Eurosceptics remedial education class 1

Eurosceptics remedial education class 1

via Willem Buiter's Maverecon de Willem Buiter le 08/11/08

If I got a pound - even the current rather devalued pound - every time an English eurosceptic (it's almost always an English eurosceptic, hardly ever a Scottish, Welsh or Northern Irish one) utters something utterly insane and hilariously wrong about the EU, the euro area or the euro, I would by now be rich enough to count Peter Mandelson among the regular visitors to my yacht.

Unfortunately, if complete nonsense or an outright falsehood is repeated often enough, it tends to become part of the mental furniture of the public. This would be unfortunate, because now more than ever, it is essential that the UK give up its opt out from the third stage of Economic and Monetary Union and join the euro area as soon as possible. I have therefore decided to use this blog to expose and denounce the half-truths, outright lies and nonsense promulgated by the eurosceptic media in the UK. This is the first of what could become a long series of remedial education classes for eurosceptics.

My target today is Neil Collins' column in the November 6, 2008 Evening Standard, London's only remaining evening paper (not counting the two free rags). I will quote him at length so he can do himself an injustice:

"IS BOND MARKET TELLING ITALY ITS NUMBER'S UP?

If you're thinking of tucking away a few euro notes in case the pound melts down and you can't afford to cross the Channel, look at the numbers on the notes first. If they start with an X, and the digits of the serial number add up to a number ending in two, hang on to them. These are good, solid German euro notes, worth their face value. If they begin with S, with digits that add up to a number ending in seven, spend these first. They're Italian euros, and with luck they won't stand at a discount in Europe's shops, or at least not yet.

If you think this is fanciful, look at the chart above. It shows the yield on 10-year Italian and Greek debt, less the return on the equivalent German government bond. I wrote last year that the risk of Italy falling out of the euro was underpriced at around 32 basis points (0.32 percent a year) and now the markets are waking up to the danger."

The chart, not reproduced here, does indeed show the widening spreads of 10-year Italian and Greek government debt over German government debt (Bunds). On Friday, November 7, these spreads were 1.40% for Greece, 0.92% for Italy and 1.04% for Ireland. As the government securities in question are denominated in the same currency (the euro) and are very similar in all respects except for the identity of the issuer, these spreads reflect differential sovereign default risk and differences in liquidity vis-a-vis Germany.

(more…)

Sur le financement de la recherche médicale

Crestor Doesn't Really Cost $500,000 Per Life Saved

via Beat the Press le 11/11/08

USA Today reports the results of a new study that indicates that by providing for the widespread use of the cholesterol lowering drug Crestor, many more deaths can be prevented. The article reports that the cost is $500,000 per life saved.

This actually misrepresents the cost to society. The vast majority of this cost is not the cost of producing and distributing additional doses of Crestar. Almost all of this cost is the economic rent that the manufacturer will earn as a result of its patent monopoly. The actual cost of producing the addition drugs is probably not more than $5,000 per life saved.

While the patent system finances research into the development of new drugs, it is an extremely inefficient mechanism for supporting research. It would be helpful in an article such as this to be clear on what the real costs to society would be of more widespread use of Crestar, if the study's results prove accurate.

--Dean Baker

The Onion: Our long national nightmare . . .

The Onion: Our long national nightmare . . .

via The Big Picture de Barry Ritholtz le 05/11/08

A pretty good Onion headline: Nation Finally Shitty Enough To Make Social Progress:

Although polls going into the final weeks of October showed Sen. Obama in the lead, it remained unclear whether the failing economy, dilapidated housing market, crumbling national infrastructure, health care crisis, energy crisis, and five-year-long disastrous war in Iraq had made the nation crappy enough to rise above 300 years of racial prejudice and make lasting change.

"Today the American people have made their voices heard, and they have said, 'Things are finally as terrible as we're willing to tolerate," said Obama, addressing a crowd of unemployed, uninsured, and debt-ridden supporters. "To elect a black man, in this country, and at this time—these last eight years must have really broken you."

Added Obama, "It's a great day for our nation."

Heh heh . . . That is, unfortunately, only a sleight exaggeration as to the landscape. Of course, for wit, prescience, and humor, nothing beats the Onion's 2001 pre-inauguration headline:

Bush: 'Our Long National Nightmare Of Peace And Prosperity Is Finally Over'

"My fellow Americans," Bush said, "at long last, we have reached the end of the dark period in American history that will come to be known as the Clinton Era, eight long years characterized by unprecedented economic expansion, a sharp decrease in crime, and sustained peace overseas. The time has come to put all of that behind us."

A classic: So witty, so foresighted . . .

&

"Trapped in the New 'You're on Your Own' World"

"Trapped in the New 'You're on Your Own' World"

via Economist's View de Mark Thoma le 04/11/08

This is the start of a long essay by Robert Solow on the need for social insurance that is disguised as a book review:

Review of Peter Gosselin's High Wire: The Precarious Financial Lives of American Families, by Robert M. Solow, NYRB: When the Bush-Cheney administration proposed to replace Social Security with a system of individually accumulated, individually owned, and individually invested accounts, my first thought was that its goal was to take the Social out of Social Security. It took a few minutes longer to realize that it also intended to take the Security out of Social Security.

That attempt failed. In recent years, however, a mixture of public and private policy decisions and impersonal market developments has had the broad effect of shifting many financial risks from established institutions, including even society at large, to individuals who are unable to cope with them in an adequate way. Information may be impossibly difficult for citizens to process; or else the basic information may not be available to individuals or private groups. Sometimes the scale of the possible bad outcomes may be overwhelming. Sometimes the appropriate insurance market cannot function or just does not exist. The result is that individuals and families can be the casualties of situations that once would have been handled by a more centralized and more bearable allocation of risks.

The current turmoil in credit markets and the recession that is sure to follow are likely to drive this trend further. Banks, insurance companies, and other financial institutions have seen too many risks go sour. They will be more determined than ever to push further risks onto those needy borrowers who are too weak and too ignorant to bargain hard. Families, small businesses, and other borrowers of last resort will be under great pressure. ...

