The World & Beyond

The writings of a global transient.

Month: August 2014

So, I am part of the Good Judgement Project

Philip Tetlock is a professor at the University of Pennsylvania.  According To The New York Times:

Beginning in the 1980s, Tetlock examined 27,451 forecasts by 284 academics, pundits and other prognosticators. The study was complex, but the conclusion can be summarized simply: the experts bombed. Not only were they worse than statistical models, they could barely eke out a tie with the proverbial dart-throwing chimps.

The most generous conclusion Tetlock could draw was that some experts were less awful than others. Isaiah Berlin once quoted the Greek poet Archilochus to distinguish between two types of thinkers: “The fox knows many things, but the hedgehog knows one big thing.” Berlin admired both ways of thinking, but Tetlock borrowed the metaphor to account for why some experts fared better. The least accurate forecasters, he found, were hedgehogs: “thinkers who ‘know one big thing,’ aggressively extend the explanatory reach of that one big thing into new domains” and “display bristly impatience with those who ‘do not get it,’ ” he wrote. Better experts “look like foxes: thinkers who know many small things,” “are skeptical of grand schemes” and are “diffident about their own forecasting prowess.”  

This is relevant to me because recently I got an email from Tetlock accepting me as a member of The Good Judgement Project.   This is not entirely surprising to me.  I recall upwards of 6 months ago receiving an email from UPENN asking me to take a survey so that I could join some sort of forecasting project.  I was bored at the time and thought sure, why not.  The survey was interesting to me because as I recall the questions all revolved around not only predictions but my confidence in my own predictions.  There were also biographic/professional questions.

I find this interesting because one of the most grievous sins of an investor is to be over-confident in his own abilities to predict the unpredictable.  So, I hoped to be a part of this project, and, well, now I am.  The exact route I took to get here I am not sure about because I have over 50,000 unread emails in my inbox and when I searched on Tetlock and Good Judgement Project the only result is very recent things.  However, I do recall the initial queries from UPENN.  They must have been sent out by a research assistant.

So what exactly is the Good Judgement Project?  Good Question:

According to the homepage:

The Good Judgment Project is a four-year research study organized as part of a government-sponsored forecasting tournament. Thousands of people around the world predict global events.  Their collective forecasts are surprisingly accurate.

Cool.  So what government sponsored forecasting tournament is this?  According to Wikipedia it is a participant in the Aggregative Contingent Estimation program of the Intelligence Advanced Research Projects Activity (IARPA).

The Intelligence Advanced Research Projects Activity (IARPA) is a United States research agency under the Director of National Intelligences responsibility. In January 2008, Lisa Porter, an administrator at NASA with experience at DARPA, was appointed director[1] of the activity formed in 2006 from the National Security AgencyDisruptive Technology Office (DTO), the National Geospatial-Intelligence Agency’s National Technology Alliance and the Central Intelligence Agency’s Intelligence Technology Innovation Center

OK great, so I am officially serving evil.  I wonder what would have happened  if this program was around in 2001 and the question Would our invading and bombing numerous countries in the middle east work out to increase or decrease regional stability and security? was asked.  Who knows?

So I will continue with the program to learn more.

The way it works is that a question is posed, and I am asked to give not a yes/no answer, but rather a percentage chance that the event will happen and then to explain my answer if I want to.  I am also supposed to select from some check boxes the source of my knowledge.  You do not have to make a forecast at all.

There were seven new questions today.  They were:

#1414: On 15 September 2014, will the Arctic sea ice extent be less than that of 15 September 2013?

#1410: Will an independence referendum *pass in Scotland?

#1415: Will there be a **lethal confrontation involving Russian **national military forces in Ukraine **before 1 October 2014?

 

#1409: Will a runoff be required in Brazils 2014 presidential election?

#1422: Will Islamic State (IS) fighters **attack a country other than Iraq or Syria **between 27 August 2014 and 15 October 2014?

#1412: Will the TOPIX Index close at or below 1200.00 **between 20 August 2014 and 31 October 2014?

