March 5 - 11, Finance and Economics: Chaos and uncertainty reigns! European debt, Chinese Banking, Dodd-Frank Section VII rules, Hong Kong housing, and Yunus gets early retirement five years late!

Well, so much for that experiment - I know what you're thinking (all ten of you, and probably my family) - I missed the midweek Economics Focus piece that I had promised. Apologies - this was a busy week (again). But I have to say, I am getting a lot out of this, even if it's a relatively pointless exercise in terms of accumulating any sort of real readership. I am finding that like a New York Times crossword, there are repeated patterns and concepts in the section, and it pays to read the section week in and week out. I think I'm picking up some basic concepts as I go and starting to recognize consistent themes - Basel 3, capital ratios, all of that stuff. You'll see what I mean if you've been paying attention, and you'll notice that some stories are continuations of past stories, and the section almost seems naked without mention of certain recurring themes. For instance, we are all shocked that not a word was mentioned this week about emerging markets or fuel prices. And no Robert Shiller, although he was interviewed on NPR this week about housing prices...is this dude going to win the Nobel or what!?But I know you can't wait to get on with it...

In this week's Economist Finance and Economics section:

• The writers get tired of coming up with new cover stories, as we have another long one about Europe's sovereign debt crisis. Things don't look good in Europe, but then again, where do they look good (other than Brazil?)
• We get a dose of a kind of wishy-washy analysis of China's banks - I can't tell if they're in trouble or not, and it would seem that neither can the Economist.
• We get the entire value of the magazine in a rather complex article about the new Title VII section of the Dodd-Frank act on financial reform relevant to derivatives. Get out yer' econ book for this one folks. 
• An interesting snippet about a study that suggests that Americans living in sunny places may be more tolerant of public sector wage premiums because they are simply less likely to move away than cold-state citizens as taxes and inefficiency in the public sector rise. 
• An article highlighting the recent EU court decision mandating the elimination of gender as a variable in the actuarial science of insurance policies.
• A brief snapshot of the ouster of Mohammed Yunus, the founder of the Grameen Bank and winner of the 2006 Nobel Prize. Disappointingly, not much about the controversy surrounding the bank nor many details about the political issues at the heart of the expulsion.
• A compelling argument for why you should not look to buy a house in Hong Kong.

But first...drumroll...

This Week's Fun Economic Facts:

• Earnings by China's banks rose by 20-50% in 2010
• American bank-holding companies made $12.2 billion in derivatives trading in only the third quarter of last year.
• 350: The number of people currently employed by J.P. Morgan trying to interpret the impact of Title VII section of the Dodd-Frank act on financial reform.
• 5000: The number of comments received by government regulators at printing from industry stake-holders on the rulemaking for the same legislation.
• Grameen bank has nearly 8.35 million clients, and as the Economist points out, most of them are poor Bangladeshi women.
• There are 31,306 licensed realtors in Hong Kong - 40% more than in 2009.
• According to the magazine's index, real estate in Australia is currently overvalued by a whopping 56%.
• Hong Kong, Singapore, and Switzerland are the only three property markets where real estate is more overvalued now than at the beginning of the economic downturn.

As always, we'll review the articles one by one, after the jump (that means there's more, so click: Read More!)

 Sovereign Remedies: In the last month's sections, the Magazine has covered the troubling debt crises in Portugal, Greece, and Ireland, and more to the point, have described the various approaches the EU is exploring to keep the Euro-area economically viable including the massive bailouts and the proposed schemes to bargain debt buy-backs (which they covered a few weeks ago.) This week's piece seems to be a timely overview of the scenarios, including the causes of the original problems and their potential remedies, as European economic summits take place March 11-24, and as the domestic political realities of Ireland and Germany (and possibly others) have started to loom somewhat larger in determining what can be done. In Germany, long seen as the reluctant "rescuer", Angela Merkel faces domestic opposition to making concessions to the "rescued", while the new ruling coalition in Ireland led by Enda Kenny may wish to revisit some of the more harsh conditions placed on their own deal in November including the interest rate negotiated at the time (5.8%). According to the magazine, the Irish will likely contend that their problems were caused by a different malady than in Greece where the massive public debt was caused by bad policies and fiscal indiscipline, as opposed to Ireland, where the problem stemmed from a banking disaster. Meanwhile, all of the proposals to move forward seem to be hitting snags. Two economists, Nouriel Roubini and Brad Setser have written a book that suggests that the proposal to allow debtors to repurchase their own debt through subsidizde bonds would actually increase the price of the bonds themselves, which of course would undermine the concept. Also, no matter the merits of the Irish case, the German Bundesbank is not really interested in making concessions, as noted above. Even with a lower rate, even a rate lowered by as much as two percentage points, debt would still peak at 150% and 125% of GDP in Greece and Ireland, respectively (and we haven't even mentioned Portugal!) The prospects look dire, and the article suggests that default and restructuring may be the final solution, even if it means destabilizing the European banking system.