He ends with:

The standard argument for leaving all the responsibility and decisions to the individual in the free market is that, in appropriate circumstances, that is the route, and maybe the only practical route, to economic "efficiency." Any interference is a "distortion," and the consequence of such distortion is that the economy produces less than it could. (A more up-to-date version is that messing with the atomistic market tends to cripple "innovation," but we actually know little about how that works, in either direction.)

One standard counterargument is that the circumstances are not always appropriate. The classic example is that private economic activity, for instance, the burning of coal or oil in furnaces or cars, may damage everyone's environment by emitting carbon dioxide and changing the climate. In those cases, and there are many, market prices give the wrong signals; regulation or taxation or subsidization is justified precisely to restore efficiency. ...

But efficiency is not the issue here, at least not the main issue. The transfer of risk from social and private institutions to individuals transfers a burden, mainly from the strong to the weak. That is primarily an issue of equity. It will surely become more urgent in current circumstances, perhaps urgent enough to be seen as a central political issue. Suppose that the best way to relieve that burden is by sharing the risk through universal social insurance. The premium then has to be a tax, a tax on work or enterprise, or some productive activity, and such a tax is a distortion, a source of inefficiency, a true cost to society. What then? I know what Gosselin would say: a society that won't pay a small cost to preserve equitable and fair treatment of, among others, the sick, the old, the unemployed, and the victims of natural disaster is not much of a society. Is that a minority view? [...read more...]

The Bank Capital Mirage

The Bank Capital Mirage

via Paul Kedrosky's Infectious Greed de pk le 23/10/08

The following more or less supports what some have been saying for a while -– that major banks in the U.S. and the U.K. will end up being entirely nationalized before this crisis is over –- but it's still a striking way of looking at the data. The gist: Government recapitalization and other fund-raising has largely been in service of banks' prior subprime losses, while corporate and consumer loans are just starting to hit bank balance sheets. It won't take much to tip banks over into insolvency again.

[via Bloomberg]

Bailing Out Homeowners: What Does It Mean?

Bailing Out Homeowners: What Does It Mean?

via Beat the Press le 21/10/08

David Leonhardt has an interesting column in the NYT discussing ideas for bailing out homeowners. He could have gone much further in his analysis if he asked what bailing out homeowners means.

As everyone should know now, the basic problem is that tens of millions of people (urged on by bankers, financial advisers, economists, and politicians) bought homes at bubble inflated prices. The bubble is now bursting so tens of millions of people now live in homes that are worth substantially less than what they paid, and in most of these cases, much less than what they owe on their home.

In this context, "bailing out homeowners" can have three obvious meanings:

1) It can mean protecting homeowners and banks from the loss they incurred from the fall in their home's value;
2) It can mean protecting them as homeowners, by allowing them to get mortgage terms that allow them to stay in their homes; or
3) It can mean allowing them to stay in their homes as tenants, if they can't afford a mortgage workout at the current price.

It would be difficult to argue on either moral or economic grounds for the first type of bailout. Homeowners would not share any capital gains on their homes with the general public, nor would the banks share their profits. It is difficult to see why the taxpayers should be asked to pick up their losses.

Some prominent economists, like Alan Blinder (who is mentioned by Leonhardt) have argued for some sort of house price support program, which presumably would be comparable to a farm price support program, to try to keep house prices at bubble-inflated levels. However, such plans make much less sense economically than farm price support programs. (Blinder also called Alan Greenspan the greatest central banker of all-time back in 2005.) Hopefully, this sort of bailout for homeowners will not go far.

2) The second type of bailout focuses on workout arrangements that allow homeowners to stay in their home as homeowners. This approach centers on forcing the banks to eat most or all of the price decline associated with the bursting of the bubble. If the homeowner really can't absorb the loss, which will be true in many cases, then banks will have little alternative to eating the loss. Even if they foreclose, the bank will not be able to resell the home at a bubble-inflated price. In many cases, a workout involving a write down to current value will be the best route for the bank as well.

While the government can encourage such workouts, there is an inherent problem that if it makes workouts too easy, then people who can afford to eat some of the loss opt to instead pass the losses onto the banks. This becomes a concern for the public, and not just the banks, if the government then has to cough up money to keep the banks alive, as is the case at present.

3) The third type of bailout keeps people in their homes as tenants, but allows the bank to take ownership of the house. This bailout has the benefit of providing housing security to homeowners without giving them any real windfall. In other words, they have no real reason to lie about their economic condition to benefit from it. After all, they will still end up losing ownership of their home. (Actually, rather than become landlords, many banks may opt to do workouts, if throwing homeowners out on the street is not an option.)

This is also by far the most simple route to deal with administratively, since it can be put in place by just changing the foreclosure laws. It requires no new bureaucracy and no taxpayer dollars. The biggest obstacle is that the same financial advisers, economists, and politicians who blindly pushed homeownership even in the middle of a housing bubble still can't think about renting as a serious housing option.

One point on which it should be possible to agree is that we should want the bubble to deflate as quickly as possible. While many economists have hugely exaggerated the problem caused by deflation (who cares if prices are rising 0.5 percent a year or falling 0.5 percent a year?), there is a real problem associated with falling house prices. Declining house prices mean that the people who buy homes in the current market will see a loss on their home. If they can't absorb this loss, then the bank that makes the loan (or whoever holds it) will absorb the loss. Rather than a program of house price supports, the country would be best served by a crash the bubble policy.

The big problem in this story is that the folks who somehow could not see the largest housing bubble in the history of the world are still running economic policy. Unlike custodians and dishwashers, economists are not held accountable for their job performance. For this reason, we should expect many tough times ahead.

--Dean Baker

The Great Crash of China

The Great Crash of China

via Paul Kedrosky's Infectious Greed de pk le 19/10/08

I'll confess to being something of a (short-term only) sino-bear, so this piece from the Far Eastern Economic Review a few weeks ago on China's looming economy troubles perhaps over-fits my biases, but it's still worth reading. The gist: A combination of capital misallocation, non-performing loans, an over-rapid forced transition to high value-added manufacturing, a post Olympics malaise, a collapse in the domestic stock market, and a recession in its main export markets mean that China is going to hit the economic wall sooner and harder than its many supporters expect.

