Discussion of Eurozone breakup and default moves to the front burner

Charles Dumas of Lombard Street argued in a letter to the Financial Times this morning that further austerity would be "immoral" while Miller and Skidelsky say that Keynes would now be arguing in favor of default over depression. What was unthinkable two months ago is now on the front burner and will soon be accepted wisdom.

Profiles in Carnage: Luc Coene, Gov. of the Central Bank of Belgium

A refreshingly modest man, Luc Coene says that Greece may leave the Euro or stay; there is nothing central bankers can do about it: "But of course, if one member decides it no longer has a shared interest in being a member [of the euro], you must allow them to get out." Euro zone growth: "This is basically a crisis of confidence. . We [central banks] cannot stimulate the economy as such." Coene may be the only above-average central banker in the world.

JPM's trivial losses: too big to understand

JP Morgan has announced it has lost about $2 billion in its hedging portfolio. This is about 1.1% of its $183 billion of equity capital and is inconsequential in terms of the soundness of the bank. The problem is that the numbers are big; in fact, too big for the average person to understand how small they are. Let's reduce the scale. Our local bank, the Hingham Institution for Savings, is very sound and has $85 million in equity. A loss proportional to that of JPM would be about $900,000, which is 65% of the CEO's salary. Unfortunate, but not that important even for shareholders, let alone taxpayers. The problem is really one of management scale. I would estimate that Jamie Dimon weights around 200 pounds, about the same as the CEO of the Hingham Institution for Savings. Dimon would, however, have to scale up to 43,000 lbs to be big enough proportionally to manage JPM. JPM is too big for Dimon, as now proportioned, to manage.

`The Laughter Curve: The funny thing about California's growing deficit

Governor Brown just announced that the state's budget deficit for the fiscal year was likely to be $16 billion rather than the $9.2 billion he projected in January (NYT, May 13, 2012) The main culprits are lower-than-expected individual and corporate income tax receipts and, to a lesser degree, faster than budgeted growth in expenditures. The funny thing is that units of economic activity are having smaller tax revenues associated with them. The solution proposed by Gov. Brown? Higher taxes, of course.

The world's central bankers: Profiles in Carnage

We already discovered that both Ben Bernanke and Mervyn King were well below-average. To this elite group we must now add their Spanish counterpart, as revealed in today's FT: "Vicente Martinez-Pujalte, economy spokesman for the ruling Popular party, criticised Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, for failing to identify the problems among Spain’s banks in his role as their supervisor. “There is a governor of the Bank of Spain who, despite being able to count on some magnificent professionals, has not done a good job,” Mr Martinez-Pujalte said in an interview with Madrid regional television."

Perhaps we should compile a book with each chapter devoted to the contributions of one of these leaders. We could all it Profiles in Carnage, or something like that.

Gotcha! Malawi delinks the kwacha

Malawi's new president Joyce Banda has ended the link of her country's currency, the kwacha, to the dollar. Like forward-thinking authorities all over the world, Banda is striving to achieve a valueless currency. The kwacha will now fluctuate in a relationship to other currencies to be known as "the banda."

Even the best central bankers are below average

One of the world's greatest central bankers, Sir Mervyn King of the Bank of England, is, in fact, an idiot, according to the Financial Times. This morning the FT had a special section on his reign in which they commented: Mervyn King was confident as he celebrated the 10th anniversary of Bank of England independence at the Royal Bank of Scotland five years ago. The economy was sound, the governor believed the risk to financial stability “appeared to be low” and lauded BoE independence as “the dramatic constitutional change” that convinced financial markets that Britain would run a stable economy. Life at the BoE was sweet. Five years on, Britain’s economic and financial stability has hit the rocks. Yet the BoE has emerged as the big winner of the crisis. Legislation to make it one of the most powerful central banks in the advanced world is passing through parliament. And its governor received not just a knighthood in 2011 but the highest form of that award, the Knight Grand Cross. How can so many of the BoE’s intellectually powerful figures have misdiagnosed Britain’s economy so badly? How can the country feel secure it will not happen again? And did Sir Mervyn’s personal style – dominating the BoE – contribute to the crisis? The study from the two economics professors that I previously sent you establishes that the distribution of human ability has fat tails, There are outliers at both ends of the spectrum. In fact, the ability of the most able is so high relative to the others that the great majority of people are below-average. This, according to the FT, applies to central banks as well as to athletes. Sir Mervyn is one of the world's best central bankers but he is still below overage. It one uses a reference population of not only living but of all central bankers who have ever lived, it is likely that all living central bankers are below average. Q.E.D. These are parlous times.