Bluematter.

In case you missed it, here is the question, answer and various links. So, what's going on?

Bernanke, the preeminent economist, has turned banker. (Or, to be more precise, he is acting banker because this is what is expected of him. I read his answer as 'I know better, but I operate within constraints'. Time man of the year or whatever, Bernanke does not single-handedly set monetary policy - far from it.)

The distinction is simple. The economist wants to return the economy to trend growth and reduce unemployment. Inflation is important, but it's no holy grail.

The banker, on the other hand, just wants inflation to be low so that the real value of debt does not fall. And that's basically it.

The Fed is completely captured by bankers. Forget about bonuses, bankers are screwing the economy by controlling the intellectual climate and policy apparatus so that inflation stays low - too low.

And by the way, a very similar question was put to the Governor of the Bank of England about a month ago - scroll down to question 49.

A few months ago I recorded a discussion with a Palestinian friend who had recently returned from a trip in the West Bank, where he visited an Israeli settlement. Before reading this post, make sure you read part 1, and the disclaimer.

Part II

About the wall. What they did, they said because we want to protect ourselves from suicide bombers, we are going to build a wall around Palestinian territories. And they told the world that it's around the West Bank only, you know, just to protect Israel from suicide bombers.

Apparently, the wall is not only around the West Bank - it's like, they don't like this village, there is a wall circling it all over. It's more like small prisons rather than a single wall identifying one country from another. It's going all the way according to their, you know - it's disconnected. It's not like one single wall.

I was telling you at the beginning about the settlement. So I told him [Asad's cousin], I want to go see a settlement. And he said, yea, I know a settlement next to Ramallah, they sometimes allow Palestinians to go. I said, how come they allow Palestinians to go into this settlement - he said yea, it's good business for them - not any Palestinian, they know that you are going to buy food or clothes or something. Right now it's calm, there isn't much tension, so they might just turn a blind eye and let you in. So I said OK, let's go and check it out.

And he goes, for him, you know -- 'it's the best supermarket you'll ever see in your life, it's out of this world, the supermarket is huge, you can find anything you want'. I mean, it was definitely like a 7-Eleven, or a Tescos or Sainsbury's - but my cousin, you know, compared to the standards they have in the West Bank - for them, it's something out of this world. [Asad's cousin lives in Nablus]

So, anyway, we were stopped outside the settlement - all the other cars are passing, but the soldier at the checkpoint in front of the settlement says 'you come this way'.

My cousin is very cynical, you know; when he speaks, he says everything as a kind of joke or something. So he tells the soldier - 'Why, everybody is passing through here, and you are telling us to stop'. And the guy with the rifle [the IDF soldier] says 'You are Palestinian'. And my cousin says 'But we are the best people!' [Asad laughs at this point] And he asks the soldier 'Why, where are you from?'; by the way, the guy with the rifle was speaking in Arabic. And he says 'I'm Israeli' - so my cousin tells him 'Ah, you are also the best people!' [Asad laughs again].

So the guy smiles, you know, and he told us 'OK, guys, since you are Palestinians, do you have any guns hidden, or rifles, or bombs' - so my cousin looks at him and he tells him 'But you are carrying the gun! It's not me carrying the gun'.

[Asad and the other friends in the room are all laughing] And the whole scenario is just so funny, because of the stereotype you get that we are meant to be trying to attack them, and here's the guy holding a gun and asking us if we have weapons.

So he [the soldier] said 'OK, open the boot of the car'. So we opened the boot, we had a few bottles of arak that I got from the duty free when I arrived in Nablus, and he looks and he goes 'Tsk, Haraam, Haraam - Muhammed, this is Haraam!' [Asad laughs again]. And we told him, 'ah, we are just having fun, and we are going out, for a night out in Ramallah, so we stocked for that'. So he goes, 'OK, good luck, go in'.

So we went into the settlement, and we were trying to park. The settlers, of course, they are all carrying weapons - it's a very nice family, you know, you get to see little girls, kids; each settler has - these guys they make babies much better than the Palestinians, I have to admit that. [Asad laughs]. You see them walking with five-six kids and the dad carrying a big M-16, a nice family.

Of course they can tell from the plate that we are Palestinian, trying to park - nobody's letting you to park. He's coming with the trolley, you know, and his family; he sees that this car, Palestinian car, wants to park, it's like against his religion you know [laughter]. He looks at you and goes 'no, no, you can't - I'm not leaving'. So we stayed there for thirty minutes maybe, and we are trying to find a parking spot.

At that moment, to be honest, I was scared. Because they can easily lock you up, or hit you, and what's gonna happen? At the end of the day, you are nobody. They will fuck you up and say, well, he's in a place that he shouldn't be. So I told him [Asad's cousin], 'man, it's OK, I don't want to see it, let's leave'. And he said ' no, no, don't worry, you'll get used to it'.