By the end of 2007 almost half of China's GDP growth was attributed to exports and government consumption, a dramatic reversal from 2003 when growth was dominated by investment and private consumption.

While savings rates have been traditionally high, immense wealth has been invested in the stock market and real estate. The Shanghai index lost two-thirds of its value since its peak in mid-October 2007 and the Hang Seng is down over 50% from its peak a year ago.

While fixed asset investment may be rising, one-third is continuing to pour into the real-estate sector (up 29% year-on-year) despite vacant commercial floor space in China rising by 6.1% at the end of July (the latest month for available statistics). Real estate prices are experiencing their slowest growth in 18 months and new home prices in Guangzhou and Shenzhen have actually declined. Meanwhile growth in new car sales, while still robust, is slowing.

Not surprisingly, consumer confidence, according to official Chinese statistics, is drifting downwards and Western ratings on Chinese commercial banks, the holders of unused commercial real estate, are being lowered. Those on the cusp of entering the middle class are faring poorly as tens of thousands of small and medium sized enterprises go bankrupt.

Guangdong Province alone, the heart of China's low-cost manufacturing base, has seen half of the shoe manufacturing industry close shop (over 2,200 factories) this year.

More here.

Perhaps unsurprisingly, this piece has sparked a great deal of (often emotional) debate, including here and here and here.

Charlie Munger: Leash and Collar Wall Street

Charlie Munger: Leash and Collar Wall Street

via naked capitalism de Yves Smith le 14/10/08

The backlash is starting to get serious. It is one thing for the man on the street to fulminate about the excesses of financiers. And even those who try to harness that anger find themselves checked. John McCain, who has said that he is going to fix the economy by (among other things) going after "Wall Street corruption" is having difficulty filling his New York fundraisers.

But it's when people in or close to the financial services start calling for reform that you know the tide is turning. In a Forbes interview, Jamie Dimon and Felix Rohatyn (storied top M&A banker for two generations, also led the restructuring of New York City's finances in its fiscal crisis) do an able job of singing from the reform hymnal. But Charles Munger, long-standing partner of Warren Buffett, calls for root and branch reform. If other prominent Main Street executives fall in with Munger, we might see the banking industry restored to its proper role, that of a support function to commerce.

From Forbes (hat tip reader Steve):

Even more radical is Berkshire Hathaway's vice chairman. Munger wants Wall Street balance sheets reduced by 70% and insists that the firms "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become." He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where "you're dealing with the safest securities around."

That 50% margin level, incidentally, is the maximum that ordinary investors can obtain from their broker when they purchase common stock. Before their respective demises, Bear Stearns and Lehman Brothers were leveraged to the tune of $30 of debt for every $1 of capital.

To rid Wall Street of its Las Vegas tone, Munger suggests leveling the options exchanges in Chicago and New York, and banning completely all derivatives contracts, a rather impossible vision but one that's true to his spirit. He's also furious with the accountants, in particular for letting Wachovia report actual profits on accrued interest from risky mortgages when, in fact, the interest wasn't paid but added to the principal amount due on the mortgages.

Derivatives are simply not going away, but there are ways to restrict OTC derivatives (for instance, forbidding any institution that has access to the Fed window from buying or selling them or lending to any entity that has non-exchange traded derivatives on its books) which pose the greatest danger.

The article concluded on this cheery note:

One thing is sure: The abhorrent excessive compensation on Wall Street is bound to be severely reduced. If Wall Street firms can only be leveraged 10 to 1 instead of 30 to 1, then the excessive gains made on borrowed funds will be reduced by two-thirds. So the path to $5 million to $10 million annual payoffs will be more reasonable but still in the millions. Hamptons summer homes will be reduced in price. Private jets will be out of range for many. Applications to law school should go up. The buyside will have their choice of the brightest business school graduates. And forever more we'll all wonder what a meltdown would have been like with the attendant chaos.

There will be an international conference dealing with global finance that will place such restrictions in order to prevent such a close brush with Armageddon and systemic collapse ever again. It cannot be left to the free market.

Worst. Week. Ever.

pour le souvenir

Worst. Week. Ever.

via The Big Picture de Barry Ritholtz le 11/10/08

Well, if you were long, anyway. Those of you who were defensive, or in cash, or God-love-ya, short, had a pretty good week. (Feel free to hit the wish list anytime and buy yourself something nice!)

This is a headline you probably have never seen before:

>

>

I don't know if you will ever see more astonishing data for another 20 years:

International Trade Seizing Up Due to Banking Crisis (Updated)

Effrayant

International Trade Seizing Up Due to Banking Crisis (Updated)

via naked capitalism de Yves Smith le 09/10/08

I have been more than a tad concerned about near-paralysis in the money markets and imploding equity prices. But this e-mail, from a well connected international investor not prone to alarm or (normally) the use of capital letters says that the banking crisis is staring to bring international shipping to a halt.

By way of background, letters of credit of various sorts are essential for trade. For instance, imagine the difficulty if you are, say, a Chinese manufacturer who wants to sell his wares to buyers overseas. How can he be sure the goods he ships will ever be paid for? Imagine the considerable difficulty and cost of chasing a deadbeat in a foreign country. Letters of credit. issued by banks, assure payment. They can also serve to finance the shipment (ie, fund the inventory while it is in transit).

Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks. From the above-mentioned reader:

At the end of the day, if every counterparty is bad then you don't have a market and you don't have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won't give it to him. That means he can't ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up. THE CENTRAL BANKS CAN'T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM.

We spoke later in the evening and said he had heard of another instance of a trade transaction failing, different parties entirely, this a shipment of coal, again due to the unwillingness of the seller's bank to accept an LC from the buyer.

Update 12:10 AM: Confirmation comes from the Financial Post, "Grain piles up in ports" (hat tip reader Vox Sanus):

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

So far the problem is mostly being felt in U. S. and South American ports, but observers say it is only a matter of time before it hits Canada.

