For equities, “naked short-selling” has been banned in the US for quite sometime now, though its enforcement has not been entirely effective (it is obvious that it’s very hard to enforce, if not impossible – even in Germany). One can still short sell the securities in question, or even should be able to short sell them naked if they are reasonably confident that they can borrow the securities (although I am not sure, at this point, how Bafin will implement and enforce the rules). The ban in Germany seems to be far less comprehensive than the restriction in the U.S.

As for the government bonds, the targets are limited to “debt securities that are traded on a regulated market”. Derivatives, such as bund futures seem to be excluded from the restriction. Thus, the securities affected should be limited primarily to German and Austrian bonds listed on German exchanges. Big deal? No, not at all.

Also, CDS transaction volume in Germany is quite limited, so the ban should have little impact, if any. Most European CDS trades are taking place in the UK, and it is very unlikely that the UK FSA will follow suit. Even subsidiaries of German banks/funds in the UK should be able to trade “naked” CDS in the UK without restrictions. Given these, the “ban” is obviously a – deliberately ineffective – blank shot in the air and has little substance, if any.

So what’s the buzz? It seems to me that -

1. Markets are irrationally driven by headlines, without proper assessment of the ban.
2. Merkel has certain credibility: Frau Merkel, unlike the SEC in the US, is not a chicken. It might have been a blank cartridge this time, but she might fire real bullets next time.
3. Markets waged preemptive strike: Financial institutions are trying to make sure the Governments understand that they will make a big noise and cause significant collateral damages if anyone tries to touch the all important “their precious” CDS.

I believe Merkel’s move is just a symbolic one and directed toward the angry voters and legislators in Germany, for now. Also, I doubt if the German leaders really expected other EU members to follow (no one actually needs to, if it is a mere warning shot and nothing significant). I cannot think of any other credible explanation for the lack of prior “formal” consultations with other member nations or the Commission. Other version of explanation, given by Mr Wolfgang Münchau is that the German leadership is criminally incompetent, which I disagree. No sane person would expect French or Briton to follow German Blitzkrieg without significant negotiation.

Merkel is cautious and far from rash. She showed that she would play “sovereign” hardball as, for instance, Chinese government would do, if she so chooses. This time, it was just a symbolic move but another one might follow and if so, it might point to more direct conflicts between sovereign nations and the markets. If this is the case, the markets feared, quite rightly.



Freedom meant that one could do as one pleased, forced neither by the bidding of a master nor by some physical necessity that demanded laboring for wages in order to sustain the body nor by some somatic handicap such as ill health or the paralysis of the members. According to Greek etymology, that is, according to Greek self-interpretation, the root of word for freedom eleutheria, is eleuthein hopos ero, to go as I wish, and there is no doubt that the basic freedom was understood as freedom of movement. A person was free who could move as he wished. (Arendt. “Willing”  )

She also wrote -

Being able to depart for where we will is the prototypical gesture of being free, as limitation of freedom of movement has from time immemorial been the precondition for enslavement. Freedom of movement is also the indispensable condition for action, and it is in action that men primarily experience freedom in the world. (Arendt. “On Humanity in Dark Times”)

Of course, Arendt was not “conservative” per se, but what she wrote about freedom is important. I support liberal immigration policy, not just because it is good for economy (it is) or it helps poorer countries more directly (it does), but also because it concerns the fundamental values upon which our society is built.

As their currencies depreciate in value (i.e. inflation), their ability to service their debts actually increases (while the peripheral countries of Europe cannot ‘inflate away’ their debts). So it is misguided to simply compare, for example, CDS spread of the UK Gilt with that of Italy or Spain (let alone comparing it with CDS spreads of corp. papers).

It makes sense to me when Faber says ‘Rather than shorting JGBs, a better way to capitalize on Japan’s dismal future fiscal position could be to simply go long Japanese equities and short the Yen. As in the case of Mexican stocks between 1983 and 1988 the appreciation of Japanese equities should in future exceed the likely weakness in the Yen.‘

Let’s be clear — the Obama administration’s position on Jerusalem is not clear. From the moment during the campaign that Obama declared “Jerusalem will remain the capital of Israel, and it must remain undivided,” to the subsequent walkback, to the demand that all settlement construction in East Jerusalem come to an end, to the subsequent walkback on that — nobody knows what this administration’s position is on Jerusalem, least of all the parties involved in the peace process.

