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Did you know that the London School of Economics has a “Paul Woolley Centre for the Study of Capital Market Dysfunctionality?”

Me neither!

But I found out about them a few weeks ago via MIT’s Simon Johnson, writing in the NYT’s  Economix blog about the LSE’s publication of The Future of Finance, and The Theory That Underpins It (London School of Economics Press).

The report has its own website: The Future of Finance: The LSE Report.

Here is an excerpt from the intro:

The financial crash of 2008-9 has been the most damaging economic event since the Great Depression – affecting the lives of hundreds of millions of people. The most immediate problem now is to prevent a repeat performance.

Much has been written about reforming the world financial system. But it is rarely based on a searching in-depth analysis of the underlying weaknesses within the system. Nor does it usually tackle the key question of what a financial system is for.

To correct this omission, we invited eighteen leading British thinkers on these issues to form a Future of Finance Group. They included journalists, academics, financiers and officials from the Financial Services Authority, the Bank of England and the Treasury. We have met twelve times, for what many of those present described as the best and most searching discussions they had ever participated in. The result is this book.

The issues at stake are extraordinarily difficult and profound. The central question is what the financial system is for? Standard texts list five main functions – channelling savings into real investment, transferring risk, maturity transformation (including smoothing of life-cycle consumption), effecting payments and making markets. But if we study how financial companies make their money, it is extraordinarily difficult to see how closely this corresponds to the stated functions, and it is often difficult to explain why the rewards are often so high. Any explanation must also explain why the system is so prone to boom and bust.

This is your weekend reading . . .

Happy Friday the 13th:

via Pink Tentacle

Taking out the volatility and the noise, July Retail Sales EX auto’s and gasoline station sales fell .1% vs an expected rise of .1% but the prior month was revised up .1 of a pt. Also, sales both headline and ex auto were a touch below expectations but headline was revised up by .2 of a pt. The so called core #, which takes out auto’s, gasoline and building materials, fell .1%. Sales fell in furniture, electronics, building materials, food/beverages, clothing, sporting goods and Dept stores but rose in auto’s, on line retailers and restaurant/bars. Bottom line, while a touch light relative to expectations, the data follows last week’s chain store data and vehicle sales so the news today is not necessarily new but lackluster remains the theme as core sales fell and are up just 4.1% y/o/y on easy comparisons.

Headline CPI rose .3% m/o/m, the fastest pace since Sept ’09 and vs estimate of a gain of .2%. The core rise of .1% was in line. The headline y/o/y gain is 1.2% and core is up .9%. Energy prices rose 2.6% while food/beverages were flat. With the rise being seen in wheat, corn, soybeans, coffee, cocoa, and cattle, retail food prices will be moving higher. OER, 25% of CPI, and therefore a big swing factor in the data, rose .1% for the 2nd straight month for the 1st time since Apr/May ’09. Apparel prices rose .6% after an .8% rise in June, influenced by higher cotton prices which are just shy of the highest since ’95. Due to cash for clunkers and a slow economy, used car prices rose .8% after a .9% gain in June and it led to a .3% rise in vehicle prices. Medical care fell by .1%, a rare sight. Commodity prices, 40% of CPI rose .5%. Net-net, while inflation is still statistically (not real life) benign, I see no evidence here of overall deflation risks.

The Coming Generational Storm: What You Need to Know about America’s Economic Future
Laurence J. Kotlikoff
April 28, 2004

Running Time: 1:04:44

Solid Q2 GDP reports from Europe are being seen as old news and are being overshadowed today by weakness in Southern European debt. Germany reported an annualized Q2 GDP gain of 8.8%, well above expectations of a gain of 5.2%. For the Euro Zone as a whole, Q2 GDP rose 4% annualized vs the forecast of 2.8%. However, the 5 yr and 15 yr bond auctions in Italy were soft as the bid to cover in both were only about 1.25 vs 1.41 for last months 5 yr and 1.74 for the 13 yr. Yield spreads in Irish, Spanish and Greek debt to German bunds are all wider. The Irish 10 yr debt spread to bunds in particular is just 13 bps from its recent high. After a sharp decline yesterday, the Yuan is lower again vs the US$ to the lowest since late June in response to the weaker than expected China economic data a few days ago. But, it’s this hoped for soft landing and no more policy tightening that boosted the Shanghai index from yesterday’s low close for the week.

“Something has to happen for this product to be marketable. I just find the whole thing ironic that FHA is providing financing for luxury housing.”

-Jonathan Miller, Miller Samuel Inc.