"We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse," said Anthony Temple, a grain marketing expert based in Vancouver....

Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship...

"The credit crisis has made banks nervous and the last thing on their minds is making fresh loans," Omar Nokta, an analyst at investment bank Dahlman Rose, said in an interview with Reuters.

While shipping has always been a cyclical industry whose fortunes rise and fall with the global economy, analysts said the current crisis over the drying up of credit is something they have never seen before.

Jason Myers, head of the Canadian Manufacturers and Exporters, said exporters across Canada are getting caught up in the turmoil as customers delay payments, forcing them to shoulder the cost.

"What some companies are saying is we can't pay you until our customer pays us, so it becomes a question of who bears the financial risk and the cost," Mr. Myers said. "We're hearing about it more and more."

What that means is that manufacturers are getting hit as revenue slows and longtime customers disappear from the order book altogether. As profits decline, investment in product development starts to fall, too, he said.

The Canadian Wheat Board, one of the world's biggest grain marketers, has yet to refuse a customer because of poor credit, according to a spokeswoman. "As of this moment we haven't run into that problem," said Maureen Fitzhenry,

Doing the right thing?

Il semblerait finalement que, via une footnote, le plan Paulson ne soit pas l'énorme gâchis/scandale que son objectif principal (attaquer le problème par la partie "actifs" du bilan plutôt que par la partie "passif") laissait présager.
En cela, l'exemple de l'Angleterre (injecttions massives de capital via des actions préférentielles)semble avoir été salutaire (difficile de prévoir à ce stade ce qu'il en adviendra), mais le consensus qui émerge aujourd'hui est que la solution "suédoise" (recapitalisation et dilution des actionnaires existants, au prix d'une nationalisation aprtielle) est la seule solution

Doing the right thing?

via Paul Krugman de Paul Krugman le 09/10/08

A tentative cheer: Paulson may have been dragged kicking and screaming into doing the right thing to rescue the financial system: Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government [...]

Should Deregulation be Blamed?

La réponse est oui, mais le débat n'en est pas moins vif. J'aime bien le raccourci de JKG

Should Deregulation be Blamed?

via Economist's View de Mark Thoma le 06/10/08

Sebastion Mallaby says deregulation is not the cause of the financial crisis. Jamie Galbraith would disagree (more direct disagreement here and here):

Goodbye, Conservatives. Hello, Predators, by James K. Galbraith: Back in the Reagan days, Republicans talked economics. We had problems; they had solutions. Tight money would cure inflation. Low taxes would stimulate saving and hard work. Small government would "crowd in" investment; free trade would make us efficient. Smart people believed this, and they had Milton Friedman to back them up. I never thought they were right-but they were serious. They were coherent. And they argued with passion and conviction, which commanded respect.

But now, real economic conservatives have disappeared from the Republican stage. ... Bush is a bread-and-circuses reactionary with a clientele of lobbies. McCain gets his economic ideas from Phil Gramm, the ultimate architect of the Enron culture, of libertine speculation and financial disaster. ... This crowd deregulates and privatizes not because they think it might work out for the public... What they care about is putting their friends in charge.

Under Bush, oil and gas, drug companies and defense contractors, insurers and usurers, banks and big media control the government of the United States. John McCain..., as chair of the Senate commerce committee,... presided over Lobby Central; notoriously, his campaign is run by lobbyists ... and until last week his policy could be summed up in slogans: he was a "free market" man, a "deregulator." ... Bush and McCain are the predator state writ large...

On the morning that Lehman Bros. and Merrill Lynch fell,... the ... Dow Jones average fell 504 points... As stocks crashed, suddenly people remembered that modern markets cannot exist without a cop on the beat. Every important market out there, from fresh food and safe drugs to autos and air travel to housing and health care, depends on government to maintain trust, and without it, none of them would survive. Without regulation, predators take over, and when they do, trust eventually collapses. Every important market is in peril now, precisely because of the predators in power these past eight years. And none more immediately than finance.

The Bush-Paulson bailout exposed the predator state in detail. Deregulation and desupervision were the origin of this crisis: the 1999 Gramm-Leach-Bliley Act repealing Glass-Steagall, and the Gramm-authored loophole legitimating credit default swaps in 2000. Bush's financial regulators brought chainsaws to press conferences, a clear signal to sub-prime hustlers that "anything goes." "Liar's loans," "neutron loans" and "toxic waste" became financial terms of art. ...

It seems unlikely that John McCain, the regulation-wrecker, will become, overnight, the man who would turn vice to virtue on Wall Street. But even suppose he were serious. Who would trust him? No one with money on the line.

This is McCain's deeper problem. If he is elected, under his leadership, trust cannot be restored. ... Restoring trust requires a government of trustworthy people. Team McCain doesn't have any, and some, especially Gramm, inspire the opposite. It wouldn't matter what their policies were or pretended to be. Nothing they attempted would work.

The ... choice in this election is well-defined. One party believes that the government serves no public purpose. The other believes that it must. One party has turned the government over to lobbies, to cronies and to big donors. The other is beginning to realize that a real government must be rebuilt. One party would keep the same crowd in office; the other would have to begin by clearing them out. No one can say there is no difference between the parties this year, and the basic issue in this election is really just as simple as that.

I thought the best part of Sebastian Mallaby's article came when he provided this link: "There's a vigorous argument about whether Calomiris's number is too high." As to his main argument, "that deregulation is the wrong scapegoat," I don't think it was deregulation of any particular sector that caused the problems we are having in credit markets, I think it was lack of effective regulation of the shadow banking sector in general (i.e. the regulations that did exist in the shadow banking sector were not directed at the right issues, thus, it's possible to believe, as I do, that some of the deregulation was warranted while still believing that needed regulation was missing). The shadow banking sector should be under the same regulatory umbrella that traditional banks are subject to, and extended the same sorts or privileges within the Federal Reserve system in return (deposit insurance of some type, and lender of last resort functions in return for regulatory restrictions). There is no guarantee this would have stopped the credit crisis from developing, but I don't think the conclusion we should draw from the present experience is that these markets weren't free enough. Hopefully, we can use what we've learned as the crisis has unfolded and also use what we've learned from regulating the traditional banking sector to devise a regulatory structure that will improve the stability of credit markets.

