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Can You Find A Ray of Light in the Darkness?

By Shlomo Maital  

  In my personal life, I truly believe in optimism and in being upbeat and hopeful. This perception alone is often enough to change reality. It dispels learned helplessness and spurs action instead of despair. 

  But this week, in reading the Financial Times, I cannot recall another time, in the past 40 years, where so much gloom gathered and so much doom threatened.  In fact, in just one issue, Thursday July 26, the FT reported on:  The futility of the Fed’s policy of creating money (nobody’s lending it, nobody’s borrowing it), the stupidity of American farm policy (using corn to feed thirsty cars with biofuel instead of hungry people, helping, together with drought, to make corn so expensive that beef, pork and poultry, which use corn for feed, may become unaffordable); the drought in India, threatening food price inflation; the drought in Russia, threatening to boost the price of bread; the imminent departure of Greece from the euro; China’s slumping economy and property bubble (if China joins the EU and America in stagnation, there is no growth left in the world economy).  We have deep recession in Britain, despite 8% budget deficits.  We have Syria massacring its citizens.  And this is just a start. Everywhere, there is a failure of political leadership.  Politicians do not know what to do. Economists don’t know what to advise.  At a time when economics, capital and technology are global, policy too must be global – but increasingly politics are local, and policy is made through politics. 

    There is comfort in the fact that we live our lives as families, not as countries. Most people are simply getting on with their lives, facing economic challenges and just getting on with life.  Babies continue to be born, couples continue to marry, and life goes on. 

     But, it would be nice if we could see a light at the end of the current dark tunnel of economic depression.  If you see one —   let me know.  

Americans Want Less Inequality..and Half Will Vote for Romney?

Dan Ariely on Wealth and Poverty

By Shlomo Maital   

    America’s distribution of wealth is enormously unequal.  The bottom 40% of the population hold only 0.3 % of total wealth.  The next 40% of the population hold only 15% of the wealth.  The top 20% hold 84% of America’s wealth.   Is this what Americans want?  Is this fair?  No way.  Yet half are willing to vote for the multi-zillionaire Mitt Romney for President.  He says Americans like success.  Sure. But do they love a tilted playing field, where wealth gets passed on from parent to child, where Romney pays far less tax than a middle class working person, where Romney shelters money in the Cayman Islands? Why do half of Americans say they’ll vote for him?  What in the world????

   Here is what an American-Israeli behavioral researcher Dan Ariely found, along with Michael Norton,  as told to NPR’s Chris Lydon:

    “There is a  30 year trend in the U.S. to a society of rich and poor:  Big wealth at top, big debt in the middle, poverty at the bottom.   So, the starting point of our research was the debate, what is the right level of equality?  If everybody is equal: it’s socialistic. If there’s some inequality: People are motivated.  When inequality is too large:  It demotivates. But nobody knows what is the right level of inequality.  Michael Norton and I stepped back and said:  Let’s ask people what kind of wealth inequality they want. 

    “We first asked people what they think is the wealth inequality in the US.  We did a study of 30,000 Americans. A national random sample. Imagine there are five segments of people, bottom 20%, next 20%, next, next and richest 20%. How much wealth do you think is owned by the top 20%?  Bottom 40%? 

     “ On average people said 9% of the wealth  accrues to the bottom 40%.  The actual figure (see graph above):   0.3%.     Top 20%? It owns 84% of the wealth.    America is close to some African countries in equality.  People do not understand this. They think there is far more equality in wealth in America than there is in fact.

    “John Rawls was a famous philosopher.  He used the  “veil of ignorance” – What society would you want to wake up in?  Imagine a society, you knew everything about it…what society would you be willing to enter, in a random place?   If you’re wealthy, you want lots of rich people, if you’re poor, you want the poor to have less..but if you don’t know which you are,  you dissociate yourself from your own situation, because you could be anything.  Create an ideal wealth distribution.

    “We found something hopeful and distressing. People created an ideal wealth distribution behind the veil of ignorance that was very equal, more equal than any country in the world.    We gave them the US distribution of wealth and a distribution of wealth more equal than Sweden and asked:  Which would you choose?  92% chosed the ‘more equal than Sweden’.  Perfectly equal?  NOBODY wants that!  People have a different view of the level of inequality we should have.  But they want to create a society more equal than anything we have on the planet. 

