904. day’s notes

Bunch of articles from today , with a few notes

Largest U.S. Banks Resist Federal Reserve’s Credit Limits- Bloombergby Cheyenne Hopkins, bloomberg.com April 27th 2012 1:31 PM The largest U.S. banks, including JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), told the Federal Reserve that a limit on their credit exposure is unnecessary and “fundamentally flawed.” The Fed’s proposed rules on single-counterparty credit limits would have a negative impact on banks, their customers and the U.S. economy, according to a letter sent to the central bank today by five banking trade groups, including the Clearing House Association. 1 of 1 Video « » Dodd-Frank Expands Community Bank Threshold (4:17) 3 hours ago In December, the Fed proposed tougher standards to supervise the largest banks whose collapse could jeopardize the economy. The central bank set a limit of 10 percent for credit risk between a company considered systemically important and counterparty when each has more than $500 billion in total assets. “The Federal Reserve has provided no basis to determine that imposing the dramatically lower and arbitrary 10 percent credit limit on certain major covered companies would even help mitigate risks to the U.S. financial stability, much less be necessary,” according to the text of the letter obtained by Bloomberg News. Other signers of the letter are the Financial Services Roundtable, the Securities Industry and Financial Markets Association, the Financial Services Forum and American Bankers Association. The Clearing House also represents Citigroup Inc. and Bank of America Corp. (BAC) in addition to JPMorgan. Fed Proposals The Fed’s proposed rules would set triggers for regulatory enforcement for systemic firms and require boards of directors to oversee and approve plans for limiting liquidity risk. Comments on the Fed’s proposal are due on April 30. The 10 percent credit risk limit is more restrictive than that contained in the Dodd-Frank financial overhaul law, which allowed for a 25 percent limit. The banks are focusing their complaints on the proposal on the single-counterparty exposure limit. They argue it goes too far without justification from the Fed for its change. Further, they disagree with the central bank on its proposed formula for determining counterparty exposure. The banks are attempting to bring heightened attention to the issue, in a fashion similar to the resistance to the Volcker rule’s ban on proprietary trading, and are beginning a push to get lawmakers’ input. Executives of the eight largest banks met with Fed Governor Daniel Tarullo on March 27, according to a Fed disclosure. Important Implications “This hasn’t gotten the attention of Volcker but its implications have been just as important,” said Satish Kini, co-chairman of the Debevoise & Plimpton LLP’s Banking Group. Banks were subject to single counterparty limits prior to the financial crisis at the bank level not the holding company level. This proposal extends the authority to the holding company of institutions. The Fed has said this change is to address the links between firms considered systemically important. “The financial crisis also revealed inadequacies in the U.S. supervision approach to single counterparty credit concentration limits, which failed to limit the interconnectedness among and concentration of similar risks within large financial companies that contributed to a rapid escalation of the crisis,” the Fed said in its December proposal. The Fed did not explain why it changed the credit risk limit to 10 percent for the largest banks. The Dodd-Frank act allows the Fed to make the change if it determines it is necessary to “mitigate risks to the financial stability.” The banks argue the Fed should first try the 25 percent limit and, if it proves inadequate, adopt the 10 percent limit. “Going beyond the 25 percent limit based on an array of untested, an unknown factors is over engineering,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm whose clients have included Wells Fargo & Co. (WFC) “Throughout the rule there are really important improvements that ought to be put in place, kick tested and then expand it.” To contact the reporters on this story: Cheyenne Hopkins at Chopkins19@bloomberg.net To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net Original Page: http://www.bloomberg.com/news/2012-04-27/largest-u-s-banks-resist-federal-reserve-s-credit-limits.html

What strikes me is the unwillingness of the reporter to go beneath the back-and-forth of the story to underlying causes.

 http://www.zerohedge.com/news/robert-wenzels-david-speech-crushes-federal-reserves-goliath-dreamRobert Wenzel's 'David' Speech Crushes Federal Reserve's 'Goliath' Dream Please allow me to begin with methodology, I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences. In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed. There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building. http://www.zerohedge.com/news/robert-wenzels-david-speech-crushes-federal-reserves-goliath-dreamRobert Wenzel's 'David' Speech Crushes Federal Reserve's 'Goliath' Dream I also find curious the general belief in the Keynesian model of the economy that somehow results in the belief that demand drives the economy, rather than production. I look out at the world and see iPhones, iPads, microwave ovens, flat screen televisions, which suggest to me that it is production that boosts an economy. Without production of these things and millions of other items, where would we be? Yet, the Keynesians in this room will reply, “But you need demand to buy these products.” And I will reply, “Do you not believe in supply and demand? Do you not believe that products once made will adjust to a market clearing price?”

His unwillingness to enter into the spirit of other views at all is really striking. The idea that the supply and demand curve solves everything is trivial. Obviously with declining wages people cannot spend. Bug worse, some people in finance are happy with not having customers for products. That is because that is not where they're selling. They're selling into a world where money is being stripped out of the normal economy.