Skill-Based or Bubble-Based Wage Differentials?

La remise en cause de toutes les théories foireuses qui ont été ressassées ces dernières années pour justifier l'injustifiable a commencé. Exemple, le "high-skill wage differential"...

Skill-Based or Bubble-Based Wage Differentials?

via Economist's View de Mark Thoma le 07/10/08

Arindrajit Dube says there's a paper he wishes to write once the data become available:

Does Mispricing of Financial Assets lead to Mispricing of Human Capital?

Over the late twentieth century, the financial sector grew rapidly, and attracted higher skilled workers at an increasing rate. Existing work attributes this to growth in financial sector productivity, which raised the marginal product of higher skilled workers. In this paper, we investigate the role of mispricing of financial assets (from asset bubbles) in artificially increasing returns to skill in the economy in the context of a two sector general equilibrium model. A speculative bubble arises from heterogeneous beliefs due to overconfidence and short-sales constraints, and investors perceive an option to resell the stock to others with even greater valuations. If the financial sector is relatively more intensive in the use of skilled workers, this can lead to an inefficiently large portion of these workers going to finance, and an inefficiently high skill-wage differential. Using data from the United States over the 1980 to 2012 period, we show that (1) the growth in asset bubbles were particularly important in increasing the perceived marginal product of higher-skilled workers; and (2) with the sharp retrenchment of the financial sector following the 2008 financial crisis, perceived marginal products and wages of higher skilled workers fell substantially. Our evidence shows that a large part of the "skill biased technical change" identified by earlier researchers actually represents a mispricing of human capital due to inefficiencies in the financial market.

Tarp in trouble

Equity Warrants and Asymmetric Information

Un des enjeux du plan de sauvetage discuté en ce moment est l'ampleur des compensations en capital que le contribuable américain doit obtenir en échange de son soutien. la première version du plan Paulson n'en demandait aucune, les opposants au plan en ont fait leur principal argument, mais la nature de cette compensation suscite d'intéressants débats. Ici, une approche intéressante de la question.

Equity Warrants and Asymmetric Information

via Economist's View de Mark Thoma le 26/09/08

Jonah Gelbach an Economist for Obama, explains why an argument against including equity warrants as part of the bailout proposal doesn't hold in the presence of the type of asymmetric information present in these markets:

"Smart Friend" vs. Asymmetric Information, Economists for Obama: Earlier today, Greg Maniw posted a three-point defense of the Paulson bailout plan from someone to whom he referred only as "a smart friend". I want to address point 2 of Mankiw's friend's argument:

2. "Taxpayers will be better off if Treasury gets warrants."

This is essentially the assertion made in David Leonhart's column in the NY Times on Wednesday. And it again illustrates that we would all be better off if high schools taught the Modigliani-Miller theorem. MM implies that the price of the asset (again, assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives. In this case of a reverse auction, imagine that the price is set at $10. If Treasury instead demands a warrant for future gains of some sort, then the price will rise in the expected amount of the warrant -- say that's $2. Then the price Treasury pays for the asset will be $12. Some people might prefer to get $12 in cash and give up a warrant worth $2 in expected value. Fine, that's a choice to be made. But the assertion that somehow warrants are needed is simply wrong.

For a smart guy, Mankiw's friend is making a pretty dumb argument. Sure, if everyone has the same information, then an asset with a value of $10 will cost $12 if it's required that a $2 warrant comes with it. But that totally misses the point. Based on what I've read, it appears that if everyone understood what these assets were worth, there wouldn't be any need for a bailout: the bailout is necessary because people with capital are scared witless that anything they buy will just be crud. Folks like Mankiw are constantly reminding us (and they're often right) that there's no reason to think government has better information than private parties. So how will Hank Paulson or his agents know any better than folks risking their own money?

In more concrete terms, the right way to think about the equity issue is as follows. (I'll abstract from debt-deflation spiral issues, which are no doubt important but are beside the point for this discussion.) Suppose a bailee has two assets, each of which has face value of one unit. However, actual value and face value diverge, say because the underlying security may default. The first asset is actually worth $10, and the other is actually worth $9. The Treasury can't tell the difference, but the bailee can.

Now suppose the Treasury declares that it is willing to pay $10 for one asset with a one-unit face value, with no equity transfer required. The bailee will certainly prefer to sell Treasury the $8 asset, as it will profit by $2. The bailee now has $10 in liquid capital, and Treasury books a real, long-term loss of $2.

Now suppose that Treasury insists on getting warrants whose value is an increasing function of the loss Treasury books when it sells off the bailee's assets. Let's suppose for simplicity that the warrants' value have expected value equal to the difference between the price Treasury pays the bailee and the price for which Treasury sells the asset. Now if the bailee hands Treasury the $8 asset for $10, the bailee will expect to pay $2 later in warrants, so the bailee and Treasury each break even, though the bailee gets liquidity in the short run, which is the point. On the other hand, if the bailee hands over the $10 asset, then there will be no warrants issued later, since Treasury won't lose anything on the deal.

In this example, the use of warrants has (1) gotten liquidity to the bailee, (2) made the bailee indifferent between transferring the two types of assets, and (3) ensured that Treasury doesn't get stuck with an adverse selection-induced loss. The moral of the story is that the use of equity claims makes truth-telling incentive compatible.

This is an example of simple mechanism design, a topic that is well understood by many microeconomists, no doubt including many smart friends of Greg Mankiw's. Obviously the real world is much more complicated than the simple example here (which I emphasize I took from Mankiw's smart friend). But the idea that the MM-type argument Mankiw's smart friend makes is at all relevant to a world full of informational asymmetries strikes me as bankrupt, tough to credit, and more than a little deflating.