“When we break this down by Republicans and Democrats,  we find almost no difference!   Sweden vs. U.S.?  92% prefer Sweden – both Republicans and Democrats want the same!  Women and men, too.   For Republicans, 90.5% want “Sweden”, Democrats, 93%.  There are tiny differences. But they are incredibly small.

“Harvard Business School?  They wanted the poor to have slightly less money..but even Harvard MBA’s wanted a society more equal than any in the world.

“How do we reconcile this?  We have high wealth inequality but people want much much less wealth inequality.  How come?  Politicians are there to obscure our view of reality.  They’re trying to prevent us from looking at society with fresh eyes.    Politicians are labeling things, “socialism”, anything that helps reduce inequality. In the end Americans want far more wealth equality and fairness than they are given.”    

Why the Fed Is Shooting Blanks

By Shlomo Maital   


   Britain is now officially in recession, and the US is on its way to the second ‘dip’ in its double-dip recession.  EU is hopeless, Asia is slowing and the world is in trouble.

  Facing this,  the Fed’s Ben Bernanke, a top expert on the Great Depression, is trying his best to prevent a repeat of the 1930’s Depression by pumping massive, truly MASSIVE, amounts of money into the American system.  And it just isn’t helping.  Why?

   Simple.  The Fed is shooting blanks.

   The Fed can pump money into the system. But it cannot (unlike China) force the banks to lend the money, nor can it force businesses to borrow it.  Banks have huge losses from asset price collapses and need the money on their balance sheets far more than they need the lending.  Businesses are desperately trying to reduce their debt, in the face of deflation, and there is no way they want to increase it by borrowing.  Small businesses who might like to borrow can’t, because banks are in a panic.  And banks have utterly stopped lending to one another, because, if the other banks are in as bad shape as they know they themselves are in, well – lending to them is a really bad idea.

    And the data:   From 2003-2008,  “excess reserves” (that is, cash banks hold as reserves against deposits and lending, beyond what the Fed requires) was ZERO.  Nada.  Zip.  Why? Because banks make money by lending money, and they want to lend as much as they can to make as much money as they can.

    In 2009, after the Fed’s “quantitative easing”,  excess reserves were $850 b.   Today, they are a staggering $1.5 trillion !   That’s almost a quarter of the entire M2 money supply.   The Fed is pushing on a string.

    Economists have run out of ideas. If interest rates are essentially zero, if money is almost free, if tons of money have been dumped on the banks, if the govt. budget deficit is massive… what more can be done?  

    Feel sorry for Bernanke.  He can see the train coming, he knows we’re on the rails…and cannot figure out what to do about it.  And neither can I. We are shooting blanks at a looming Depression, and cannot find any real ammunition. 

Disaster Economics: Why “Up” is Now “Down”

By Shlomo Maital      


     In physics, matter behaves differently at very high pressure and temperature.  Apparently, in economics, too.

   Writing in the  Financial Times today (July 24), Gillian Tett says “we have entered the world of disaster economics”, where the normal laws of economics move in the wrong direction.  Today, what was “up” is now “down”, and vice versa.

   Tett observes that judging by credit default spreads (a measure of risk), bond markets judge that not only Greek and Spanish bonds are risky, but also German and US bonds.  When bonds are riskier, that should mean that they bear a higher risk premium, i.e. interest rate.  And the higher the yield on bonds, the lower their price.

  Except – that’s not happening.  German and US bond yields have hit multi-year lows, and their price has gone way up.   If risk is up, how come yields are down?  What is going on?

    Tett has a simple explanation.  In normal times, and in normal economics, bond buyers look for a return on their money and seek higher yields.  In abnormal times, like the times we live in now – when it has dawned on the world that there isn’t enough money in all of Germany to bail out Spanish banks, when they fail, not to mention the Italian banks that the failure of Spanish banks will topple, too —  investors are not looking for return or interest, they’re looking for SAFETY of their principal!  And German and US bonds seem safe from default in a global meltdown.  We are seeing an extreme panic and flight to safety, when the laws of economics are suspended. This creates demand for safe bonds, raises their price and lowers their yield, even if they are perceived as riskier day-to-day but safer in case of disaster (global collapse). 

    I find this scary, don’t you?  If the world is built not on money, but on trust, and if fundamental trust is evaporating,  how will the global economy run?  If we don’t trust one another, how will we do business with one another?  And how in the world will lost trust ever be rebuilt?   

Sea Bass: They’re Both Mommy and Daddy!