So in the end we managed to park and we walked to the supermarket. Because we were late for half an hour the guys [the IDF soldiers at the checkpoint] had already spoken on the walkie talkie to the guys inside the settlement asking if we had showed up, so they were looking around for us; when we showed up they came to us and said hello. Because, anyway, they can't tell by looking at someone's face that they are Palestinian - in the settlement you get people that are Moroccan-looking, Iraqi-looking, British-looking, French-looking, all sorts. So they can't tell that someone is Palestinian just by looking at them.

I'll be posting the final part soon.

A few months ago I recorded a discussion with a Palestinian friend of mine who had recently returned from a trip in the West Bank. Asad is from a well off family, he is UK-born and holds a British passport. He grew up in Nablus in the West Bank, and he has spent more than 10 years in the UK where he went to boarding school (from the age of 15) and university. He currently lives and works in Jordan.

Before continuing, a disclaimer: I am not a journalist, and the text below is not meant to be a fair and balanced depiction of reality, or even a statement of my own views. If you have any objections to anything you read, especially concerning facts, comments to this post are open and (respectful) contributions welcome.

What follows is a verbatim transcription of the discussion. Whenever anyone other than Asad speaks the text is in italics (I remained silent throughout, but other friends - all Europeans - were also taking part). Here goes:


Part I

The West Bank, politically, is Palestinian land - under UN law it is for the Palestinians. Now you get a Jewish guy coming from Russia, and they all have a station car or a four-wheel drive. And he's allowed to go anywhere - you know, it's his country - so he goes at the top of a mountain for example. He camps there, first with a tent. Then a few friends come along. It's just a tent - by law that's all right.

By the way, by the law they are not allowed to build anything; if the soldiers know they are meant to stop them. In the beginning, there will just be tents; then after a while you see a single house has appeared. If you complain about it, nobody shows up to check the house. After a few months, after the house has been there for a while, practically it's his - even though it's your land. The guy has a weapon, you cannot go in, and that's how it starts.

So we went to this settlement that's next to this Palestinian village. My cousin is a distributor for [a big Israeli company], so they've given him identification so he can move around the West Bank, including the settlements.

- So, normally Palestinians are not allowed to visit the settlements? 

No, and not just settlements, there's no way you can move around in the West Bank; you come from this village, you stay in this village; you come from this town, you stay in this town. You get people who haven't left their village or town for ten years now.

-So from Nablus you can't go to, say, Bethlehem.

Man, you get people in Nablus who haven't been outside Nablus in ten years now. Never seen anything outside Nablus for ten years.

- So is the wall covering the whole of Nablus?

Actually, there is no wall next to Nablus, but on the main streets there are three checkpoints. The checkpoints, I'll tell you about them.

We went out of Nablus, and he [an IDF soldier] said please walk, get out of the car. I told him we have the license and stuff, he said no - walk. They are like an international airport these checkpoints, it's not a checkpoint per se; you have a rotating door, and this is for the car, and several guns pointing at you from several directions; I got scared at that point. Why is he asking me to walk when I have the permit to leave?

So I walked out of the car and the guy said, well, he started speaking to me in Hebrew. I tell him no; only speak Arabic or English. One of them then goes, 'hold on, you speak English you said'? And I said yes, I do speak English. And he said - in Arabic - 'how is it to curse?'

And I thought, shit, this is gonna - because you hear stories, of them making fun, taking the piss. The guy is bored at the checkpoint and he wants to insult you basically so he tries to insult you in any way he finds. So I think, fuck, I'm not going down this route, you know.

And he said 'you know, bitch, fuck, how do you curse?' And I said 'I don't know these words man; I just learned English in school, they don't teach us these words'. And then he goes - in Arabic - 'no, you know, sharmuta, manyak - speak some Arabic swear words. I want you to curse'. And I spoke a few swear words in Arabic. And he said 'OK, come with me'.

So I went into that room, and they had a guy, they took out his shirt, put it on top of his head and two guys are kicking him. Apparently, on the check point, after he left, he cursed at them. And they did the whole thing, they made everyone wait for an hour, with so many cars behind you know, and they are beating this guy and waiting for someone to come and tell him that they are beating him because he is cursing on them. And most of the time of course they can speak full arabic. But it's just - you know, setting an example. So, in this case, the whole thing was for me to see what's happening so they can set an example - the guy [the IDF soldier] spoke perfect Arabic, they didn't need me to tell the guy anything. [pause]

At checkpoints, you cannot move unless he [the IDF soldier] tells you to move. And with these guys, you know, it's random; he can tell you 'wait for an hour and after one hour I'll let you guys move'. They don't need a good reason to do that.