Bankers are criminals

Ha, le trickle down, cette bonne vieille lubie de la droite conservatrice américaine. Une victime bienvenue du credit crunch ? pas sûr...

Red Ink Trickling Down

via Financial Armageddon de panzner le 25/09/08

For many years, Republicans, in particular, have espoused the virtues of "trickle-down economics." This theory holds that "increases in the wealth of the rich are good for the poor because some of such additional wealth will eventually trickle down to the middle class and to the poor." (Wikipedia)

Since the credit bubble began to burst, however, we've seen a malignant variation of this phenomenon. Instead of wealth, red ink has been trickling down from the orifices of badly-run financial companies, undermining the economic wellbeing of a wide range of individuals and firms.

Among the victims, according to a CNNMoney.com report, "Credit Crunch Freezes Hiring, Expansion," are small businesses.

When small businesses can't get loans, job growth and economic expansion stall.

After 41 years in business, Hull Printing shut down its printing presses for good in March, laying off 19 workers and closing one of the oldest family-run businesses in Barre, Vt. The catalyst: Hull Printing's bank slashed its line of credit, kicking off a death spiral that led to the company's collapse.

"All of the equipment's gone and been liquidated," said Jon Hull, 32, whose grandparents started the commercial printing business in 1967. "The bank got all of their money back, but it left a lot of unsecured creditors that will never be paid back, including many other small businesses in town."

Hull's story is a familiar one to millions of small business owners across the U.S. who rely on credit lines and loans to fund expansion or help them recover from setbacks. In a National Small Business Association (NSBA) survey released this week, 67% of business owners polled reported being affected by the credit crunch in August, up from 55% in February. Additionally, 32% reported a deterioration in the terms of available bank loans, up from 27% six months earlier.

"If there is a squeeze on banks, even if only large investment banks, the repercussions can easily flow over into commercial bank loans," says NSBA President Todd McCracken. "Based on what history suggests, if banks have to pull back, they'll pull from small business loans first."

A small business cutback will have ripple effects on the larger economy - and on the jobs pool. Small businesses employ about half of all non-government employees in the U.S., according to Small Business Administration estimates. This year, small companies have been crucial in keeping the job-loss numbers from turning even grimmer: While bigger businesses shed workers, companies with fewer than 50 employees have reported a net increase in positions every month this year, according to ADP, which compiles a monthly employment report. In August, when overall employment fell by 33,000 jobs, small companies added 20,000 net new hires, according to ADP's estimates.

A credit crunch can force companies to make hard choices. "Sometimes there may not be enough work for key staff, so they'll face the choice of losing good people or hanging on to them until they catch the next wave," McCracken said.

In D'Iberville, Miss., Fayard's Grocery owner Rusty Quave is waiting to find out if he'll receive a deferral on loan payments that will mean the difference between staying in business and going under for his general store. For now, Quave has shortened the store's operating hours and temporarily stopped selling gas and diesel as he tries to cut his daily operating costs enough to stay afloat.

Stalled growth

Quave is also the mayor of D'Iberville, a town of 6,000. All around, he sees signs of economic development at a standstill. Shattered three years ago by Hurricane Katrina, D'Iberville responded with a comprehensive urban-development plan for rebuilding. The 60-page document is a blueprint for sustainable retail, residential and industrial development, but little ground has been broken because of the credit-market freeze.

"All the major developers can't come up with the financing," Quave said. "We're a district that has legal gaming. We have groups that have bought property and haven't been able to start."

The NSBA's president says Quave's situation is in line with others he's seen. "For a company that has a growth opportunity, you can still get funding, if you take a lot of energy and time and pull from different places. But companies not in a position to expand may lose money," he said.

While officials in Washington hash out the details of a proposed $700 billion bailout to address the financial-system crisis that began unfolding on Wall Street last week, business owners far from the financial markets' epicenter are already feeling the effects of banks' reluctance to risk new loans.

When entrepreneur Tim Trzepacz and his partner sought funding last year to expand their fledgling product-development company, Sprout Creation in Wayland, Mass., they had the benefit of sterling personal credit and years of experience and networking in their industry: Trzepacz is the former merchandising director at consumer-electronics retail giant Brookstone, where his partner, David Laituri, headed up design and engineering. They also had one product already on the market and generating sales, the Vers iPod dock, available at Target.com (TGT, Fortune 500) and other retailers.

Trzepacz pitched almost a dozen banks. One bank executive "told us we'd be approved unless they pulled our credit history and found out we'd committed mass murders," Trzepacz recalled. They were turned down. Over and over, the pattern repeated: Trzepacz and Laituri would meet with a bank and quickly win over their prospective loan officer. But when that advocate pitched the loan further up the bank hierarchy, it would be shot down. Banks wanted 18 to 24 months of cash flow and a demonstrated operating history before they would consider opening their coffers.

Bank of America (BAC, Fortune 500) agreed to extend the company a line of credit for around $80,000, but it was essentially a credit-card line, carrying interest rates of 15% and up. When Trzepacz sought a higher limit, Bank of America told him to look elsewhere.

In the end, Laituri found salvation literally on his doorstep. Laituri walked into a nearby branch of Middlesex Savings Bank, his local community bank, and asked if they'd be interested in talking about financing his business. Two weeks later, Trzepacz and Laituri had a $200,000 line of credit at interest rates less than half those they'd been paying to Bank of America - and they had a promise that as their business grew, their financing would grow with them.

Since getting that financing this spring, Vers Audio has added an employee, introduced new Vers models and created the next extension of its line, a combo iPod dock/alarm clock that will soon be on sale. None of that would have been possible without their line of credit.

"We came within 45 days of D-day," Trzepacz said. "We probably would have had to halt business operations, and our revenues would have been half what they'll be this year."

Other small businesses are stuck at a standstill. Take, for example, Jamaal Oldham of The Cheesecake Experience in Nashville. His four-person operation has been hand-delivering their specialty cheesecakes for years, and the business has been growing locally. The problem is that the team is still working out of Oldham's home kitchen. It needs funding to expand into a larger facility.

