"It's the asset prices, stupid"

In a good post titled 'Why Obama is Winning' Harold James points out that political strategist James Carville's famous "it's the economy, stupid" quip from the 1992 U.S. presidential election campaign has gained a new twist:

...the lesson about the economy’s electoral salience is being subtly reformulated. It is no longer the real state of the economy, but rather the perception of asset markets, that is crucial. And the perception can be far removed from reality, which means that the more the prevailing political wisdom assigns decisive electoral importance to the economy, the greater the temptation to view monetary policy’s impact on asset prices, and not on long-term growth, as crucial.

What James is basically saying is that people feel wealthier when asset prices - stocks, bonds, real estate, etc. - go up in value. This phenomenon -- the so called 'wealth effect' -- can make those who don't read The PolyCapitalist and the other recommended sites listed on the right side of this blog feel like the real, fundamental economy is doing better than it actually is. Or so the theory goes. 

Further, positive feelings about how the economy is trending due to rising asset prices can in turn drive higher consumer consumption and business investment, which in turn can increase GDP. At least in the short (and possibly) medium run.

For how long can this wealth effect ponzi-esque scheme go on? In other words, are programs like QE3 nothing more than an macroeconomic cheap trick?

No one knows for sure because, like much of modern macroeconomic theory, we are conducting a live, empirical test of the theory. And this test has arguably been running since at least 1987 (the year Alan Greenspan became Chairman of the Fed), if not 1971 (the year Nixon severed the U.S. Dollar's anchor to the price of gold).

What this means longer-term, according to James, is further politicization of the Federal Reserve and other central banks around the world:

Republicans will blame their defeat in November on the Fed’s monetary stimulus (if not on the ineffectiveness of Mitt Romney’s blunder-filled campaign). 

Meanwhile, in Europe, many national leaders, looking at Obama and the Fed, may conclude that they would do better with more direct control over the central bank. Given the difficulty of establishing such control over the European Central Bank, the euro’s next great challenge may be growing sentiment in favor of a return to national currencies.

In other words, expect central banks to remain in the politial bullseye following the 2012 U.S. and 2013 German elections, regardless of the their outcomes.

Will major reform be applied to central banks? For example, there has been open discussion of terms limits for the Federal Reserve Chairman.

Perhaps changes like term limits, greater Fed transparency, etc. are in the cards longer-term. But I am personally skeptical that any significant reforms will be enacted at the Federal Reserve prior to the end of the U.S. dollar's global hegemony.

Why is the U.S. Government Still Hiding Financial Crisis Documents?

Here here to former Lazard partner turned Wall St. author/historian William Cohan and his fighting the good fight to obtain public documents from the U.S. government related to financial firms such as Goldman Sachs.

What's the Difference Between 'Financial Repression' and 'Macroprudential Regulation'?

Axel Weber and German Chancellor Angela Merkel

The most striking remarks made by former Bundesbank Chief and ECB frontrunner Axel Weber in a recent WSJ interview were his comments on the possibility of using financial repression to solve the Greek and wider European debt crisis:

“Ultimately, there will be a debate about financial repression. Take what we had in Germany — the Zwangsanleihe [compulsory loans introduced after World War I to help make reparation payments]. If voluntary contributions don’t add up, then the one tool that is still on the shelf is financial repression.”

To my knowledge, this is the first time a major senior policymaker (albeit one who recently stepped down) has publicly used the term 'financial repression'. As economist Carmen Reinhart and others have noted, the policies associated with financial repression are typically couched under the more benign, positive sounding 'macroprudential regulation'.

Update: News today emerged that Weber will become Chairman of Swiss megabank UBS, which perhaps explains the reasoning behind his choice of words.

Economic Newspeak

The term 'financial repression' was first coined in 1973 by two Stanford economists, and the word choice was intended to disparage developing economies which enacted what were deemed to be anti-competitive (and hence anti-growth) policies. In other words, the term 'financial repression' was invented with negative connotations in mind.