- Where was that? 

In Nablus, going out of Nablus.

- How could you go out of Nablus? Because you have a UK passport?

No, because there is the permit which allows you to go. Personally, I had my British passport on me so, I wanted to use it, in case - but also, man, for them it depends on your face and whether they buy your story, it's all judgmental...

- So, the people who haven't been able to go out of Nablus for 10 years, they can't get the permit?

Yeah, some of them can't get the permit. And some of them when they go to the checkpoint - they ask you questions you know, 'where are you going?' - and if he doesn't buy your story, well, OK - go back. So you have to have a good reason [to move]- you go to the checkpoint, he'll ask you for your permit.

- So why can't they apply for the permit?

Well, most of them [Palestinians in the West Bank], they'll either not get it or not try to apply.

- So how come you got one? Was it because of your passport?

No, no, I applied normally - most people can exit and leave. But man, you end up paying £200 for the journey, you know over there some people just can't afford it. And most importantly, there are no guarantees that the town won't be blocked and then you can't come back; you know there's all these logistics. If you are going on holiday and you are not well off, and you know there is this a slight chance that Nablus will get locked for three weeks, I mean, this is not something you risk.


I will be posting parts two and three once I get a chance to transcribe them, hopefully later this week.

A formatting fubar involving an Excel spreadsheet has left Barclays Capital with contracts involving collapsed investment bank Lehman Brothers than it never meant to acquire.

Working to a tight deadline, a junior law associate at Cleary Gottlieb Steen & Hamilton LLP converted an Excel file into a PDF format document. The doc was to be posted on a bankruptcy court's website before a midnight purchase offer deadline on 18 September, just four hours after Barclays sent the spreadsheet to the lawyers. The Excel file contained 1,000 rows of data and 24,000 cells.

Some of these details on various trading contracts were marked as hidden because they were not intended to form part of Barclays' proposed deal. However, this "hidden" distinction was ignored during the reformatting process so that Barclays ended up offering to take on an additional 179 contracts as part of its bankruptcy buyout deal, Finextra reports.

The Register has the full story. As Merv has always warned, 'horrible things happen when you hide cells in excel'.

I see this as a manifestation of a wider lack of education on the importance of communicating information efficiently. The Spartans, Tufte, Strunk and White, the Economist, Picasso and numerous econometricians have done a lot to improve things, but management-speak, TV advertising and other such phenomena show we still have a long way to go.

In case you missed it, Friday saw a hell of a meeting:

The intense discussions reportedly saw US Treasury Secretary Henry Paulson literally down on one knee, begging Ms Pelosi to help push through the bail-out package.

It looks like economists may have had something to do with the plan bein' stalled and all:

Republican Senator Richard Shelby moments ago on CNN explaining why the tentative deal reached earlier today is bunk:

"If 200 of our economists say the plan is flawed we should listen to them."

Here's the statement by the actually 192 economists.


And last but not least, Greg Mankiw's smart friend discovers a free lunch - go no further than point 1.

I was wondering about that. Zubin Jelveh has the answer:

[...] There are roughly $14 trillion in outstanding residential and commercial mortgages and five percent is also roughly the loss rate on those categories, he added. Five percent of $14 trillion is = $700 billion.

Nice.

"It's not science," Bernanke said.

There are two main reasons people don't want government interfering in private markets:

1. The rule of law. No-one can be referee and player at the same time, and government officials should not be allowed to use their discretion to benefit one player over another.

With the Paulson plan, not only will there be discretionary action on a vast scale, but it also looks like there will be a minimal degree of accountability. This is not specific to the current plan however: any 'solution to the crisis' requires discretionary, arbitrary actions by the Treasury and Fed.

2. Government is inefficient. It is likely to make a mess of things and waste taxpayer money, so if something can be handled by the private sector it should be.

What I find funny with the Paulson plan is that instead of doing something to address this worry, it actually guarantees that taxpayers' money will be wasted. The fund is limited to buying worthless securities, so it doesn't even allow the possibility the taxpayer might turn a profit or even minimise the loss. It boils down to preferring to lose money instead of running a risk of losing money.

And what makes this even more remarkable is that the current environment is the best possible for government to actually make money by investing in financial markets. Following standard commentary, the biggest problem right now is not that there are gigantic losses in the system, but rather a lack of liquidity and a lack of trust. Government is the unique institution right now that enjoys an abundance of both, and in any economic system whoever controls the scarce resource is amply rewarded.

A plan along those lines, albeit one which I think could be improved, is described here. The Economist blogger's reaction is telling:

I get the feeling that a bigger hurdle to the latter plan than any real concern would be a gut Congressional reaction against the government taking equity stakes in a broad array of American corporations.