By Shlomo Maital     

Mommy? Daddy?

  Some of us are mommy’s.  Some of us are daddy’s.  Very very few of us are sometimes mommy’s, sometimes daddy’s.  So, you’ve got to hand it to those sea bass, better known to us as tasty dishes at restaurants.  

   Black sea bass are increasingly rare in the wild, and so are being fish-farmed. Problem is, according to Prof. David Berlinsky, a zoology prof. at U. of New Hampshire, “they have a tendency to change sex unpredictably in captivity”. (Science Daily, 2006): 

   “In the wild, black sea bass are born as females and turn into males at around two to five years old,” Berlinsky explains. “When you bring them into captivity, they change into males more quickly.” Some captive-born fish emerge as males even before reaching adulthood, devoting energy toward reproductive development and away from growth. Such problems make breeding and growing the fish in captivity a tricky proposition.   Berlinsky and his colleagues have discovered that fish are more likely to become males if raised at constant temperatures. But temperature is hardly the only factor involved. Sex ratios and density also come into play. Berlinsky’s team found that females were more likely to change sex when no males were present in the tank. Additionally, the fish were more likely to turn into males when kept in crowded tanks.

   Let’s give those sea bass a round of applause.  When there aren’t enough males around…well, females become males.  Human females just enroll in JDate.  Crowding?  Sea bass females turn into tough males with sharp elbows (or fins).  Human females?  They just use a little more perfume.  Hot and cold flashes? Sea bass stay female. Human females wish they were males. 

    Love those sea bass.  I think they are purposely screwing around with the fish farmers, because, frankly, they don’t love being put in cages.  Free the sea bass!  Any creature capable of being both mommy and daddy, well — they’ve earned their freedom. 

LIBOR is SF – but Not Why You Think It Is

By Shlomo Maital




  My favorite SF (Science Fiction) writers are the late Ray Bradbury (Fahrenheit 451, The Martian Chronicles) and Philip K. Dick (Do Androids Dream of Electric Sheep?).  Bradbury famously said, when asked if he tried to predict the future:  “No! I’m trying to prevent it.” 

   They now have a rival. It is the LIBOR (London Interbank Offered Rate), the rate at which banks lend money to one another. LIBOR is truly science fiction. But not why you think.  Not just because big banks manipulated it (among them, Barclay’s), with the apparent knowledge (as early as 2007) of the New York Fed, headed then by Tim Geitner, who is now US Secretary of the Treasury.     

   No, it’s much more serious.  You see, in order to have an Interbank Offered Rate, you have to have an Interbank Offer – banks lending to one another.  According to The Economist (July 14, p. 55) “banks are lending almost no money to one another”.  Why?  Because they know that if other banks are in as bad shape as they are – it’s too risky.  How bad? We don’t know, because European banks have “marked to market” (written off) only a tiny fraction of their ultimate losses, and we don’t know how much. 

   So LIBOR, even if it is not fiddled, is STILL science fiction.  Indeed, as fast as the European Central Bank pumps money into Europe, the banks pump it back, depositing ECB loans back in the ECB (at zero interest, by the way), instead of lending it to people and to businesses.  (That’s too risky, apparently).   This is why ECB “quantitative easing” has no impact.  There is something called a EURIBOR (euro interbank offered rate), which is even MORE science fiction.  It’s supposed to present lending between one “prime” European bank to another.  Well, there ARE no ‘prime’ European banks, except German ones, and they can borrow at far far lower rates than any other bank in Europe…so the EURIBOR rate is just the German rate, which reflects nothing but, well, Germany.   

    Does this all sound wacky?  Could the weird imaginative brains of Bradbury and Dick have dreamed this all up?  Not a chance.  When it comes to science fiction, you have to hand it to the bankers.  They’re doing their best to ensure that we truly don’t have a future.  

Why Romney Won’t Reveal His Taxes

By Shlomo Maital 

  Writing in  Bloomberg Business Week, Joshua Green offers an interesting explanation about why Republican presidential candidate Mitt Romney refuses to reveal his income tax returns, apart from two years, 2010 and 2011.   He has taken enormous criticism for this, with his secrecy compared to that of the openness of his dad, George Romney, a man who created jobs when he ran Amerian motors (rather than destroyed them, as Romney did at Bain) and who revealed all when he was a candidate.  Here is Green’s theory: 

As a member of the ultra-rich, Romney probably wasn’t spared major losses. And it’s possible he suffered a large enough capital loss that, carried forward and coupled with his various offshore tax havens, he wound up paying no U.S. federal taxes at all in 2009. If true, this would be politically deadly for him. Even assuming that his return was thoroughly clean and legal—a safe assumption, it seems to me—the fallout would dwarf the controversy that attended the news that Romney had paid a tax rate of just 14 percent in 2010 and that estimated he’d pay a similar rate in 2011.