#1418: Will Afghanistan sign a Bilateral Security Agreement with the United States **before 1 November 2014?

I dont have to answer right away, and I am sure that these guys want my prediction and not group ones from my blog.  But for now I will answer the sea ice extent question.  As I understand it sea ice extent is increasing year over year, even if the total volume of ice is decreasing (i.e. it is expanding but getting thinner).

I have strong feelings about the Russian clash in Ukraine question as well, but will hold off for a day.  In short, Ukraine is getting increasingly desperate and will provoke a clash in order to try to inflame the west.  By the way, why havent we heard the MH17 Air Traffic Control tapes yet?  Can you remember a single other airline disaster when they werent released within days?

Argentinas Debt Crises Part 1 The Background

Click here for Part 2 of this series:  The failing in international law that is to blame.

Click here for Part 3: A discussion of Kyle Basss bullish view on Argentina and my own thoughts as well.

For Part 1 of this series we will simply examine the background to the Argentine bond crises in laymans  terms:

Argentina has long struggled with fiscal stability.  By the time the Presidency of Carlos Mennem began in 1989, Argentina had previously defaulted on its debt 6 times since independence from Spain.  The 1980s had been a period of very high inflation as Argentina monetized its national debt.

Monetization of debt is what happens when a country pays off its exists debt by issuing new currency.  The new currency introduced into the system results in the weakening of the currency overall, and thus an increase in prices (think basic supply and demand.. by increasing the supply of currency while demand for it remains the same, the price (value) of the currency falls).

When Menem took office Argentina sought to prevent the hyperinflation of the 1980s from occurring again.  The result was the Convertibility Law which pegged the currency so that the value of 1 Peso was 1 US dollar.

Under this system new pesos could not be created unless new dollars entered into the country.  This limited the Argentine government from issuing Peso debt, spending the money, and then monetizing the debt by printing new pesos.

Rather than live within its economic means, Argentina decided to take another route.  By issuing US dollar bonds in New York, it was able to bring dollars into Argentina, which allowed the government to then print an equivalent number of pesos that it could spend.    By issuing bonds in New York and subjecting them to New York law, Argentina agreed that New York law would govern any disputes.

In 2002, faced with the worst economic crises in its history, Argentina defaulted on a wide number of its obligations, including the NY Issued bonds.

In 2005, Argentina began a debt restructuring.  In 2005 76% of the dollar bondholders agreed to take new bonds worth roughly 30% of the original ones issues.  In a second debt-swap in 2010 that number was increased to 93%.  We will refer to these bondholders as the exchange bondholders.

7% of the bondholders did not agree to the exchange and demanded payment in full.  These holdouts include a subsidiary of fabled hedge fund Elliot Management.  We will refer to these bondholders as the holdouts.

For some years, Argentina has been making regular debt service payments to the exchange bondholders. However, this creates two problems for Argentina:

1.  The original bond agreement states that all bondholders must be treated equally.  That is, Argentina is not allowed to make payments to the exchange holders without also making payments to the holdouts.

2.  The agreements made with the exchange holders states that if the holdouts receive more than the roughly 30 cents on the dollar that they received then the exchange holders need to be paid that much as well.

That is, Argentina cant just pay the holdouts the full amount to get them to go away without also paying the rest of the exchange bondholders the full amount.

Elliot sued in New York to keep BNY Mellon(Argentinas agent) from distributing funds to the exchange bondholders as the original bond contract states that all bondholders must be treated equally.

