September 15

"In theory there is no difference between theory and practice. In practice, there is." Yogi Berra.

The fair. Tim Duy, Fed Watch.

A man takes his son to the county fair; the lights and sounds of the amusement rides are like a magnet to the boy. The boy, however, is penniless. His father, seeing the longing in his son's eyes, hands the boy a dollar for the rides, but quizzically adds "if it looks like you are about to have any fun with that dollar, I will take it back from you." The boy is puzzled. First, a dollar only buys three tickets, and the least expensive ride is four tickets. Plus, Dad said he would take the dollar back if he went to buy tickets. So what is the point of even trying to buy any tickets?

Consequently, the father and son stand at the edge of the midway, the father wondering why his son simply stands there while the son wonders why his dad doesn't want him to have any fun. They are soon joined by the boy's grandfather, who, assessing the situation, says that the father should never have given the son a dollar in the first place. "He will just buy candy, which will cost you more later when you have to take him to the doctor to treat diabetes." The father neither agrees or disagrees. Along comes a trusted uncle, who says to give the boy another dime, but "then if he looks like he will have any fun, take back a quarter."

The grandfather and uncle start bickering, loudly, in public, about what to do with the boy and his dollar. Soon another uncle rushes into the fray, proclaiming it is pointless to give the boy a dollar because all the workers are already busy helping other fairgoers. "He can't buy anything anyway, and if he tries, he will just drive up prices for all his cousins." The discussion becomes increasingly heated, drawing the boy's cousins away from the rides. The lights and noise of the fair fade as lines dwindle and the rides grow silent.

All the while, the confused boy is wondering why his father just stands there, refusing to criticize the grandfathers and uncles even as the argue increasingly silly positions. Finally, the father, realizing the boy's confusion, turns to him and says "Reaching consensus in the family is always more important than the fair." The arguing continues as employees begin to turn off the rides, one by one.

This, I believe, is an apt analogy of the current state of monetary policy. A policy that is supporting disinflationary expectations simply because it lacks a credible commitment to any other outcome.

more at the link

Debating the flat earth society about hyperinflation. Mish.

with the new Basel III rules the talk of the week, here's some amusement:

What is a capital standard? Deus ex Macchiato.

note: not that we're concerned here in Canada about the capital ratios, given that our banks are all in good shape, but, more generally, any changes in capital ratios are totally irrelevant if assets are over-valued; if you're not sure the assets are valued properly, what good are any ratios?

for much more, see Capital can't be measured, by Steve Waldman, in which he says:

For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.

what's more, what if you can't trust not just the accounting but the accountants? remember LEH, which (i), as noted in Waldman's article, reported 11% tier one capital ratio just 5 days before it went BK; and which (ii) said it had a $32.5 billion liquidity pool, which, it turns out, they overstated by just a measly $30 billion; and which (iii) was window-dressing its books by shifting $50 billion of assets off and back on with "Repo 105" (BoA also manipulated its quarter-end books; & GE admitted in 2009 to cooking its books; and its now being sued again)

and, with FASB letting companies do whatever they want, has there been any evidence of improvement in accounting practices?

speaking of bank rules:

William White says getting tough on banks may not hurt economy. naked capitalism

Will the Basel III bank regulations change anything? Washington's Blog.

The Empire strikes back. Avinash Persaud, voxeu.

I haven't read this yet, so don't know for sure that its worth recommending, but, like Hussman and Grantham and Hoisington, etc., Howard Marks' musings are usually worth the time.

other fare:

How much is left? The limits of earth's resources, made interactive. Scientific American.

who are the terrorists? American military practice has been to indiscriminately kill Iraqi civilians by randomly firing bullets in a 360 degree circle anytime that an I.E.D. hits a U.S. soldier

If, Rudyard Kipling (hat tip to Rosie who quoted the first few lines in one of his recent market musings)