Can the contrast between 'financial repression' and 'macroprudential regulation' be viewed along the same lines as the difference between 'quantitative easing' and 'printing money'? The two monetary terms can mean approximately the same thing, although those who oppose Fed policies, like QE2, tend to embrace the use of the latter, which is arguably both more provocative and transparent to a broader audience.

This blog has in the past been highly critical of other examples of opaque, economic 'newspeak', such as Yale Professor Robert Shiller's argument that terms like 'bailout' should be replaced with ‘orderly resolution’ so that the voting public 'gets it'.

Financial Repression Redux

The latest from Carmen Reinhart and Co. on the return of financial repression has been published on the IMF's website here. If you're a little turned off by academic papers then you'll find this latest short, magazine-style piece much more appealing.

For more thoughts on financial repression, including how to protect oneself from it, see here.

Video: 60 Minutes on High Frequency Computerized Trading

Video: WikiSecrets -- Frontline's Profile of WikiLeaks, Julian Assange and Bradley Manning

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Watch the full episode. See more FRONTLINE.

How to Play the 'Reprofiling' of Greek Debt

Today comes the latest in a long list of euphemisms for a Greek debt default, this one courtesy of Eurogroup head and Luxembourg PM Jean-Claude Juncker:

“If all these conditions are fulfilled, we can discuss the question of reprofiling,” Juncker told reporters late yesterday after chairing a meeting of euro-area finance chiefs in Brussels. “It’s not reprofiling or nothing. It’s measures, measures and measures, and then maybe reprofiling.”

Source: Bloomberg

While it's unclear how many of Europe's leaders are in agreement with Juncker, at least some of the Eurozone's grownups have begun to publicly acknowledge what the market has been communicating for awhile, which is that maintaining the current Greek debt program is hopeless. John Mauldin spells out the inescapable arithmetic:

(Greek) GDP at -4.5% in 2010 and still likely to be -3.0% in 2011 (Source: IMF). If your economy slows down by 10%, then your debt-to-GDP ratio rises by 11% without any new debt. And Greece is being asked to further reduce its deficit by what is in effect 15% of GDP, while taking on no more debt. Within two years Greece will have a debt-to-GDP ratio of 160%.

No country save Britain...has ever recovered from a debt-to-GDP ratio of over 150% without a default. None. 

And the reason is simple arithmetic. Even a nominal interest rate of 6% means that it takes 10% of your national income just to pay the interest. Not 10% of tax revenues, mind you; 10% of your total domestic production. That is a huge burden on any country. It sucks up half your tax revenues (or more), leaving not enough to pay for ordinary government services like police, defense, education, pensions, health care, etc. 

Greece runs a massive trade deficit with the rest of Europe, which just makes the problems worse. Unemployment in Greece is now 15% and rising.

The details of Greece's default (aka 'reprofiling') appear to involve some type of maturity extension in exchange for an acceleration of Greek government cuts and 50 billion euros of privatization, which translates into selling about a fifth of the property that the Greek state owns.

The question now becomes how much appetite is there in Greece for any additional cuts and the selling off of state assets to pay back the foreign banks (primarily French and German) which lent Greece money? And are the Greeks really willing to put up 'collateral' (e.g, Mykonos?) in exchange for any additional financial assistance from Germany?

Continue reading the full article at SeekingAlpha here.

Outrage of the Week: FCC Commissioner Meredith Attwell Baker Cashes-In

Shameful

Federal Communications commissioner Meredith Attwell Baker, who just four months ago voted in favor of the hugely controversial merger between Comcast and NBC, announced this week that she planned to join the lobbying office of Comcast.

From the Washington Post:

Baker stood out among the FCC’s five commissioners for criticizing the merger review process for taking too long. She said the agency attached too many conditions to the deal. Among them, she opposed holding Comcast accountable to Internet access rules and the sharing of content with new online distributors such as Netflix and YouTube. She said those Internet television platforms were too new and that the market for online video was competitive and still forming. 

The deal was approved in January by the FCC and Justice Department, forming a media behemoth that controls a bevy of television and movie assets along with the largest number of U.S. home Internet and cable subscriptions.