Elliot won this lawsuit.  It was appealed to the Federal Court of Appeals which affirmed the New York judges ruling:

This is a contract case in which the Republic of Argentina refuses to pay certain holders of sovereign bonds issued under a 1994 Fiscal Agency Agreement (hereinafter, the “FAA” and the “FAA Bonds”). In order to enhance the marketability of the bonds, Argentina made a series of promises to the purchasers. Argentina promised periodic interest payments. Argentina promised that the bonds would be governed by New York law. Argentina promised that, in the event of default, unpaid interest and principal would become due in full. Argentina promised that any disputes concerning the bonds could be adjudicated in the courts of New York. Argentina promised that each bond would be transferrable and payable to the transferee, regardless of whether it was a university endowment, a so-called “vulture fund,” or a widow or an orphan. Finally, Argentina promised to treat the FAA Bonds at least equally with its other external indebtedness. As we have held, by defaulting on the Bonds, enacting legislation specifically forbidding future payment on them, and continuing to pay interest on subsequently issued debt, Argentina breached its promise of equal treatment.

The Supreme Court refused to hear the case.

With the case back in New York judge Griesas hands,  BNY Mellon is prohibited from making interest payments on Argentinas behalf, and the exchange bonds are in default.

BNY Mellons UK subsidiary is also refusing to make payments on Argentinas behalf to the Euro Denominated bonds, despite not being under the jurisdiction of the New York court.  This is the subject of a lawsuit by Euro denominated bondholders Kyle Bass and George Soros, discussed in Part 3.

Argentina has responded by promising a further exchange of bonds, this time offering the exchange bondholders another exchange whereby they will be issued new bonds in Argentina, and government by Argentine law.  This creates a host of logistical problems, and so far the exchange bondholders have not expressed much of an opinion one way or the other.

In Part 2, we will discuss the failings in international law that have led to this crises.

Argentine Debt Crises Part 2 A Failing of International Law.

Click here for Part 1:  An overview of the Argentine Debt Crises.

Click here for Part 3: A discussion of Kyle Basss bullish view on Argentina and my own thoughts as well.

 

In order to understand this debt crises, it is important to understand the history of bankruptcy law, which I present as follows:

As a definition, Bankruptcy is the legal status of someone who is unable to repay his debts.   We shall refer to such people as bankrupts or the bankrupt.  For most of recorded history, someone who was bankrupt was considered a criminal and a pariah.  Bankruptcy laws such as they existed were designed to punish the bankrupt while at the same time recovering as much as possible for the creditor.  In ancient Greece, for example, the bankrupt became an indentured servant to his creditor.

In various places and times throughout the world punishment for bankruptcy included various forms of servitude or prison.  The more modern approach to bankruptcy began in England in 1705.  Under this act the Lord Chancellor was allowed to release jailed bankrupts after 14 days once a disclosure of all assets was made and there started to be some recognition that bankruptcy law ought to be used to protect the debtor as well as the creditor.

Allowing bankrupts to start their own proceedings began in 1825 if their creditors agreed, and by 1849 Voluntary bankruptcy was introduced in England.

Bankruptcy law under the Articles of Confederation and early United States also was designed to protect creditors.  After the United States was formed bankruptcy law was left primarily to the states and debtors prisons in many states existed until the mid 1800s.

The Federal Government passed the  Bankruptcy act of 1898 and established the modern version of debtor-creditor relations and also permitted companies voluntary relief from creditors.

There have been numerous major overhauls of bankruptcy laws since.

 

Modern Bankruptcy laws are designed to accomplish three things:

  1. To solve a collective action problem among creditors.
  2. To enhance or maintaing the ongoing value of a firm in distress.
  3. To provide an individual with a fresh start in his finances.

 

Lets examine the reasoning and justification for each one:

 

1.  If an individual debtor is overburdened by debt to multiple creditors there is a collective action problem.  Lets look at an example:

John is a carpenter by trade.  He owns a Van worth $2,500 and has $2,500 worth of necessary tools.  He makes $3,000 per month.  He overextended himself on debt and owes 5 different credit card companies $5,000 each.  Without bankruptcy law each credit card company is in a race to see who can file and prosecute a civil case against John and then race to take his assets to satisfy the debt.  This results in extensive costs for all 5 credit card companies with one of them recovering $5,000 and the rest recovering zero.