The only “achievement” this administration can claim is having driven the Israeli public into Bibi’s arms, helping him solidify his support across party lines, and destroying President Obama’s credibility with the Israeli public — smart power.

While all this is very true, let’s add one more thing — the President’s credibility with the palestinians has also been irreversibly destroyed.

1. additional investments in roads and bridges
2. incentives for making buildings more energy efficient
3. additional tax cuts for businesses to create jobs
4. additional steps to increase credit to small businesses
5. an ‘aggressive agenda’ to promote exports.

1. Investments for roads and bridges should have been maximised in the first stimulus. See 2.

2. NO MORE ENERGY EFFICIENCY. It is too much already. The President should consider re-allocating money in the first stimulus away from Mr Chu to roads and bridges.

3. Is this new hire tax credits/benefit? I think the economists in the administration are smart enough to advice how difficult it is to implement an effective tax credits for new hires.

4. This might be sensible thing to consider, if the administration does not care financial institutions’ health.

5. Exports promotion… Good, if the President promotes trade in general – and if so, is this stimulus? and if not, White House might be thinking that the trade war can be stimulus.

The biggest question, however, is why the President had to talk about all these NOW. These measures will not do much for the economy in the short term other than adding to already-huge national debt. With the two defeats in the elections and unemployment data above 10%, the President might have thought that Congress might come up with something which would be difficult for him to oppose, further undermining his control (if any is left) on Congress, and that he needed to be ahead of the curve. Alas, he is already behind the curve, had he not thought about the possibility of this situation coming.

Now with landslide win by the DPJ, Japan now seems to be moving away from social nationalist, well, toward plain socialist… Amazing.

Does Japan Want Real Banks or Not? (WSJ)

The Great Depression was caused, or at least greatly worsened, by too little liquidity. Bernanke has avoided that mistake. He has instead committed the opposite mistake of too much liquidity and too few failures. Obama has praised him. How history judges him will be the real test.

I agree, though, without hindsight, I would think Mr Bernanke did fine job overall and deserves the re-appointment.

Source: Will Time Prove Ben Bernanke Wrong?

Mr Obama stated his objectives in March:

I want the American people to understand that we have a clear and focused goal – to disrupt, dismantle, and defeat al Qaeda in Pakistan and Afghanistan, and to prevent their return to either country in the future.

This seems to be a very limited ‘search and destroy’ mission. But Ambassador Richard Holbrooke and his team, the Obama administration’s special representative for Afghanistan and Pakistan, at the briefing at the CAP, talked about

‘an agricultural development program aimed at restoring jobs and income, improvement of governance, reform of the justice sector and the rule of law, build up of the government’s capacity to promote economic development, and working with civil society’

This sounds very much like ‘nation building’ his party criticised so much in the past regarding Iraq. Of course the strategy is logical. After all, you will need ‘well-governed’ Afghanistan to defeat Al Qaeda. However, what the administration is doing seems to be selling one war while fighting another.

If Mr Obama needs additional troops and funding, he needs to tell the facts and make the case, even though it may subject himself to the same criticism he offered in the past. It might not help poll numbers, but will help him win the credibility he needs so badly.

From Mises Economics Blog -

Germany ‘did nothing’ and its economy recovers

‘Last year, according to the IMF, the U.S. pumped an extra 1.1% of GDP into the economy. Germany did next to nothing.’ (WSJ)

‘The latest figures showed German exports had grown at their fastest pace for nearly three years at 7%, with particularly strong growth in demand from rapidly-growing economies such as China.’ (BBC)

I would add a quote from Japanese Prime Minister Taro Aso.

‘Berlin had failed to understand why strong fiscal action was vital for recovery’ (Financial Times)

Of course I am not saying the stimulus is useless (China’s massive stimulus seems to have helped German too, after all) – but I feel this is a bit ironic. At the least, Frau Merkel only had to pretend to do something, while avoiding spending too much of their own money.

‘In summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.’

‘Collective Imagination Failure’? I know ‘market failure’ and ‘government failure’…. but failure of collective imagination?. Simpler answer, though not politically correct of course, would be ‘the Economics is not, at the least has not yet been, able to predict a course of such a complex phenomenon’.

No, it is not a shame. Suppose you put a certain pressure on a glass. Some physicists would be able to tell you the glass will break at some time, in some way in the future, but not exactly when nor how.

The Global Financial Crisis – Why Didn’t Anybody Notice?