought possible a year ago.  It now looks like the Obama administration is close to earning consensus on a framework arrangement on macroeconomic policy coordination.  The devil's in the implementation, of course, but the fact that they're close to consensus on such a framework is truly surprising. 

Naturally, the French like to focus on peripheral issues that they are convinced contributed to last year's financial meltdown.  Last April it was tax havens; this time France's pet peeve is placing a cap on bank bonuses (admittedly less peripheral than the tax havens). 

It now looks like there will be agreement on that issue -- in part because the caps will not include specific monetary caps. 

I raise all of this because Nicolas Sarkozy's "bonus tsar", Michel Camdessus, gave an interview to the Financial Times in which he was refreshingly candid about the issue: 

 

France’s bonus tsar on Thursday said that traders’ bonuses were a largely symbolic issue for G20 leaders, and that in terms of money they were the “least important” item on the agenda.

Michel Camdessus, the former head of the International Monetary Fund, said: “If you look at this issue of remuneration in the global agenda of the G20, it is certainly – in terms of cash, money – the least important of all issues on the table.”

Mr Camdessus, charged by Nicolas Sarkozy, the French president, last month with monitoring bonuses of traders at state-aided banks, added: “But if you look at the symbolic value of the issue, it is one of the most important.”

Fine -- it's symbolically important.  But if a symbolic agreement can allow the G-20 to keep their eyes on the macroeconomic prize, then three cheers for symbolic gestures. 

When your agency is less popular than the federal institutions responsible for torture enhanced interrogation techniques, tax audits, and the requirement that you take your shoes off at the airport, you know you have a public image problem. 

So I wonder if the following news will help or hurt the Fed: 

The Federal Reserve has made a $14bn profit on loan programmes that have provided hundreds of billions of dollars in liquidity to the financial system since the start of the crisis two years ago, according to Fed officials.

The internal estimate is based on the difference between the fees and interest on the lending facilities and the interest the Fed would have earned had it invested the funds in three-month Treasury bills.

The central bank earned about $19bn in income from charging interest and fees to financial institutions and investors that tapped the new facilities to obtain much-needed funds during the turmoil. The interest the Fed would have earned by investing the same amount in T-bills was an estimated $5bn, leaving a $14bn gain since August 2007....

The calculation by Fed staff, which has neither been audited, published or risk-adjusted, only deals with its liquidity facilities.

Those include discount window and Term Auction Facility loans to banks, currency swaps with other central banks, purchases of commercial paper and financing for investors in asset-backed securities.

If I'm reading this right, this assessment does not include the Troubled Assets Relief Program (TARP).  According to Daniel Gross, however, it seems like TARP will at least break even.   

The spreadsheets at financialstability.gov document the status of the 667 investments, worth $204.4 billion, made under the CPP. Morgan Stanley, which borrowed $10 billion in October 2008, paid back the cash in June and purchased the warrants for $950 million on Aug. 12, giving taxpayers a 12.7 percent return, according to SNL Financial. For the 22 companies that have bought back shares and warrants, the taxpayer received an annualized return of 17.5 percent—better than most hedge funds have done lately. (Another 15 have repaid part or all of the principal.) Since many of the largest financial institutions have left the program, the 37 "exits" represent 34 percent of the total cash initially disbursed. The bottom line: taxpayers have received $70.3 billion in principal, plus about $10 billion in dividends and warrant payments....

Investors have seen other returns. Since the Treasury Department in July converted the $25 billion CPP loan to Citi into common stock, at $3.25 a share, the U.S. taxpayer now holds 7.69 billion shares of the once mighty bank. As of Aug. 26, thanks to the rallying market, taxpayers were sitting on a $10.52 billion paper gain....

Given the results of the central-bank bailout thus far, Herb Allison, the former TIAA-CREF CEO who was tapped to run TARP, notes that "it's quite possible we'll have a positive return on the CPP program as a whole."

Regardless, the CPP —combined with all the other stabilization efforts—has become less of a political and financial liability than it was last fall. In late August, the Office of Management and Budget said the lower-than-expected cost of bailing out the financial system—including the money paid back from the CPP—meant the 2009 fiscal deficit would be $1.58 trillion, $262 billion less than the prior estimate of $1.84 trillion. Lee Sachs, counselor to the Treasury secretary, invokes the MasterCard ad in weighing the true yield. "Dividends: 5 percent; equity warrants: 2 percent. Financial system not going into total abyss: priceless."

In essence, the U.S. Federal Reserve has acted like the Mother of All Sovereign Wealth Funds for the past two years.  It placed a huge bet that most financial assets were being radically undervalued during the Great Panic last fall.  That bet appears to have paid off handsomely.  Oh, and the complete and utter collapse of the financial system was averted. 

Ben Bernanke has some significant political skills, and one would expect him to be able to put the best possible spin on this kind of news. 

Still, I wonder if it will do him any good.  When you have a 30% approval rating, it's pretty easy for the other 70% to concoct stories that take good news and turn it into a narrative of evil. 