It is in the interests of ALL parties if this doesnt happen.  By racing to take away Johns van and his tools, the total amount recovered will be LESS for the creditors than if John is able to declare bankruptcy.  (Now, bankruptcy law is complex and there is a difference between a restructuring and a liquidation but I am just illustrating a point here).  By allowing John to keep his van and tools a bankruptcy court might order that John be allowed to repay his debts over a period of five years, allowing all of the companies to be paid in full.  This is a win-win for all parties involved.

 

2.  This same concept can be applied to a company in distress.  For simplicitys sake lets imagine a company that earns 10 million dollars per year.  It has operating expenses of 9 million dollars per year and thus an operating income of 1 million dollar per year.  That is, the company opening every day and producing its products is creating gain to the shareholders and creditors of 1 million dollars per year.  However, the company has an interest expense of 2 million dollars per year and can no longer make its payments.  Lets assume in this case that the company has $500,000 of assets and owes $20 million to two different creditors.

In the absence of bankruptcy protection for the company, creditors will race to seize the $500,000 of assets.  The company will close down, and the employees will lose their jobs.  However, as the company operations are profitable it makes more sense if the company is given bankruptcy protection and is allowed to continue to operate while a deal is worked out between the owners and the creditors under the bankruptcy system.  There are many possibilities of how this might be worked out.  .  Most likely in the case that I described the company would be turned over to the creditors.  It would continue to operate and combined the creditors would both come out ahead compared to one of them seizing the $500,000 of assets.

3.  The third major justification for modern bankruptcy law is to provide a fresh start for a bankrupt individual.  There are really two motives for this.  The humanitarian motive is really just a second-chance motivation.  That is, much of society believes that people should be given second chances and not be burdened by an un-repayable debt for the rest of their lives.  The second motive is economic.  A man facing crushing debt who cannot ever keep another penny that he earns will simply never work again and become a burden on his family, friends, and/or the government.

 

Why Is This Relevant to Argentina?

Lets say we have a company in the US that typically is profitable and has promise for the future but is going through a slump and cant pay its debts.  We will call it Jones Manufacturing.  It negotiates with its creditors and 93% of them agree to take new bonds worth only 30% of the previous ones.  However, 7% of the bondholders refuse this agreement and attempt to seize the companies assets.  What would happen?  Again, bankruptcy law is complex but the short answer is that Jones would filed for Bankruptcy and with 93% of the existing bondholders agreeing to the restructuring the bankruptcy judge would be able to force the existing 7% into the same deal.

Simply put:  Argentina doesnt have this option.  There is no international bankruptcy court.

Hence, the issues that we discussed above come into play.  Creditors are racing each other to try to take Argentinian assets around the world.  By having to hide these assets and keep assets in Argentina ALL creditors are being impacted as it impairs Argentinas ability to operate in the world economy and thus be in as strong of a position as possible to repay its debts.

Why isnt there an international bankruptcy court?  First of all, international law itself is a tricky concept, and one that I intend to discuss in a later post, but countries have shown that they can work together under a variety of economic treaties and there is no reason why an international bankruptcy court could be created.  There have been calls for this before.  In fact, the IMF has been charged with the task of coming up with an international bankruptcy framework before.  The Economist Joseph Stiglitz has been calling for one as well.  The opposition to one comes mainly along the familiar lines:

1.  The contract is clear.  Argentina agreed to pay its debts in full.  Ryan McMaken of the Mises Economics Blog makes this argument:

Basically, the contract with the creditors is crystal clear. It does not allow for the Argentine state to weasel out of paying some creditors by striking new deals with some other creditors. It’s as simple as that.

Interestingly, he then goes on to say:

Now, I agree with Chris Westley that the Argentine government should just honestly announce that it has no plans to pay anyone back, and to make a clean default. That was a risk the creditors took. Indeed, while Stiglitz and Gusman claim that Griesa’s decision prevents a “fresh start” the only true “fresh start” here for the taxpayers of Argentina is a default.