   So, let me get this straight.  Romney is a multi-multi-millionaire.  He’s the richest candidate to run for president.  He has offshore accounts in the Cayman Islands, sheltering his wealth from taxes.  He apparently has Swiss accounts too.  Yet he is still neck-and-neck with Obama in the polls.  Who in the world would even think of voting for a super-rich candidate, raised in wealth, who cannot possibly conceive what it is like to struggle to pay for electricity and food?  Someone who paid no taxes in 2009, when ordinary Americans paid lots of them?   At a time when millions of Americans are unable to make ends meet?  And when Romney represents the party that largely caused this huge mess, not only in America but in the world, by fostering crony capitalism?

    The only explanation is, Obama and the Democrats are doing a truly awful horrendous job of explaining to Americans what their vision and policies are.  The fact that the presidential race is actually so close is to me mind-boggling.   

Banker Cats Guard the Cream…Again!  (It Just Gets Worse and Worse)

By Shlomo Maital  



And you thought the LIBOR-rigging case was scandalous, unbelievable?  Where major banks (not just Barclay’s) rigged the daily LIBOR figure, almost openly, to keep it low, to underestimate bank borrowing costs, to reassure capital markets and make balance sheets look better? (As one cartoonist put it:  Swindle and cheat, so that people will believe in the banks’ integrity). 

   Well try these two additional variations.

  • ·         HSBC, a major British bank, (Hong Kong and Shanghai Banking Corporation), world’s second largest bank, indeed world’s second largest public company, one that has come unscathed through the global crisis,  has now been caught guarding the cream rather badly.

An American Senate subcommittee found the following:  “The investigations found that HSBC, with its headquarters in London, allowed affiliates in countries such as Mexico, Saudi Arabia and Bangladesh to move billions of dollars in suspect funds into the US without adequate controls.  Besides, HSBC in 2009 authorised its affiliate to supply Indian rupees to Saudi Arabia’s Al Rajhi Bank, which, the report said, has links to financing terrorism.  The report also said that Al Rajhi Bank handled IIRO’s ( International Islamic Relief Organisation) “charitable contributions intended to benefit suicide bombers by directing Al Igatha Journal advertisements … in Somalia, Sri Lanka, India, and the Philippines.”

   Now – who actually tries to see that HSBC doesn’t help money-launderers, shipping an estimated $7 b. from Mexico to some really bad places?  Well, it’s….would you believe, HSBC itself? Its own compliance staff.   In fact, its employees in India, a kind of internal outsourcing.   With a huge backlog of transactions, the overworked Indian workers were swamped.  Could it be that HSBC knew this, organized it purposely to avoid excess scrutiny for highly profitable deals?   No, that couldn’t possibly be true.

 ●  Credit default swaps (not swaps at all, but ‘insurance’, called swaps to avoid regulation) are a huge multi-trillion dollar market, unregulated.  When nations can’t redeem their bonds, the CDS pays up, billions of euros or dollars.  Who decides that nations are in default?  Who decides that the banks get paid billions and billions in credit default insurance?   Well, it’s a shadowy body called the “Determinations Committee of the International Swaps and Derivatives Association”. And, who are they? Who are the members? 

  You guessed it.

  The major banks, and their traders and dealers.  They decided that Greece was in default, after the recent ‘haircut’ reducing Greek debt in return for EU cash.   It is not at all clear that this in fact was a default. 

   The banks themselves decided if the banks should be paid the ‘insurance’. 

    There is nothing fundamentally wrong with capitalism. There is a great deal wrong with crony capitalism where the fat cats guard the cream.  This isn’t capitalism at all.  It’s simply corrupt.  And it is taking a very long time to clean the filthy stables, with no Hercules in sight. 

Political Leaders: Stop Screwing Our Youth!

By Shlomo Maital


It is widely agreed that our political leaders, all over the world, are screwing up badly, on the crackpot advice of economists.  Europe is in recession, it is spreading to America and elsewhere, and no solution is in sight. 