In this case, I can easily imagine Bernanke's opponents combining this news with rumors about the Plunge Protection Team, nostalgia for the gold standard, a jeremiad by William Greider, and the belief that if the Fed made a profit that means it must have screwed the old, the poor and minorities out of their hard-earned money.  Mix together well, and I think you have a story that would make Fed-haters feel quite comfortable in their convictions.

Readers are encouraged to proffer their narrative for why Ben Bernanke is evil despite apparent policy successes in the comments.  The more outlandish, the better -- I want to be ahead of Glenn Beck and Keith Olbermann on this one. 

One of the Economist's leaders this week focuses on the global economy and the nature of the incipient recovery.  They use an alphabet metaphor to explain the possibilities: 

The first step in any recovery is for output to stop shrinking. But the more interesting question is what shape the recovery will take. The debate centres around three scenarios: “V”, “U” and “W”. A V-shaped recovery would be vigorous, as pent-up demand is unleashed. A U-shaped one would be feebler and flatter. And in a W-shape, growth would return for a few quarters, only to peter out once more.

Well, first of all, their description of the "U" trajectory sounds an awful lot like an "L" to me. 

Second of all, if that's the case, well, it seems they were paying awfully close attention to an obscure report entitled "Alphabet Soup." 

Third of all, if anything, I'm more convinced of the likelihood of the "W" path coming to fruition.  The nature of the Chinese recovery and the absence of any other global economic locomotive is playing a large role in my calculations here.

OK, so by my calculations, your humble blogger has heard from at least .001% of the Icelandic population in response to my latest book review.  By an eerie -- and not conspiratorial!! -- coincidence -- they have been unable to post responses using FP's f***ed-up somewhat dysfunctional comment software.  Sooo... as a special courtesy to Icelandic Friends of Drezner's Blog (IFDB), here are the responses: 

1) From Petur Henry Peterson: 

You seem, rather naively, to think that this book was written by the Nation of Iceland. You would be better to "follow the money" and realize that its author is one of the people hired and payed handsomely,  for what at the best, appears to be to deceive and manipulate Icelanders about the real state of their banking system. Is he going to identify himself and his friends as the culprits, I dont think so. Strangely, the people who were the best and the brightest, now claim to have been totally clueless
(well some of them were and still are ;).

Most Icelanders realize all too well the cause of the meltdown in lax regulations and cronyisms between right wing politicians (and their supporters, the farmers party) and the financial sector, plus a dash or two of nepotism, stupidity, greed, lack of active democracy and a national minority complex.

I think that's supposed to be "inferiority complex" rather than "minority complex," but you get the idea. 

2)  This one comes from Audur Ingolfsdottir:

I have not read the book myself, and thus have no comments on your analysis on the book itself. However, I must agree with your own second thoughts, on if the last part of the review is perhaps a bit harsh. Not so much because I think Icelanders should not look within to find explanations for the crash last October, but rather you assumption, after having read a book by a single individual, that his analysis are reflective of the "country´s mindset".

The Icelandic public went out to streets, outraged, pounding their pots and pans, which resulted in the government resigning and early elections were called. The director of the financial serveillance authority resigned after huge public pressure. The central bank managers were forced to leave theirs seats, also after great pressure by the public. Hardly any of the people that were in power during and before the collapse are still holding their positions.

Currently the government is going through the very painful process of cutting down costs in the public sector. At the same time, considerable amount of money is being spent in order to investigate the banks, and what went wrong.

So I would say that although there were of course some strong international forces influencing the chain of events, most Icelanders are acutely aware of that a number of things went wrong in our own country, and a lot of work is aheaad to clean up the mess. 

These are fair comments, and it would certainly be unfair to say that Jonsson's worldview represents all Icelanders.

That said, I'm not the only one who's picked up on this meme.  Both Michael Lewis and Ian Parker sussed out the same vibe when they visited Reykjavik -- and it comes out a little bit in the newest Icelandic PM's recent public statements.  Furthermore, the Financial Times recently noted that, "Iceland has a tendency to imagine a British or Dutch conspiracy behind any bad news." 

The problem with this kind of label is that it's hard to shake, so maybe this is dogpiling on a small country.  I'll merely point out, with respect, that this statement in my book review was not based only on Jonsson's book -- rather, it is emblematic of everything I have read to date about Iceland. 

I have a book review in today's Wall Street Journal of Why Iceland? by Ásgeir Jónsson.  The closing paragraph: 

The greatest value of "Why Iceland?" is the window it may open on the country's mind-set. Mr. Jónsson ­devotes page after page to the international culprits that allegedly helped to scupper the economy. In one chapter it is hedge funds. In another, rating agencies, aiming their malice at Iceland in ­particular. Finally, it is a cabal of central bankers who, it is claimed, froze Iceland out of the help they could offer and forced it into the arms of the IMF. None of this is convincing. In the end, Icelanders who want to find someone to blame for their woes may want to look at themselves.

That's a bit harsher than I intended -- Iceland is not solely responsible for theire predicament.  Still, the lack of self-reflection about what happened is quite extraordinary. 

I'm not a big fan of this book, but a great book on this case is dying to be written.