"Restaurants both in-state and out are interested in carrying our product, but we can't produce on a mass level because we don't have the facility," Oldham said.

He's confident he'll be able to pay back the $10,000 loan he's seeking. But banks are not budging, including the one that holds his company's accounts. "They told us to consider using credit cards, but with rates as high as 20%, I'm not really willing to go that route," Oldham said.

Oldham is now looking for cheesecake-loving investors, which may mean giving up partial ownership of the company: "I'd rather do that than deal with rates."

Weathering storms

Few entrepreneurs say they're looking for financing and loans to fund ordinary operations; business owners know that debt is expensive. What drives businesses to banks are growth plans or unexpected shocks.

For Hull Printing, the tipping point was an expansion gone wrong. About to outgrow a too-small building, the company owners began looking for new real estate. A sales manager pitched a broader expansion: Add new equipment and increase printing capacity, she said, and sales will jump.

That turned out to be inaccurate. Hull Printing added employees and bought advanced new printing presses, but sales stayed flat. Then the company's bank turned the vise tighter: It announced that by expanding without the bank's permission, Hull Printing had violated the terms of its existing loan. Although the company was making all its payments on time, Jon Hull says, the bank placed Hull Printing in default.

"Our banker knew, and chose not to tell us, 'you guys are risking a lot by making this expansion,'" Hull said. "Putting us in default instantly caused the interest rates on our credit lines to double, which only added fuel to the fire. Here we have a struggling company, and they're adding fees."

Hull worked with a business consultant to try to improve the business's cash flow, and he lined up a buyer interested in taking over the business. But as the company's credit dried up, so did its options and its daily operations. Eventually, closing down became inevitable.

Rusty Quave of Fayard's Grocery is trying to stave off that fate. Storms are his problem. Almost 30% of D'Iberville residents who left town after Katrina haven't come back. When Hurricane Gustav blew through last month, D'Iberville evacuated again, and Fayard's Grocery had no customers for several days.

Open every morning at 6 am, the store has temporarily pulled its closing time back from 9 pm to 3 pm. That's still enough time to feed the breakfast and lunch crowds, who gather at Fayard's for buffets of chicken, shrimp, crawfish, and other Gulf Coast specialties. Locked in negotiations this week with the Small Business Administration, which holds the note on the disaster-assistance loan Quave took out after Katrina, Quave is seeking a deferral. A one-year break on repaying his loans will give him the cash flow he needs to keep Fayard's Grocery open and his staff of 10 employed, he believes.

"We're not asking for free money, we're asking for loans and deferrals of payments to allow us to stay in business and keep being productive," Quave said. "My business is struggling but I'm hanging on. I'm not going to quit or file for bankruptcy, which would be the easy way out. You can't give up. We want to live here and keep our businesses going."

Latest Bailout Plan Spin: Its a Money Maker!

Il ya eu beaucoup d'arguments débiles pour faire avaler la pilule du plan de sauvetage concocté par Paulson & Co. Celui ci a vraiment la palme...

Latest Bailout Plan Spin: Its a Money Maker!

via The Big Picture de Barry Ritholtz le 25/09/08

Most people are unfamiliar with the evolution of financial management over the years. It began as a clubby old boys network, who you knew mattered more than what you knew. It evolved over time. Starting in the late 1970s, retail stock brokerage became a telemarketing sales business. Although that model is clearly changing, there is still trillions of assets under management today that got that way via the cold call.

The cold calling sales approach was developed and refined at Lehman Brothers (perhaps their collapse was Karma). It was encapsulated by a man named Martin D. Shafiroff, who wrote up, refined and perfected various phone techniques. These include the straight line, the first trade, the trust close. All of his various techniques were published in the book "Successful Telephone Selling in the '80s" and subsequent editions ('90s, etc.)

Having worked on the Sell side for the first decade of my Wall Street career, I am intimately familiar with the various pitches the retail world uses to obtain clients and assets. There is not a single retail broker of my acquaintance that does not have Shafiroff's how-to on his bookshelf.

The reason I bring this up today is due to the latest sales pitch from various people, aggressively pushing the bailout plan. The newest spin on the massively expensive plan is "Hey, its a jumbo money maker!"

The spin reminds me of the classic retail stock jockey. The guy has buried his clients in a series of bad trades, bad judgment, poor risk management -- all motivated by his self-interested, commission-generating trades. The only way out of the money losing mess, pitches the broker, is a big, Hail Mary trade.

Sound familiar?

This technique is one of the last ones in the the Shafiroff book. Once an aggressive retail broker is upside down, the plea goes out for raising more money from the mark client. "Believe me, I hate being under water more than you. I pulled in some favors, this is the trade that makes it all back for us and then some. I could even get in trouble telling you this, so don't mention this to your pals. This is the one -- but I need you to send in more capital so we can recoup the prior trades that went bad on us."

I guess Paulson read the book in the early days of his career. That line of bullshit is identical to what the public is now being fed. A series of OpEds in the Washington Post and the Wall Street Journal (and who knows where else) are all pushing the same nonsensical line: The bailout plan is a big money maker:

Andy Kessler in the WSJ:

"My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillion -- yes, with a "t" -- for the United States Treasury...

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay. Better mortgages and CDOs are selling for 70 cents on the dollar. But many are seriously distressed (15-25 cents on the dollar) because they are the last to be paid in foreclosures. These are what Wall Street wants to unload the quickest.

Firms will haggle, but eventually cave -- they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for his $700 billion."

Bill Gross (who just volunteered to manage the bailout for free) in the Washington Post:

"The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury. Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent. Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that."

Now, I have a few question for Messrs. Kessler & Gross: What does this say about the private sector? Why can't the all of the private equity funds, sovereign wealth funds, and enormous pools of capital do this themselves? There are trillions of dollars sitting around in cash, yet none of it that sees any value here?

I guess that Hank Paulson, George Bush and Ben Bernanke -- all of whom have been been unequivocally, expensively, tyrannically wrong about the entire crisis from the beginning -- are smarter than both the markets, and all of the private equity pools, about this paper?