Also of note, Meredith Attwell Baker is a Republican who was appointed to the F.C.C. by President Obama two years ago. On the endemic problem of regulatory capture, here's The Future of Capitalism:

In a better world, this would be a hot political issue for a politician to seize on. But because it's such a bipartisan problem — both Republicans and Democrats cash out through the revolving door — it doesn't get much attention. It's a part of why government gets bigger, though, because for the politicians and regulators the incentives are there to make more complex rules and laws that they can then earn money helping companies to either comply with or get around.

Meredith Attwell Baker is just the latest example of the pervasive 'go into government to cash-in' culture which has poisoned public service in the U.S. Baker's shameful move is nothing new, but she does earn extra outrage kudos for brazenly waiting a scant four months before making such a blatant ethical affront.

Some may wonder whether it's right to cast shame on Attwell Baker? I'm not a legal expert, but I suspect she's not violating any laws or rules. Instead one could argue that she is simply behaving in accordance with the system's incentive structure.

The big problem with taking this view is that regulatory capture is a very difficult problem to address, but one that creates huge costs. Most of the people who are best served to work in the regulatory arena naturally come, and can most easily find later employment in, the industries they regulate. Until a systemic solution is devised accountability has to be maintained at the individual level, and that means shaming the shameful.

As the regulatory revolving door leading in-and-out of industry keeps going around, and around, and around, and as fiscal deficits keep piling higher, can there be any doubt that we're simply biding our time until the next big crisis?

'Adult Supervision' at Facebook?

But who is supervising Facebook's 'adults'?

Remarkable timing award of the week.

News of Facebook's secret smear campaign leaks the day after BusinessWeek publishes a rosy cover story on Sheryl Sandberg, which prominently quotes the Facebook COO as providing "adult supervision" at the social network.

However, Sandberg no doubt authorised and perhaps even concocted Facebook's idiotic PR caper.

In the competition over who people should trust with their very personal data, score a checkmark in Google's column and yet another minus against Zuckerberg and Co.

Updated: Confirmed Map, Satellite Imagery, and CIA Diagram of Bin Laden's Compound in Abbottabad (Bilal Town), Pakistan

(Note: in the hours following confirmation of bin Laden's death various maps purporting the location of the bin Laden compound were circulated by the mainstream media. In the interest of maintaining the chronology of these releases, and to highlight some of the astute comments made on this post, I've kept the two inaccurate map sets in the order they were circulated. The final, accurate satellite image from 2010, along with the CIA diagram of the compound, can be found at the bottom of this post.)

Osama bin Laden was killed today (unconfirmed death photo here, WARNING: graphic) about 100 kilometers outside Pakistan's capital of Islamabad. The op was carried out by the Special Forces 'legendary' (in both the literal and figurative sense) Seal Team Six.

The Location

Bin Laden was located in the relatively posh part of Abbottabad, Pakistan called Bilal Town. The compound itself was located a short distance from the Pakistani military academy (the "West Point or Sandhurst of Pakistan" as it's being characterized).

The Compound

His five-to-six year old property, believed to have been purpose built to hide the ultimate 'High Value Target' (HVT), was three stories tall and approximately eight times larger than any other nearby dwelling. Other key details:

• 12-to-18-foot walls, topped with barbed wire
• Internal walls sectioned off different areas of the compound
• Access was restricted by two security gates
• Closed-circuit cameras positioned around the property
  

Yet bin Laden's "mansion", as it has been characterized, did not have a phone line or internet. The couriers, Afghans brothers named Arshad and Tariq who were also gunned down by ST6, did not report any income and had no visible source of wealth. They also burned all their own trash. Neighbors also reported that the women who were living inside the house spoke in Arabic and not the local dialect.

Assessing Bin Laden's Hideout Strategy & What Did Pakistan Know?

Bin Laden's choice to hide near Pakistani military installations and in a residential community of retired Pakistani officers strikes me as both intriguing and suspicious. Less wise, perhaps, were some of the activities noted above, like burning the trash and not having a phone or internet line.

