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What We Read Today 29 January 2016

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

This feature is published every day late afternoon New York time. For early morning review of headlines see "The Early Bird" published every day in the early am at GEI News (membership not required for access to "The Early Bird".).

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Topics today include:

  • Subprime Crisis Revisited

  • The Fed Caused the Financial Crisis

  • The Fed Didn't Cause the Financial Crisis

  • Study of Causes of the Financial Crisis

  • End of Growth

  • Fed Hikes in 2016 Now Less Likely

  • Trump, Sanders and Iowa

  • China's January Stock Crash

  • Are We Headed for a Global Crash?

  • And More

Articles about events, conflicts and disease around the world

Global

U.S.

  • Odds of Fed Hike This Year Are Practically a Toss-Up After BOJ's Surprise Move (Bloomberg) In the bond market’s view, the chance of a Federal Reserve interest-rate increase this year is practically a toss-up after the Bank of Japan’s surprise policy move.  Yields on sovereign debt fell worldwide after BOJ Governor Haruhiko Kuroda introduced negative interest rates for some bank reserves to support the world’s third-biggest economy. Derivatives traders see less than a 60 percent shot that the Fed will raise its benchmark even once this year, let alone the four quarter-point increases that policy makers projected in December.

rate.hike.probability.2016.jan.29

  • Why a Trump Victory in Iowa Would Matter So Much (The New York Times)  Ted Cruz was thought to be an easy favorite in Iowa. Now it’s not nearly as clear.  He has trailed Donald Trump in 10 of the last 12 surveys in Iowa, and prediction markets now give him just a 31% chance of winning the state. As recently as a couple of weeks ago, Mr. Cruz had an edge in 8 of the prior 11 polls, with a 79% chance to win.  But the increasing possibility that Mr. Trump will win the state,  in no small part because of an improbable alliance with the party’s establishment,  makes Mr. Trump’s path to the nomination far more plausible than ever before.

  • Donald Trump And Bernie Sanders' Voter Problem (Forbes)  The two outsiders depend on voter groups with a history of voting apathy (low turnout).  Trump's base is "non-educated whites" and Sanders support is greatest among "millenial voters, ages 18 - 35".  Other candidates have more backing from party faithful with much higher voter participation levels.  See also next article.

  • Wintry-looking Iowa caucus intensifies turnout fears for Trump and Sanders (The Guardian)  How will potential Monday night caucus goers rspond to a snowstorm?  Sanders plans to bus college students home for caucuses - snow could cancel some of those trips.

  • Bernie Sanders’s Big Turnout Problem: He’s Reliant on Infrequent Voters (The New York Times)  It’s common to talk about the turnout challenge facing Donald Trump, who clearly fares well among those who don’t vote regularly. But the candidate with the biggest turnout challenge in this cycle is probably Bernie Sanders.  Mr. Sanders appears to be extraordinarily dependent on turnout from infrequent voters, even more than Democrats have recently been in general elections, and maybe more than Barack Obama in the 2008 Iowa caucuses.  That is mainly because his support is so strong among the young.

  • How the Iowa Caucuses Work (Bloomberg)  Click on link to see good 4 minute video.  (Sorry, no code available to show video here.)

  • Voter Registration Doesn’t Point to Huge Iowa Surge (The New York Times)  This year looks nothing like 2008.

iowa.voter.registration

Germany

China

  • China's Biggest Drop "Since Lehman" Is Worst.January. Ever (Zero Hedge)  Thanks to BoJ's global "float all boats" NIRP-tard-ness, Chinese stocks avoided the headline of "worst month in 21 years" by rallying above the crucial 2,667 level (for SHCOMP). However, January's 23% plunge is the worst month since October 2008 and is officially the worst start to a year in the history of Chinese stocks.  

Click for larger image at Zero Hedge.

Other Economics and Business Items of Note and Miscellanea

  • Subprime Reasoning on Housing (David Beckweith and Ramesh Ponnuru, The New York Times)  The authors attribute the Great Recession the the Fed maintaining tight money policies from late 2007 until a few weeks after the fall of Lehman Brothers in September 2008.  The recession would have been quite ordinary, they say, if the Fed policy had been different.  See next article.  One of their statements which is offered to explain why subprime mortgages were not a proximate cause of financial crisis and the Great Recession is the observation that only "roughly 6 percent of banking assets were tied to subprime mortgages in 2007".  Econintersect:  With most major investment banks leveraged at 30:1 and more (Fannie and Freddie were leveraged 100:1), if "only" 6% of assets are diminished in value by half the highly leveraged institutions are bankrupt.  The authors seem not to have considered this.   Their final statement:

The Fed of 2008 feared inflation too much and recession too little. It placed too little weight on market expectations about future conditions and on how its behavior affected those expectations. If these mistakes go unrecognized, they could well be repeated.

  • Confusion About the Financial Crisis Won't Die (Barry Ritholtz, Bloomberg)  Ritholtz accuses the authors of the preceding article of many errors in analysis, including:

    • Assumption that a single factor was predominant in causing the financial crisis;

    • No recognition that causation is "nuanced" and "correlation can be confusing";

    • To attribute the financial crisis to the bursting housing bubble is "to confuse cause and effect";

    • The assertion that there was uncertainty about value of MBS (mortgage backed securities) is incorrect - the values were "unknown" because "these mortgages were going into default in record numbers" - constituting "a basic misunderstanding of mathematics".

    • The argument of Beckweith and Ponnuru is an attempt to explain "the financial crisis through the lens of ideology". 

  • The Origins of the Financial Crisis (Brookings)  This is an excellent thorough examination of the financial system during the years 2007 - 2008.

  • Economic Growth Isn't Everything (Bloomberg)  Noah Smith argues that economic growth and human happiness are not necessarily related (although negative growth, Econintersect would argue, is likely to reduce overall happiness).  He discusses the thesis of Robert Gordon's book:  The Rise and Fall of American Growth.  The essential theme is that technology driven growth is running out of steam because the easy things have been done.  As a result future growth will be much slower than we have seen over the last century or more.  Smith thinks that there is more to slower economic growth than just the technology story - he says that governance is also a factor limiting growth.  His example is the growth of South Korea which can be compared to North Korea.  His comment is:  "You can only transition from being North Korea to South Korea once."

  • Economics Might Be Very Wrong About Growth (Bloomberg) Has the world entered a period in which economies simply won't grow at the rate they once did? Radical as the thought may seem, it might not be radical enough. For two decades now, a lesser-known group of mostly German economists has been making a more extreme argument: that the standard model of exponential growth -- in which an economy can be expected to expand by a given percent every year, no matter how big it gets -- is fundamentally flawed. Rather, these economists claim that while exponential growth fits some young economies, mature economies tend, as a rule, to grow much more slowly -- in a linear way, meaning that the percentage growth rate would constantly decline. For a new study supporting this hypothesis see Do Mature Economies Grow Exponentially? (PDF, Cornell University Library). 


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