The Zingales plan also has much to recommend it, although it wouldn't be my first best option.

For my take on the long-term solution to the problems in the finance industry, tune in later this week.

Many (other) serious people think the Paulson plan sucks: see Naked Capitalism, Politico, and of course Tyler Cowen and Greg Mankiw.

Empires came crumbling down, blood flowed on the trading floors and the real economy quickly headed for the Great Depression mark II. The collapse of Lehman Brothers led to a true Black Week, as predicted by numerous self-serving bankers.

Only it didn't.

The Dow fell from 11260 four days ago to 11060 yesterday - that's 200 points, or 1.8%. When future dictionaries define 'disaster', they will not be displaying this picture by means of example:

(Source: Yahoo finance)

Now, the worse is not necessarily over, and markets might yet crash as a direct result of this week's events. There is still a not-so-reassuringly-low probability this blogger will have to eat his words in the not so distant future. But so far it looks like Lehman's demise caused no more than a shrug.

It really is impressive how quickly the lessons of Bear Stearns were not only understood but also put to action by the bankers (be sinister and wait long enough, and the Treasury will give you a bank for free.) Yet, it is even more impressive how the government put an end to the emerging orthodoxy.

A proud week for everyone fighting on the taxpayer's side. Public officials, I salute you!

Assume house prices fall by 50%. Heck, assume stock prices also fall by 50%. As Tyler Cowen notes, no houses are dynamited. No factories are burned to the ground. No people are shot. In short, no resources are used up. We, as a society, have exactly as much material wealth as we did before.

At the end of the day, a massive fall in asset prices is nothing more than a transfer of resources from people that hold a lot of assets to people that hold few assets.

In fact, it is very difficult to argue that a fall in asset prices is not in fact a good thing. Asset-heavy individuals tend to be rich(er) than asset-light individuals. We, society, value redistribution. In fact, we value it so much that we impose highly distortionary taxes to achieve it. A massive fall in asset prices means that we now get a lot of redistribution with none of the distortionary effects.

One more thing: Tyler says 'Most of the costs of overinvestment in housing already have been borne in the form of lower living standards, namely we have fewer non-housing goods and services.' Of course, this implies that as P went up, Q supplied went up as well - but the housing market is a bit different to regular markets. In crowded European cities at least, Q is constained by the planning system, which responds to price changes very slowly and not necessarily in the direction a profit maximising supplier would. Given that the opportunity cost of utilising your land for housing is extremely low (how much do you think agricultural land is worth?) if you can get permission to build you do so as long as construction costs are less than the price the house will command (a near certainty for any development reasonably near to civilization).

In other words, high house prices are unlikely to have had a massive effect on building activity, thus driving a misallocation of resources on a grand scale. Strictly speaking, it is the land price bubble that burst; not the housing bubble.

Israel's deputy defence minister has said Israel will have "no choice" but to invade Gaza if Palestinian militants step up rocket attacks.

Matan Vilnai said Palestinians risked a "shoah", the Hebrew word for a big disaster - and for the Nazi Holocaust.

"We're getting close to using our full strength. Until now, we've used a small percentage of the army's power because of the nature of the territory," he added.

From BBC News. And the follow-up:

[...] many of Mr Vilnai's colleagues have quickly distanced themselves from his comments and also tried to downplay, them saying he did not mean genocide.

FRIENDS of rogue trader Jerome Kerviel last night blamed his $7 billion losses on unbearable levels of stress brought on by a punishing 30 hour week.

Kerviel was known to start work as early as nine in the morning and still be at his desk at five or even five-thirty, often with just an hour and a half for lunch.

One colleague said: "He was, how you say, une workaholique. I have a family and a mistress so I would leave the office at around 2pm at the latest, if I wasn't on strike.

"But Jerome was tied to that desk. One day I came back to the office at 3pm because I had forgotten my stupid little hat, and there he was, fast asleep on the photocopier.

"At first I assumed he had been having sex with it, but then I remembered he'd been working for almost six hours."

As the losses mounted, Kerviel tried to conceal his bad trades by covering them with an intense red wine sauce, later switching to delicate pastry horns.

Well, that should finally be enough proof that the whole 'lump of labour fallacy' thing is an evil Anglo-Saxon conspiracy to destroy ze vorld. All credit to the Daily Mash for the scoop.

They started it!

Looks like the worst is past now, and we can finally breath a collective sigh of relief.

There's much to be said, but I will keep this short. I am sad about the state of Greek journalism; however the resilience exhibited by the country's young political institutions a mere three weeks before a general election can only fill me with pride. There lies hope in the ashes.