In short, Bin Laden stopped just short of hiding in veritable plain view. Did his failure to go all the way here do him in? One thing we do know is that the U.S. was only able to locate bin Laden by trailing his courier back to the compound in August 2010, and the whole reason bin Laden had to employ the services of a courier was due to his aversion to phones and the internet.

This location at least gave bin Laden some chance as the first assassination option considered by President Obama, employing B-2 Stealth Bombers, was abandoned due in part to the likelihood of collateral damage.

Bin Laden apparently lived in this compound for the last 5-6 years. This raises very important questions about how much Pakistan, or elements of Pakistan's military and intelligence service, knew about the whereabouts of bin Laden. The U.S. has sent billions of dollars to Pakistan over the past several years to help find and kill people like bin Laden.

Was bin Laden's thinking on where to locate influenced by his correct calculation that the U.S. was unlikely to drop a bomb or conduct a Predator drone strike on this particular location? In turn, was bin Laden expecting a tip from Pakistani intelligence should any planned U.S. Special Forces assault to be attempted?

The Map, Satellite Imagery, & Compound Diagram

From the below maps, sourced from The Atlantic, you can see that it was located very close to a police station.

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And below is the pinned version marking bin Laden's compound (B) and the nearby police station (A).

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Update 1: As a commenter pointed out the exact location of the compound appears to be unclear. Here are the satellite imagery of the compound's surrounding area and closeup from the above Google maps sourced from The Atlantic.

(click to enlarge)

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Update 2: Here's a second Google Map with corresponding satellite imagery of the compound, sourced from the Huffington Post. This location is in nearby Bilal Town, a newer development a couple miles from Abbottabad:

(click to enlarge)

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Update 3: As an astute commenter pointed out, based on an evaluation of these compound photos (which include a daylight image of the scuttled MH-60 Seahawk Helicopter; nighttime footage of the burning wreck here) these previously reported locations are not correct.

Below are the maps for the now CIA confirmed location of bin Laden's compound:

(click to enlarge)

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The following two satellite images appear to be circa 2004-2005.

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This satellite shot is from 2010 and shows some of the other dwellings that sprouted up around bin Laden since 2004-2005 that are clearly visible in recent compound photos.

(click to enlarge)

And here is the diagram, complete with dimensions and other pertinent op information, that the CIA just released of the actual compound.

(click to enlarge)

Fed President Hoenig Opens-up on Why He (in Fedspeak) 'Went Off the Reservation'

Kansas City Fed President & FOMC Member Tom Hoenig

FOMC-member Thomas Hoenig explains why he has been the lone dissenting vote against the Fed's zero interest rate policy (ZIRP), which is coming up on an extraordinary three years.

Link to audio recording include Q&A here, and below is a brief bio:

Thomas M Hoenig is president and chief executive officer of the Federal Reserve Bank of Kansas City. He assumed the role of president on October 1, 1991, making him the longest serving of the 12 current regional Federal Reserve Bank presidents. He is senior member of the Federal Reserve System's Federal Open Market Committee, the key body with authority over national monetary policy in the United States.

Why Isn't Wall Street in Jail?

Good question!

Weekend reading from Matt Taibbi in Rolling Stone here on why so few prosecutions have been brought by the Obama administration against 'main stream' Wall Street. This has left over-the-top ponzi crook Bernie Madoff as the only high-profile financial villain serving time in the pokey.

Johny Depp in Blow

Speaking of Madoff, fellow ponzi-schemer 'Sir' Allen Stanford was recently moved into Madoff's digs at Butner prison. Will the two get a chance to compare notes?

Docudrama filmmakers: there may be a fun movie here. I'm imagining a screenplay set in part at Butner, perhaps featuring Stanford and Madoff as cellmates, with flashbacks to their pre-arrest glory days ala the stylized cocaine caper, Blow.

Podcast: Interview with Michael Lewis, 'Financial Disaster Tourist'

Link to NPR Planet Money podcast featuring Michael Lewis here.

A description of the interview and a few excerpts:

"At bottom, I'm not all that interested in money," Michael Lewis tells us on today's Planet Money. 

"It's peculiar that I've written financial books and worked on Wall Street. ... I'm interested in something else, and I guess that other thing is character and action and the general drift of societies. Money, because people care so much about it ... is this great prism through which to view people."