 Cognitive Dissonance: If there is anybody out there with expertise in the banking sector, you might help me interpret this one. Basically, despite posting record earnings of 20-50% in 2010 with more good numbers in the first quarter, there are signs that Chinese banks are heading into troubled waters. First of all, the banks, says the article, have typically traded at 2.3 times their book value and 12-13 times future earnings, whereas right now, they are only trading at 1.5 times their book value and eight times expected earnings. Accounting for the change could be anticipation of a massive increase to the currently minuscule losses of 40-50 basis points (which I had to look up) despite the fact that  losses should be much greater as a result of a government-mandated credit expansion (which we covered a few weeks ago.) Another reason for concern is the extension of credit to local government and property investors, but it's not clear how risky the real estate market currently is, and this article sheds no further light on the subject. Nonetheless, an accumulation of reserves seems to imply that the banks are accounting for risk in their lending. It would also appear that the central government's economic plan to restrict credit and to cool off the ridiculous economic growth China has grown so accustomed to; yet credit is still expanding. This article is so confusing it seems paradoxical - there are concerns that credit has been over extended, yet concerns also that credit will be constricted; there is concern as to whether or not banks are sufficiently capitalized, yet banks are raising capital above and beyond what they already hold, which the article acknowledges is in excess of global standards.  I give up - if you get this article, e-mail me.

Unlucky for Some: Unlike the article before it, this is a fascinating article about the snags and snares of creating new regulation of a heretofore unregulated market under new requirements to consult with affected stakeholders during the rulemaking process. It's also great because I learned some new terms and had to do some research just to understand what we're talking about. (If, like me, you don't know much about swaps and derivatives, I suggest you look up derivatives in the Economics A-Z for a primer on swaps. I had to.) As we've discussed in the past, there is new legislation called the Dodd-Frank act on financial reform (Actually, the Dodd-Frank Wall Street Reform and Consumer Protection Act; all 2319 pages can be found here for your reading pleasure.) As rule-making proceeds for Title VII of the act, that which deals with over-the-counter derivatives, the consequences of the details of the section are difficult to determine and heavily debated. One of the issues is that the reforms, including the creation of "Swap Execution Facilities" (which as far as I can tell are just transparent trading mechanisms, but defined by the act as: "a facility, trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system, through any means of interstate commerce.") will make transactions more expensive, and the big dealers such as JPMorgan and Goldman worry that these costs will put a dent in the $12.2 billion dollar market of derivatives trading. But beyond the implications of specific reforms, it's no wonder it's causing confusion. First of all, there are two independent government agencies writing the rules for the section: the Commodities Futures Trading Commission  and the Securities and Exchange Commission (for the securities based swaps only), including 1000 pages worth by the former, prompting 5,000 comments from stakeholders. (Although I contest the Economist's suggestion that it is unusual to solicit comments, and in fact, is a new requirement under E.O. 13563 to publish rules in the federal registry for public comment prior to implementing regulations.) But back to some of the proposed rules and their effects. For one thing, some banks are concerned that the new requirements for transparency of the transactions ("post trade reporting - tried to look that one up to no avail.) could mean that any one dealer might be more reluctant to go through the process of offering customized quotes on contracts for fear that their hard work might be cherry-picked by rivals. In addition to these kinds of concerns, and those from the hedgers themselves about cost transfers to them, the concern remains that the two agencies won't be able to coordinate with one another on regulation, and even more complicated, it's unclear how cross-border deals will take place, especially in light of the fact that the EU is creating its own derivatives based rules. Good grief, anybody know a good reference to learn about hedge funds and derivatives?