Anything else is a twisting of a very simple legal contract to favor a relatively-powerful government over the interests of private investors. Argentina wants to get out of paying its debts either way, but if it honestly defaults, there will be a downside to its credit rating. On the other hand,  if it can game the legal system so that it can avoid making good on its debts while still not legally be in default, then that’s so much better. And, of course, that’s what Stiglitz et al want. Endless spending with no consequences, ever.

This argument makes no sense to me.  Argentina is trying to behave as if an international bankruptcy court exists.  That is, Argentina is trying to do the right thing.  It successfully negotiated with its creditors.  Under any bankruptcy court if 93% of creditors agree to something, the court would force the other 7% into agreement.

Now, unlike Stiglitz, I agree with McMaken that Judge Griesas ruling was correct.  Griesa is not a bankruptcy judge and the case was not a bankruptcy case.  It was not Griesas place to act as if it was, and it is not his place to impose international bankruptcy policy on the world.

It is worth noting that Argentina is not voluntarily in default.  Argentina wants to pay its creditors who agreed to an exchange.  In response to Griesas ruling, Argentina is moving again to do what it can to pay its creditors.  The holdouts have the option of joining the exchange creditors.

Why McMaken would encourage Argentina not to try to pay its creditors is beyond me, but I suspect that it is a failing to understand the underlying principles and reasons for bankruptcy law, and how bankruptcy law is beneficial to all parties involved.

With the litigation by the holdouts against Argentina and the exchange holders we see precisely the theoretical problem as outlined earlier above creditors working against each other to the detriment of all parties.

It is important to note that Elliot is not a vulture or evil.  Elliot is simply pursuing its own economic self interest.  While many deride Elliot for that, I dont.  I simply point out that this is precisely why international bankruptcy law is desperately needed.

The other arguments against an international bankruptcy court are really just arguments against bankruptcy law itself.  The most common argument against an international bankruptcy court is that It will make it harder for sovereigns to issue debt.  However, bankruptcy laws in the United States have certainly not decreased the degree to which lenders are willing to lend.   Over the last 20 years lending of all sorts has skyrocketed even as bankruptcy filings have increased.

Other arguments are just the same familiar arguments against bankruptcy in general.  Namely, that the bankrupt are deadbeats who shouldnt be given a break, etc.

The last 100 years of bankruptcy law demonstrate however that bankruptcy laws improve outcomes for both debtors and creditors.

In the face of this crises we have George Soros and Kyle Bass buying Argentine debt.  Lets take a look at that in part 3.

Argentinas Debt Crises -Part 3 Kyle Basss view And Mine.

Click here for Part 1 of this series:  An Overview of the Argentine Debt Crises.

Click here for Part 2 of this series:  The failing in international law that is to blame.

In April of 2014, before the latest dust-up over Argentinas bonds, legendary hedge fund manager Kyle Bass gave a speech to the CFA Society of Dallas.  In his speech he outlined his bullish stance on Argentina which he called the most interesting place in the world to invest for the next 3-5 years.

Heres the video, starting at 20:46 (embedding has been disabled):

http://youtu.be/VBPZ58dzjfE

 

The short version of his view on Argentina is  that Argentine Euro debt is a good bet.
Prices will go from 65 to 100 over next three years and meanwhile you
get a 13.5% yield.  The bad government will go and there will be huge
Foreign Direct Investment into Argentinian oilfields and resulting exports after. 

George Soros is also an owner of Argentine euro debt and has also placed a large bet on the Argentine Shale Boom.

Needless to say, with recent events these investments are not working out as well as planned.

With the latest decision by Argentina to attempt to pay bondholders in Argentina the peso on the unofficial exchange rate has plummeted:

 

Unofficial Peso Exchange Rate

However, Argentinas Euro Bonds are currently up since April, trading at around 76 cents on the dollar.  On the down side, Bass, Soros, and others have had to file suit and BNY Mellons UK subsidiary to force it to release its latest interest payment, as BNY is apparently concerned that it will be found in violation of the New York order discussed in my first piece on this subject.