On the show, we talk about the long arc of Lewis's work. 

In the '80s, he wrote a book about the people who created mortgage-backed securities. Last year, he described people who bet against mortgage backed securities and got rich when they collapsed in the financial crisis. 

In his next book, he'll profile some of the places that got hit particularly hard in the crisis. 

"We're having this global financial crisis. The cause in the various countries is all basically the same thing: it's incontinent credit. It's money washing in at terms that shouldn't be offered, to people who should never be lent money in the first place. ... But in each place, the symptoms are completely different if you look closely."

"So I thought, here we have an opportunity to create a genre: financial disaster travel journalism. We are going to learn about the places through the prism of their financial affairs. They're all subjected to a temptation: a pile of money in a dark room. Do what you want with it. ... They want to do different things in different places. Those are social portraits. They're masquerading as financial pieces."

Video: Translation of Hillary's Egypt Briefing (Spoof)

Video: Exporting Propaganda - China's New Charm Offensive

Spin, manufactured in China

A friendly, gentle depiction of the People's Republic may soon be coming to Americans and Europeans via their television screen and newspapers (see today's International Herald Tribune and its cleverly disguised paid-for-but-looks-like-news insert) .

Yes, this bought and paid-for China is the same country which has banned its citizens from using Facebook, Twitter, YouTube, and most recently Skype. As noted by the NY Times, China's rulers are "obsessed with the threat posed by the Internet".

From the article:

Li Changchun, a member of China’s top ruling body, the Politburo Standing Committee, and the country’s senior propaganda official, was taken aback to discover that he could conduct Chinese-language searches on Google’s main international Web site. When Mr. Li typed his name into the search engine at google.com, he found “results critical of him."

A Chinese person with family connections to the elite (said) that Mr. Li himself directed an attack on Google’s servers in the United States 

In the wake of the overthrow of Tunisia's government, other dictatorships (e.g., Mubarak's monarchy in Egypt) are now following China's lead.

I can only imagine how the Politburo Standing Committee's discussion over China's international image problem went down: "China is the world's greatest exporter, and propaganda works pretty well here, so why not package the two together?"

Twitter vs. Facebook: Which Was a Bigger Factor in Overthrowing Tunisia's Government?

Viva la revolution! (a photoshopped Mark Zuckerberg)

Interesting read over at the Atlantic which builds the swirling debate over just how important a role Silicon Valley tech companies, like Facebook and Twitter, played in the recent overthrow of Tunisia's government.

From the article:

There has been a lot of debate about whether Twitter helped unleash the massive changes that led Ben Ali to leave office on January 14, but Facebook appears to have played a more important role in spreading dissent. 

"I think Facebook played a bigger role in this case," said Jillian York of the Berkman Center for the Internet and Society, who has been tracking the Tunisian situation closely. "There are a lot more Facebook users than Twitter users. Facebook allows for strong ties in a way that Twitter doesn't. You're not just conversing."

The Atlantic article also addresses Facebook's response to attempted hacks, presumably by the notorious Ammar (Tunisia's secret police operation).

From Facebook's Chief Security Officer Joe Sullivan:

"We get requests all the time in a few different contexts where people would like to impersonate someone else. Police wanting to go undercover or human rights activists, say," Sullivan said. "And we, just based on our core mission and core product, don't want to allow that. That's just not what Facebook is. Facebook is a place where people connect with real people in their lives using their real identities."

Anyone still wondering why in addition to Twitter and Facebook, China also blocks its citizens from using YouTube and Skype?

Economic Newspeak: Has Yale's Robert Shiller Seen the Light?

"To me...part of the process of pursuing the inexact aspects of economics is speaking honestly to the broader public, looking them in the eye...and then searching one’s soul to decide whether one’s favored theory is really close to the truth."

-Robert Shiller, Project Syndicate Op-ed January 20, 2011 

Yale Professor Robert Shiller

The above words come from the same Professor Shiller who just a few months ago brazenly argued that our government, when engaging the broader voting public on the "complexities" of 'necessary' bailouts, should employ economic propaganda.