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That’s my pal JM discussing condos in today’s WTF?! article. Via Bloomberg, we learn:

“The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments range from $820,000 to $3 million.”

The irony Jonathan refers to is due to the history of the FHA (which Bloomberg misstated). They were created in the midst of the Great Depression (1934) primarily to assist homeownership at a time when banks were collapsing, and credit had disappeared for low-to moderate-income Americans.

Are we merely throwing money at anything housing related to get the economy moving? Providing a “lifeline to new Manhattan luxury condominiums after sales stalled” makes very little sense to me.

The Manhattan real estate market has held up better than the vast majority of the country, despite the collapse in Wall Street employment.

Why? Coop Boards.

Yes, its true: New York buildings’ busy body neighbors, who are ordinarily thought of as odious organizers of an onerous application process, prevented a full blown RE meltdown in the Big Apple. While the banking industry was creating No Doc Liar Loans, Co-op boards were looking at 10 years worth of financials and tax returns. When most banks were pushing 0% mortgages, Co-ops insisted on at least 30% down. And while the vast majority of the eventual defaulting buyers bought much more house than they could afford, the intrusive boards did the banks jobs for them: They ensured buyers bought only so much property as they could hold and withstand during an economic downturn.

But condos have no such board. Hence, the scramble to find buyers as the defaults rise, condo prices fall, and foreclosures occur. So one of the few regions of the country that did not engage in aggregate risky behavior (thanks to Co-ops) has found a sliver of homes — there were 8,700 new apartments in Manhattan empty as of June — that they can stimulate with yet more risky lending.

Bloomberg adds “At least nine Manhattan condo developments south of 96th Street have sought approval for FHA backing…”

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Source:
Manhattan Luxury Condos Try FHA Backing in Sales ‘Game Changer’
Oshrat Carmiel
Bloomberg, August 13 2010
http://noir.bloomberg.com/apps/news?pid=20601109&sid=al6359ElixDE&

Some decidedly odd reading today, from (mostly) unusual sources:

• The great false choice, stimulus or austerity (FT.com)

• Themis Trading: Sen. Shumer is HFT Industry’s Bitch (Themis)

• Eejits! HUD Offers Interest-Free Loans to Reduce Foreclosures (Bloomberg)

• Telling Swiss secrets: 222 billionaires (Global Post)

• How Soon Will We Face Deflation? (DeLong)

• Cockroach Theory and Levy Flight (Bigger Capital)

• Paul Kasriel Runaway Federal Government Spending? I Report, You Decide  (Northern Trust)

• Identifying Psychopathic Fraudsters: These Men Know ‘Snakes in Suits’ (Fraud)

• Feds admit storing checkpoint body scan images (CNET)

• Hitchens: ‘We’re all dying, with me it’s accelerated’ (Independent)

• Is the Jet Blue Flight Attendant story Bunk ? Slater’s Story Raises Suspicion (CBS.com)

• Millions Of Barrels Of Oil Safely Reach Port In Major Environmental Catastrophe (The Onion)

What is on your browswer?

The 30 yr bond auction, the part of the curve one can define as the leap of faith maturity in my opinion, was mixed. The yield was a touch above the when issued but the bid to cover of 2.77 was above the 1 yr average of 2.63. The combined direct and indirect take of the auction was the highest since Feb ’06, the first auction when the 30 yr was reintroduced. The 30 yr maturity is mostly purchased by insurance companies and pension funds in order to best match up with their long term liabilities and is the main reason why its spread to the 10 yr has gone to a record high this week as market participants outside of the above two go for smaller maturities. Also, regardless of where inflation is today or tomorrow, betting that we’ll see inflation of substance at some point in the next 30 years in light of current Fed policy seems like a good one and another reason why its lagged.

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Bloomberg’s Chart of the Day shows the growth in federal payouts to state and local governments, also known as grants-in-aid, in the past half century:

They have increased almost three times as fast as overall spending during the period, according to data compiled by the Commerce Department. Funds were provided at a $525 billion annual rate in the second quarter, a 33 percent jump from two years ago. Most of the money went to pay health-care expenses under the Medicaid insurance program and to cover educational costs. . . .

The federal government provided $131.25 of state and local aid last quarter for every dollar spent 50 years ago. For total expenditures, the second-quarter figure was only $45.75, as the chart illustrates.”

That’s just great . . . Now I have another book to write.

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Source:
Soaring Federal Aid Bails Out U.S. States, Cities: Chart of Day
David Wilson
Bloomberg, 2010-08-11 14:36:57.821 GMT