My Own View:  Argentina has behaved reasonably well towards its creditors.  Originally, Argentina reached an agreement with 93% of its outstanding bondholders.  Had as US company with financial troubles reached an agreement with 93% of its bondholders, a bankruptcy would have forced the other 7% into line.  With better finances after the bankruptcy and a strong willingness to pay, capital would be readily available.  As discussed in Part 2 of this series, Argentina has behaved appropriately as a creditor, but is suffering from the lack of an international bankruptcy court to the detriment of all parties.

The Argentine leadership at this moment is borderline incompetent, but the new elections in 2015 should produce better leadership, and this should occur right when a huge amount of Foreign Direct Investment starts coming into the nation.

Basss view on the Euro bonds is correct, and they have  a healthy yield.  I would be more concerned about the US Dollar debt as at present there is no possibility to receive interest payments.  That being said, the dollar debt is plummeting in price as of late:

I am not sure what my entry point would be, but if there is another big move down and you have some cash that can sit for a few years, it might be a rock-solid choice.

This disruption in the repayments to the dollar bondholders will be worked out eventually by a nation that has demonstrated its willingness and ability to pay.

Once Again, The Name Of The Game is Fraud

There is much academic debate over what causes so-called bubbles This  is something I will post about at a later date.  However there doesn’t need to be one single cause.  It can be a blend of causes.  One thing we do know from every major financial crises is that looting and fraud are pervasive.

In the wake of the 1929 financial crises the Pecora Commission described wide-spread criminal behavior by National City Bank.  These findings resulted in the Glass-Steagall Act.

In April of 1994 George Akerlof and Paul Romer of the National Bureau of Economic Research wrote a study titled “Looting: The Economic Underworld of Banking for Profit”.

They examined 4 events in the 1980s:  The collapse of the finance sector in Chile, the S&L crises, The Dallas real estate and construction boom and bust, and the boom and bust of the junk bond market.

From the abstract:

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes….Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

“Bankruptcy for Profit” is the best was to describe the business model of Countrywide. It was announced yesterday that the government is putting together a civil case against former Countrywide CEO Angelo Mozilo, conveniently after the statute of limitations for criminal charges has expired.

Today we learn from the NY Times that a Texas based subprime auto lender has agreed to pay a fine for submitting bogus information to credit reporting agencies in order to get customers approved for sub-prime auto loans.

This is fraud – and it should be prosecuted.  Instead the government has extracted a fine.  All told the Obama administration has extracted over $20 billion in fines for Wall Street’s rampant criminal behavior.  Why no indictments?  One popular theory is that the banks are “too big to indict”, that is, that the government fears that criminal indictments will wreck the financial system.  This of course has it backwards:  It is criminal behavior that is wrecking the financial system.

Another popular theory is the “revolving door” theory.  This supposes that the various regulators all look the other way in order to secure lucrative jobs on wall street at a later time.  There is a lot of merit to both of these arguments.    I have written elsewhere that this behavior of looking the other way at criminal behavior and then extracting money from the criminals seems to mimic the behavior of Emperor Vespasian.

When Vespasian became emperor he was still dealing with the horrible fiscal mess left by Nero. One of his solutions was to let the tax collectors run rampant. He looked the other way while the tax collectors robbed the citizenry. Then, when they were wealthy, he would become the champion of the people and arrest the tax collectors and seize their ill-gotten gains, which he would of course deposit in the treasury.

As described by Suetonius in “The Twelve Ceasars”: “They were, at any rate, nicknamed his sponges — he put them in to soak, only to squeeze them dry later. ”

For some time now I  have viewed the banks and the government as essentially one and the same, and the two political parties as representing one pro-bank and pro-war party, that then squabbles over meaningless things in order to have us think they are in effect two different parties.

While I still feel the same way about the political parties, the recent fines and criminal inquires against JP Morgan and other banks have me wondering if perhaps I was wrong. Instead of the banks owning the government (or being one and the same) that in fact the banks are simply Vespasian Sponge’s.