Yves Smith over at Naked Capitalism also took exception when Shiller's November op-ed came out, characterizing the Yale Professor's argument as a justification for Orwellian newspeak.

Shiller previously argued that terms like 'bailout' should be recast as ‘orderly resolutions’ so as to make sure the voting public 'gets it'.

From Shiller's November piece:

When life is smooth, people tend to remain complacent, reflecting confidence in the economy. In times of crisis, such confidence is also vital, even if government can’t absolutely guarantee that it’s justified. 

...well-thought-out framing packages can work. They can help sell crucial intervention packages to people who don’t fully understand the financial system’s complexities.

As I noted in my response to Shiller:

In other words, Shiller is making the argument that it's not only ok, but advisable for the government to be less than frank with voters. During a financial crisis, Shiller argues, this lack of candor is actually in the public's own good.

Putting aside the subject of the ethical responsibilities of public officials for a moment, the first question is would Shiller's recommendation even work?

To help answer that question we can turn to a recent example from early 2008, prior to the apex of the financial crisis. On March 28, 2008, Fed Chairman Ben Bernanke, testifying before Congress about the housing market, made the now infamous false assurance that the subprime real estate crisis was "contained".

There are two possibilities here: either a) the Fed Chairman honestly believed that the Fed's actions had magically put the breaks on the real estate meltdown; or b) he was consciously using propaganda to reassure people, as Shiller advocates.

Regardless of which of these two possibilites is correct, what we do know is that his reassurances did absolutely nothing to prevent the financial crisis, which hit full force later that year in September. Perhaps Bernanke's comment postponed the crisis, but postponement may in fact have made it worse by allowing the problem to further fester under a blanket of false Fed confidence. 

What made Shiller's November words all the more disheartening is that they came from from one of America's most respected and credible academic economists. Professor Shiller hails from Yale University, and he is both a widely read author and creator of the influential Case-Shiller Home Price Index. While Shiller was not one of the academic economists skewered by Charles Ferguson in his excellent documentary film Inside Job, his November remarks certainly made him a deserving target of popular criticism.

Here's to hoping Shiller's more recent reflections indicate an about face in his thinking along with a commitment to speaking clearly and truthfully on economic matters, like taxpayer funded bailouts, with the general public.

Above the Law? All Quiet in the U.S.-U.N. Spy Scandal

U.N. Secretary General Ban Ki-Moon and Hillary Clinton

Some time has passed since the disclosure that U.S. Sate department diplomats apparently engaged in illegal spying on U.N. officials. I say 'apparently' because it does not appear that any further investigation or legal charges are forthcoming.

To recap, State Department Secretaries Hillary Clinton (Democrat) and Condoleeza Rice (Republican) both instructed U.S. foreign service personnel and diplomats to obtain a wide variety of information about U.N. officials, including the following:

• DNA
• Fingerprints
• Iris scans
• Computer passwords
• Credit card numbers
• Personal encryption keys

What Precisely Constitutes 'Spying'?

While I'm not a legal expert on what constitutes 'spying' (which is banned from being performed against the U.N. under international treaty and law), the above laundry list (which once collected by State's 'diplomats' was handed over to the CIA's HUMINT department) sounds an awfully lot like 'spying' to me.

The Formers: U.S. and U.N. Secretaries Rice & Annan

Clinton and Rice signed off on orders instructing diplomats to obtain this type on information "on key UN officials, to include undersecretaries, heads of specialised agencies and their chief advisers, top SYG [secretary general] aides, heads of peace operations and political field missions, including force commanders".

Another angle here is that the U.N. human data collection project, rather than having been carried out by CIA clandestine ops, appears to have been performed by State's foreign service officers and other diplomatic personnel. One of the purported goals of U.S. diplomats is to build relations and trust among foreign nations. What impact has the disclosure that these individuals are engaged in the gathering of the DNA samples of foreign diplomats had on this important function?

Where's the Followup?

I've been waiting to hear an announcement of an investigation, or perhaps at least rumors of an internal State department review. But so far there has not been one peep of anything like this.