Sun, Salaries, and Public Servants: Another of my favorite kind - the "quickie", usually a small blue shaded box with a short article. In this case, and this is kind of cool, an article about a certain kind of "tax" on living in better weather. Two economists (do they always work in pairs?), Jan Brueckner and David Neumark of UC Irvine, argue that the "wage premium", (i.e. the additional wages earned by laborers extracted from their employers above that which can be explained by education or experience) is tolerated for public sector employees by the local taxpaying public in sunny states such as California and Florida more so than in states where the weather is colder. Usually, the wage premium is paradoxically lower for public sector employees than their private sector counterparts because taxpayers can pick up and move elsewhere - but in nice places, the residents seem to be willing to tolerate more inefficiency. Hmm. A short article, so not much by way of analytical or statistical support to explain this - not sure how parsimonious this variable can possibly be among a host of others.

A Boy Racer's Dream? I'll be quick with this one - not sure you really need to read it, although it is kind of interesting. On March 1, the European Court of Justice ruled in favor of a Belgian Consumer protection group called Test-Achats that gender should not play a role in determining insurance rates. Gender, evidently, has for a long time played a more general proxy for a number of other criteria that could be used in actuarial science to determine longevity and risky behavior - but not any longer. Until the insurance companies figure out the science-minus-gender, the article worries that the additional "uncertainty costs" will discourage annuity investment (annuities must be priced based on actuarial determinations) and thus could actually be counterproductive.

Halo, Goodbye: One of the bigger stories of this month among the micro-finance cognoscenti is the ouster of Grameen Bank, Mohammed Yunus by the Central Bank of Bangladesh on the pretense that he is violating policy by remaining in his position despite a rule requiring bank managers to retire at age 65 (even though he has technically been in non-compliance for five years.) This article speculates, as have many, that it is a grudge held by Prime Minister Sheikh Hasina for the 2007 political ambitious of Yunus, rather than any real violation of rules. And, as have many others, the Economist provides the list of Yunus' supporters, from economists to the government of the United States. Sadly, as the article notes, if the action provokes instability for the bank, many of its investors may lose out - and they are primarily poor women. Unfortunately, the article does not get into the debate about some of the controversy of the bank, including the fact that many of its debtors are currently having a great deal of difficulty paying their loans, having been extended credit without any regulation governing the transactions. I also take this opportunity to offer a rare recommendation for an article in another periodical, in this case a wonderful one page article by one of my favorite writers, James Surowiecki, about the unintended consequences of micro-finance.


Hong Kong phew-whee: As noted in this week's economic facts, Hong Kong now has in excess of 31,000 real estate agents- almost as many as Herndon, Virginia (ba-dum-cha!) But this article is really about the results of the Economist's quarterly housing price indicators index, which shows a new winner in the housing price increase category. In Hong Kong, the ratio of price to rent (rent should be a good indicator of housing value) has now surpassed 53% and rising, nearing the Australian high of 56.4%. Remarkably, or not, in mainland China, the ratio hovers around 13%, which means that mainland wages are probably not enough to compete with prices in Hong Kong. Luckily for me and my wife, the U.S. over-valuation is now only at 10.2%, but in an article clearly written before the Japan earthquake and by no means intentionally cruel, we learn that Japan is the real deal, where property is actually undervalued by a full 33%.

So, that's it until mid-week, and I will do the Economics Focus and highlight a few other articles I've come across, including a great one in Foreign Affairs about currency wars that will shed some light on some of the past weeks' articles.  But more importantly, it's Selection Sunday and George Mason pulls a Big East heavyweight in Villanova in the first round. Rough pick. My hometown of Greeley will send the University of Northern Colorado Bears up against the red-hot San Diego State Aztecs. But, of course, my thoughts are with the people of Japan and Libya and everywhere else that seems to be in the crucible of conflict or tragedy this week.

** Monday morning, I will go through and do the proof-reading I should have done before publishing. Sorry for the "raw-ness" of the first posts - lots of grammatical mistakes and some clumsy prose.