Having bankrupted the country in all manners of spending (particularly raining bombs down on people on the other side of the world) the politicians figured that it was easier to let the banks steal from the population, (and then to squeeze the money out of the banks) then it was to just take the money directly from taxpayers (which might affect their re-elections).  This way everyone wins.  The government get’s it’s money, the bankers get their bonuses.

A Controlled Field Experiment on Corruption (Oh, The Irony)

Amadou Boly of United Nations World Institute for Development Economics Research (UNU/WIDER) and Olivier Armantier of the Federal Reserve Bank of New York both work for Public Institutions. Yes, I know that the Federal Reserve Bank of New York is not technically a public institution but according to its own website The Fed, as the system is commonly called, is an independent governmental entity created by Congress in 1913 to serve as the central bank of the United States. (http://www.newyorkfed.org/aboutthefed/whatwedo.html).

In short, by any moral standard they are paid for by the people and work for the people. They have written what to me anyway is an apparently interesting paper:

A Controlled Field Experiment on Corruption

Abstract: This paper reports on a controlled field experiment on corruption designed to address two important issues: the experimenters scrutiny and the unobservability of corruption. In the
experiment, a grader is offered a bribe along with a demand for a better grade. We find that graders respond more favorably to bigger bribes, while the effect of higher wages is ambiguous: it lowers the bribes acceptance, but it fosters reciprocation. Monitoring and punishment can deter corruption, but we cannot reject that it may also crowd-out intrinsic motivations for honesty when intensified. Finally, our results suggest several micro-determinants of corruption including age, ability, religiosity, but not gender.

The paper is appealing to me. Since I have lived overseas in countries that are considered corrupt I have been paying more attention to public corruption and how it works. As an aside: The
most thrilling book on public corruption is Its Our Turn to Eat By Michela Wrong (http://www.amazon.com/Its-Our-Turn-Eat-Whistle-Blower/dp/0061346594).

The abstract itself is not all that interesting, for example it is not surprising at all that the larger the offered bribe the more likely that it will be accepted and that higher wages lower acceptance. The last sentence is intriguing in that age, ability, religiosity apparently affect acceptance.

Great, so lets read the paper. Heres the link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2466849. Not available for download. What? Ok, lets google the title: All roads
lead to here: http://ideas.repec.org/a/eee/eecrev/v55y2011i8p1072-1082.html

So lets recap: Two people getting paid for an receiving benefits from public institutions have written a paper that is arguably important for public policy: And they are charging $35.95 to read it.

Oh, The Irony.

Do you have more cash in a bank account than is insured by the FDIC? You might not for long

Cyprus recently completed a bank bail-in for its troubled financial system. The terms are as follows: The German government is going to contribute 13 billion euros to help bail out Cyprus bankers and their Russian clients. What is Cyprus kicking in? As part of the program Cyprus will kick in 7.5 billion Euros by levying a one time tax of 6.75% from INSURED Cyprus bank deposits of E100,000 or less and a 9.9% tax on amounts above that. What does this mean for you? The concept of the bank bail-in is picking up traction around the globe. By and large this is a good thing: The government should stop bailing out banks altogether, and to the extent that the government offers deposit insurance (which it shouldnt) it should only insure the amounts that it has agreed to insure and not increase them every time the banking industry is about to collapse from its usual dosage of greed, fraud, and poor investment decision making. Both the US, UK, and EU have adopted a framework for the next melt-down that is vastly preferable to the last bailout. The appropriate section of the Dodd Frank legislation reads as follows:Title II of the Dodd-Frank legislation reads as follows:

Title II of the Dodd-Frank Act provides the FDIC with new powers to resolve SIFIs by establishing the orderly liquidation authority (OLA).Under the OLA, the FDIC may be appointed receiver for any U.S. financial company that meets specified criteria, including being in default or in danger of default, and whose resolution under the U.S.Bankruptcy Code (or other relevant insolvency process) would likely create systemic instability.3 Title II requires that the losses of any financial company placed into receivership will not be borne by taxpayers, but by common and preferred stockholders, debt holders, and other unsecured creditors, and that management responsible for the condition of the financial company will be replaced. Once appointed receiver for a failed financial company, the FDIC would be required to carry out a resolution of the company in a manner that mitigates risk to financial stability and minimizes moral hazard.4 Any costs borne by the U.S. authorities in resolving the institution not paid from proceeds of the resolution will be recovered from the industry.