Is it possible that the reason behind why no further investigation is that international treaty only outlaws spying agains the U.N. and its officials on U.N. premises? In other words, all U.S. State department spying on U.N. officials took place offsite?

Or, in a perhaps somewhat more conspiratorial vein, is the lack of follow-up due to the fact that the source of the spying information is WikiLeaks? One way to limit the credence of all WikiLeaks disclosures and move the leaks out of the headlines is to not pursue any of the potentially illegal activity disclosed by WikiLeaks. This may also serve as a disincentive to future prospective leakers.

One of the most interesting elements of the the recent WikiLeaks disclosures was the near uniform international condemnation of WikiLeaks and, as far as I could tell, almost complete lack of criticism directed at the U.S. by foreign sovereigns. Perhaps this is simply a case of the pot not wanting to call the kettle black; I have little doubt that Putin's Russia, for example, engages in similar espionage.

Walking the Rule of Law Talk

There are many unanswered questions, but the bottom line for me is this: if the U.S. wants to lay claim to the moral high ground or simply preach the importance of the rule of law to countries such as Russia, China, Iran, etc., then the U.S. needs to 'walk the talk'. 

Keeping mum about whether illegal spying on U.N. officials occurred only hurts the U.S.'s international standing and credibility. Instead there should be some type of investigation so that U.S. citizens, and the world at large, can be confident that U.S. leaders and diplomatic staff respect and uphold agreed upon laws.

China: 2011's Biggest Question Mark

China just shut down Skype, the free/cheap internet phone calling service, by making it illegal.

While attention grabbing, the Skype move is hardly a surprise as Facebook, Twitter and YouTube are already blocked in China, and Google shut down its Chinese servers last year after government pressure.

Its very hard to see how this type of thinking on the part of China's communist party leadership will serve the country's economic interests over the longer run. China economic historians are well aware of how inward turns have worked out for the middle kingdom in the past. During the Ming dynasty, China largely shut itself off from the rest of the world, and the country's subsequent economic development suffered.

While China's technology blocking moves have more to do with the country's longer-term competitive position, two factors are weighing heavily on China's immediate-term prospects:

1. Trade tension between China and the U.S. has been on the rise, leading to talk of a U.S.-China economic war.
   
2. The Chinese real estate market, which according to legendary Enron short-seller Jim Chanos accounts for 60%+ of China's economy, remains in a frenzied bubble even with recent government moves to reduce lending activity through increased interest rates, reserve requirements, etc.

One of the biggest question marks going into 2011 has to be China and whether the country can manage a soft landing, or if in fact the mother of all bubbles will finally burst. If the latter is the case then there will be significant knock-on ramifications for perhaps nearly every investment sector (particularly commodities) around the globe.

On the Ethics of the Banks' War Against WikiLeaks

Should the financial industry, which manages and controls the payments system (which can be viewed as a public good), be able to bar a legal entity like Wikileaks (which has yet to be charged with any crime) from the payments system?

From today's NY Times:

Visa, MasterCard and PayPal announced in the past few weeks that they would not process any transaction intended for WikiLeaks. Earlier this month, Bank of America decided to join the group...the Federal Reserve, the banking regulator, allows this.

But a bank’s ability to block payments to a legal entity raises a troubling prospect. A handful of big banks could potentially bar any organization they disliked from the payments system, essentially cutting them off from the world economy.

Like other companies, banks can choose whom they do business with. Refusing to open an account for some undesirable entity is seen as reasonable risk management. The government even requires banks to keep an eye out for some shady businesses — like drug dealing and money laundering — and refuse to do business with those who engage in them.

But a bank’s ability to block payments to a legal entity raises a troubling prospect. A handful of big banks could potentially bar any organization they disliked from the payments system, essentially cutting them off from the world economy. 

The fact of the matter is that banks are not like any other business. They run the payments system. That is one of the main reasons that governments protect them from failure with explicit and implicit guarantees. This makes them look not too unlike other public utilities. A telecommunications company, for example, may not refuse phone or broadband service to an organization it dislikes, arguing that it amounts to risky business.