Does that sound right to you? The guys who missed this from day one -- despite many many admonitions from many people -- only they see the value in this paper, whereas the smart guys who saw the shitstorm coming in advance, and bet against it, don't?

I am in the same camp as Michal Lewis, who writes at Bloomberg "the Treasury plan also creates this wonderful hidden opportunity for Goldman Sachs to make a killing, and thus preserve its bonus pool for a long time to come."

Put me down as sympatico with Anatole Kaletsky, who writes in the London Times:

"Mr Paulson may be a former chairman of Goldman Sachs, but as US Treasury Secretary he does not know what he is doing. His recent blunders, starting with the "rescue" of Fannie Mae, have triggered unintended consequences around the world, resulting in the death-spiral of financial values. But last Friday Mr Paulson outdid even these Rumsfeldian achievements, when he demanded $700 billion from Congress for a "comprehensive and fundamental" solution to the global financial crisis, without apparently having any idea of what he would actually do."

Agreed.

I have a 10 year bet for those folks now pushing the "Trust me, we will make it all back on this one trade" spin. If you who think the Paulson plan is a money maker, a cash winner, and a net after-fees taxpayer surplus creator, put your money where your mouth is. I bet you one million dollars, to the charity of the winner's choice, that the current plan is ginormous money loser.

Any takers?

&gt

Anti-Intellectualism

Le débat politique américain est pollué, depuis Nixon, par certains comportements qui paraissent impossibles dans un environnement européen mais n'en sont pas moins fondamentaux, ne serait ce que par par leur impact indirect sur les politiques publiques européennes (en matière d'environnement, d'économie, de recherche etc.). une bonne sytnthèse par J. Sachs.

Anti-Intellectualism

via Economist's View de Mark Thoma le 22/09/08

Jeffrey Sachs says anti-intellectualism "could end up getting us all killed":

The American anti-intellectual threat, by Jeffrey D. Sachs, Commentary, Project Syndicate: In recent years, the United States has been more a source of global instability than a source of global problem-solving.

Examples include the war in Iraq, launched by the US on false premises, obstructionism on efforts to curb climate change, meager development assistance and the violation of international treaties such as the Geneva Conventions. While many factors contributed to America's destabilizing actions, a powerful one is anti-intellectualism...

By anti-intellectualism, I mean especially an aggressively anti-scientific perspective, backed by disdain for those who adhere to science and evidence. The challenges faced by a major power like the US require rigorous analysis of information according to the best scientific principles.

Climate change, for example, poses dire threats... that must be assessed according to prevailing scientific norms... We need scientifically literate politicians adept at evidence-based critical thinking to translate these findings and recommendations into policy and international agreements.

In the US, however, the attitudes of President Bush, [and] leading Republicans ... have been the opposite of scientific. The White House did all it could for eight years to hide the overwhelming scientific consensus that humans are contributing to climate change. It tried to prevent government scientists from speaking honestly to the public. The Wall Street Journal has similarly peddled anti-science and pseudo-science to oppose policies to fight human-induced climate change.

These anti-scientific approaches affected not only climate policy, but also foreign policy. The US went to war in Iraq on the basis of Bush's gut instincts and religious convictions, not rigorous evidence. ...

These are ... powerful individuals out of touch with reality. They reflect the fact that a significant portion of American society, which currently votes mainly Republican, rejects or is simply unaware of basic scientific evidence regarding climate change, biological evolution, human health and other fields. ...

Recent survey data by the Pew Foundation found that while 58 percent of Democrats believe that human beings are causing global warming, only 28 percent of Republicans do. Similarly, a 2005 survey found that 59 percent of self-professed conservative Republicans rejected any theory of evolution, while 67 percent of liberal Democrats accepted some version of evolutionary theory.

To be sure, some of these deniers are simply scientifically ignorant, having been failed by the poor quality of science education in America. But others are biblical fundamentalists... They reject geological evidence of climate change because they reject the science of geology itself.

The issue here is not religion versus science. All of the great religions have traditions of fruitful interchange with -- and, indeed, support for -- scientific inquiry. ...

The problem is an aggressive fundamentalism that denies modern science, and an aggressive anti-intellectualism that views experts and scientists as the enemy. It is those views that could end up getting us all killed. ...

It is difficult to know for sure what is giving rise to fundamentalism in so many parts of the world. ... Fundamentalism seems to emerge in times of far-reaching change, when traditional social arrangements come under threat. The surge of modern American fundamentalism in politics dates to the civil rights era of the 1960s, and at least partly reflects a backlash among whites against the growing political and economic strength of non-white and immigrant minority groups in US society.

Humanity's only hope is that the vicious circle of extremism can be replaced by a shared global understanding of the massive challenges of climate change, food supplies, sustainable energy, water scarcity and poverty. ...

The US must return to the global consensus based on shared science rather than anti-intellectualism. That is the urgent challenge at the heart of American society today.

Extending the Bailout: It's Simple, Sell Us the Company and You're In

dean Baker says it all...
Sur la question des compensations en capital de tout plan de sauvetage

Extending the Bailout: It's Simple, Sell Us the Company and You're In

via Beat the Press le 23/09/08

The WSJ discusses the puzzling issue of how far the bailout should go. Should it cover auto loan debt, student loan debt, construction loans?

If the bailout were structured correctly, this wouldn't be a problem. The bailout has to be painful, it is not supposed to be a reward for ridiculously overpaid executives who pushed their companies to the edge of bankruptcy. If the government's purchases of bad debt were tied to serious restrictions on executive compensation and the forced sale of equity to the government, then only banks that really needed the money would line up for the bailout. Under these terms, we could include whatever assets the Wall Street boys and girls want to sell.

--Dean Baker

Financial One-Liner of the Day

Excellente citation qui résume tout

Financial One-Liner of the Day

via Portfolio.com: Market Movers de Felix Salmon le 22/09/08

As shared with David Altig:

"The problem with financial institution balance sheets is that on the left hand side nothing is right and on the right hand side nothing is left."