What this means is that next time around the US is prepared to do the right thing:If a bank is in danger of default the FDIC can take over the bank and begin an orderly liquidation of it. The losses will be born by stockholders, debt-holders, management, and other unsecured creditors. That other unsecured creditors is your deposits that exceed the FDIC deposit threshold of $250,000. A common strategy to minimizing this risk is to simply have more than one account at more than one bank, but it is not clear that is going to work. Senior policy makers in the EU and the US are questioning that route, and it appears that it will be up to the interpretation of the relevant deposit insurer when the time comes. Seeing as the FDIC is under-capitalized even now and that the next time there is a melt-down it is likely to be worse than the previous one, I dont consider relying on such a strategy to be prudent. A better solution is jurisdictional and currency diversification. By spreading your money out in banks across the world in different currencies, your risk of losing your hard earned cash is greatly diminished. You might lose some of your money, but you are not going to lose it all which you are at risk of now if it is all in one place.

Public Transportation in The Caribbean

I love to travel, but like everything else it has its ups and downs. One of the things that causes me the greatest anxiety is using taxis in new places. Frankly, I dont like getting ripped off.

Dont get me wrong: I understand that in Panama there is going to be a gringo premium. I dont really mind paying 3 dollars for a ride that would have cost a local 2 dollars. Similarly in Kenya I didnt not mind paying 300 shillings for a ride that would have cost a local 200 shillings.

When I was in Kenya almost every night I used to walk from the apartment to the same group of cab drivers about 50 yards down the road to take a mile or so ride to a street corner that had my favorite restaurant in Nairobi on it (Cedars). On the rare occasion I was bored with Cedars I could go nearby to Osteria. Also on that corner was the night club Casablanca.

I had made this trip (and then back) at least 50 or 60 times with the same cab drivers. Yet every time I got it and said Cedars they would say 400 shillings. I would then have to say no, 200 shillings and then we would settle on 300 shillings. On the way back it was the same thing only I didnt have to tell them where I was going because they knew.

In my last week in Nairobi I went through this same routine. It was a little bit late when I was coming back and I didnt feel like arguing with the guy. He said 400 shillings. I said ok.

With that, the new price had been set. I could not argue at all with any of them anymore. They knew I had paid 400 shillings for that ride once, and they were going to make sure that was what I paid from now on.

Fortunately I only had to deal with that 3 times or so as it was my last week.

Which brings me to tst lucia bushe Caribbean. Taxis in the Caribbean are expensive and it is a constant hassle to deal with them. I went to St. Lucia last month and decided I would learn the bus system. Check out the picture to the side. Every one of those minivans with a green license plate is a public bus they are everywhere. They seem to have some pre-arranged stops but also you can just flag the down wherever you want and ask the to let you out wherever. I cant quite figure out precisely how the pricing works, but every 5 miles or so costs you a 1.50. I had no problems.

On my recent trip to Anguilla I got done with work a day early and so decided to spend the night in St. Martin which I had not done before. Looking around on the internet it looked like it would be 25-30 dollars to take a taxi from the airport to Philipsburg, and that I would have to haggle with the cab driver. Unwilling to do that I decided to try taking the bus. Im glad I did. It was an adventure and I enjoyed it quite a bit.

It turns out taking the bus was easy, and it only cost me 2 dollars for the 30 minute ride to Philipsburg.

Below is the view from the minivan.

IMG_5579

And yes, did manage to hang out at the end of the runway in St. Martin. I did not get to see a 747, but I shot this video that is pretty cool:

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