The Great Transition http://www.nybooks.com/articles/archives/2012/may/10/byzantium-islam-great-transition/ In the century between 630 and 730 a considerable portion of the Old World took on its modern face. Through a series of astonishing campaigns, Arab Muslim armies created a single empire that, for a time, would reach from southern Spain to northern India and the western borders of China. From the “big bang” of these conquests a new galaxy emerged. From then onward, a closely interconnected chain of Muslim regions (one part of which, from modern Morocco to the borders of Iran, came to speak Arabic) stretched across Africa and Eurasia, joining the Atlantic to western China. A new civilization came into being, one that has lasted, with many permutations, into our own days. In the words of Finbarr Flood, a major contributor to the catalog of the Metropolitan Museum’s somewhat modestly titled exhibition “Byzantium and Islam: Age of Transition (7th–9th Century),” the foundation of the Arab empire was “one of the most remarkable achievements in human history.” This exhibition—along with the groundbreaking scholarship that has gone into its catalog—has banished the melodramatic tone with which the rise of Islam has usually been presented in standard accounts of the period. We can now say with confidence that the Arab armies did not leave a trail of desolation across the Middle East. Local populations did not sink into poverty. Far from retreating into the status of timorous minorities, vigorous Christian and Jewish communities continued to maintain their own traditions largely unmolested. It is time to look more closely at the ideals of these people. We can do this through the unique collections of ivories and textiles that are the pride of the exhibition. For it is through ivories and, above all, through textiles that we get to the heart of the self-understanding of the persons (Muslims, Jews, and Christians alike) who both bore the burdens of empire and reaped its profits. What did these objects mean to them? For textiles, the answer is plain. Textiles meant robes, and robes meant status. Looking at the spectacular Coptic textiles in the exhibition we are looking at a language of wealth and power that runs from one end of the period to the other. Many of these robes have been redated to the seventh and eighth centuries. Muslims would have worn them with as much pride as did Jews and Christians. These robes swathed their bearers in a mystique of good fortune. This mystique was adopted by members of every religious group. The ninth- or tenth-century shawl of Apa Toter carried an inscription that combined Kufic and Coptic letters that wished: “use it in happiness…and rejoice.” A contemporary shawl bore an inscription in Arabic that wished the Muslim wearer “blessing and happiness and safety.” We forget this because we have been taught to see late antiquity and early Islam in exclusively religious terms. In the words of Finbarr Flood, the period has suffered from an “excessive focus on religiosity.” Anna Ballian warns us not to assume that “religion permeated every aspect of medieval society and in importance far outweighed secular matters.” For this was by no means the case. There was always room for a “religion of the world”—a tenacious conviction that there was more to life than piety. There was also something thrilling and almost numinous about wealth, good health, and the gift of children. In around the year 600, these developments still lay in the future. But the young monk from the monastery of Epiphanius at Luxor, who copied out the Greek maxims of Menander, chose one maxim that says it all: “We all wish to get rich. But not all of us make it.”

Just good to know more of this history.

Your Brain Is Not as Rational as You May Think It IsSource URL: http://www.thedailybeast.com/articles/2012/04/28/your-brain-is-not-as-rational-as-you-may-think-it-is.html
Your Brain Is Not as Rational as You May Think It Is http://www.thedailybeast.com/articles/2012/04/28/your-brain-is-not-as-rational-as-you-may-think-it-is.html The boys had been carefully screened for uniformity—all were white, middle-class, and Protestant. None were particularly smart or dumb, and none knew any of the others. But both groups quickly formed tight-knit identities. The Rattlers and the Eagles, as they called themselves, each came up with their own flags, as well as "preferred songs, practices and peculiar norms," as the researchers put it. Despite their similarities, when the groups were finally informed of the other's existence, a fierce rivalry took hold, resulting in fighting, sabotage, and endless insults. And yet, once the "counselors" (in actuality, the researchers) presented them with challenges that affected all of them—for example, restoring the camp's water supply, or starting a stalled truck that was going to acquire food for the camp—the groups quickly set their hostilities aside and worked as a cohesive unit. What could explain this? Why would young boys quickly bond together, develop an instant dislike for a rival group, and then set it all aside to work with that group when presented with common goals? In Subliminal: How Your Unconscious Mind Rules Your Behavior, Leonard Mlodinow argues that this and countless other peculiarities of human nature can only be explained by understanding that our rational brains aren't really calling the shots. Most of the time, subtle cues—a flag, for instance—have a powerful, discomfiting pull on our behavior. Indeed, as our models of the brain progress, rationality finds itself with less and less breathing room. That’s not to say we aren’t capable of rational thought, of coolly weighing the pros and cons of a purchase or a relationship or a trip abroad. But when we try to employ the most logic-bound parts of our brain, psychologists and neuroscientists are discovering, it’s incredibly easy for us to fool ourselves into thinking that we’re being rational when in reality there are powerful, submerged cognitive forces actually guiding us. As it turns out, Mlodinow writes, “the brain is a decent scientist but an absolutely outstanding lawyer.” In other words, we’re experts at spinning out elaborate stories for why we believe what we believe—or about why we’re special. It’s no wonder that every psychological study that asks a large group to self-report about a given skill always elicits the same result: everyone considers himself or herself above average. (It’s an important self-defense mechanism, argues Mlodinow, since happy people simply do better than unhappy people on just about every metric.) A fair bit of Subliminal overlaps with other recent popular treatments of our biased, easily confused brains, namely Daniel Kahneman’s Thinking, Fast and Slow and Jonathan Haidt’s The Righteous Mind: Why Good People Are Divided by Politics and Religion. If you’ve already read one or both of these books, you’ll find a lot of rehashing in Subliminal. Mlodinow’s book is, however, a quicker read—he doesn’t go quite into as much depth as Kahneman or Haidt—and might be a better entry point for those who are less familiar with the subject. Overall, it’s a useful addition to the growing body of work arguing convincingly against the idea of the rational human brain. It may be discomfiting, but it’s true.

This is part of a large argument going on about rationality and emotions. While there is a new recognition of the power of emotions, they're still treated as separate from rationality. This view is fundamentally wrong. Rational is making decisions that are consistent with some set of values and feelings.

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