  With  such short-term woes, it is easy to lose sight of a more serious long-term problem.  We are screwing our youth.  If the political leadership of any country were to define a mission statement (why we exist), it should always include, near the top, “building opportunities for the younger generation”.  There seems to be no such mission, and even if there were, politicians are everywhere destroying such opportunities.   Look at these youth unemployment rates: Spain 45%, Greece 49%, Sweden 30%, Ireland 35%, Finland 25%, U.S. 20%, Eurozone 22%.  And those are vast underestimates – because faced with no jobs, many youths simply do not even bother to look for one, and hence are not included in the labor force. And the best and the brightest, those who can, get on a ship or plane and leave.

   New research by Harvard U. political scientist Robert Putnam (remember “Bowling Alone”, about growing fragmentation of society) reveals:

►    “…. the children of the more affluent and less affluent are raised in starkly different ways and have different opportunities. Decades ago, college-graduate parents and high-school-graduate parents invested similarly in their children. Recently, more affluent parents have invested much more in their children’s futures while less affluent parents have not.”  [See David Brooks’ NYT Op-Ed, July 9]. 

 ► Over the past decades, college-educated parents have quadrupled the amount of time they spend reading “Goodnight Moon,” talking to their kids about their day and cheering them on from the sidelines. High-school-educated parents have increased child-care time, but only slightly.

►  Over the last 40 years upper-income parents have increased the amount they spend on their kids’ enrichment activities, like tutoring and extra curriculars, by $5,300 a year. The financially stressed lower classes have only been able to increase their investment by $480, adjusted for inflation.

► Putnam writes: “It’s perfectly understandable that kids from working-class backgrounds have become cynical and even paranoid, for virtually all our major social institutions have failed them — family, friends, church, school and community.” As a result, poorer kids are less likely to participate in voluntary service work that might give them a sense of purpose and responsibility. Their test scores are lagging. Their opportunities are more limited.  

► Richer kids are roughly twice as likely to play after-school sports. They are more than twice as likely to be the captains of their sports teams. They are much more likely to do nonsporting activities, like theater, yearbook and scouting. They are much more likely to attend religious services.

   Our worthless politicians are indeed addressing the youth issue – they exploit it, to seek voters and constituencies, rather than address it, to ameliorate it.  As Brooks notes:  “Political candidates will have to spend less time trying to exploit class divisions and more time trying to remedy them — less time calling their opponents out of touch elitists, and more time coming up with agendas that comprehensively address the problem. It’s politically tough to do that, but the alternative is national suicide.” 

How Much Money Do You Need? Less Than You May Think

By Shlomo Maital


  Mother Teresa…

  New research by Elizabeth Dunn (UBC) and Michael Norton  (Harvard),  (“Happy Money: The Science of Spending”), about the link between money and happiness,  is summarized in a recent (July 7) Op-Ed in the Global New York Times. 

  Here are their main findings:

  •  Using Gallup data collected from almost half a million Americans, researchers at Princeton found that higher household incomes were associated with better moods on a daily basis — but the beneficial effects of money tapered off entirely after the $75,000 mark.
  • ·         In research we conducted with a national sample of Americans, people thought that their life satisfaction would double if they made $55,000 instead of $25,000: more than twice as much money, twice as much happiness. But our data showed that people who earned $55,000 were just 9 percent more satisfied than those making $25,000.
  • ·         we teamed up with the developmental psychologist Kiley Hamlin and gave toddlers the baby-equivalent of gold: goldfish crackers. Judging from their beaming faces, they were pretty happy about this windfall. But something made them even happier. They were happiest of all when giving some of their treats away to their new friend, a puppet named Monkey.  …. rather than focusing on how much we’ve got in our bowl, we should think more carefully about what we do with what we’ve got — which might mean indulging less, and may even mean giving others the opportunity to indulge instead.


Among the many wrongheaded ideas we economists have dumped on the world, is the worst one of all – that the more money you have, the happier you are. Over the years, I’ve taught people with a whole lot of money, and many were very unhappy, because they sacrificed their family life for the money and ended up realizing they made a really really bad deal.

 By the way, the optimum amount of money in the U.S. is very close to average household income.

  So if you’re seeking happiness, look for it in a different place than the economists counsel – in giving some of your money away, wisely,  to those who lack enough of it, rather than using it to buy more needless junk to stuff our homes and closets with. 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
July 2012