Pruning Shears

No Associated Press content was harmed in the writing of this post

Our image in the Muslim world would probably improve if we stopped killing so many Muslims. Which may be happening (for a while, anyway).

Combat operations have concluded for Army Spc. Mikayla A. Bragg, 21, of Longview, WA. Via.

Matt Taibbi had a phenomenal post on who exactly has skin in the game.

Our foreign policy is shrouded in secrecy. This is why I look to media outlets outside the US sphere of influence.

Memo to US: Creating weapons of mass destruction is not a good idea!

For the first time ever, a government advisory board is asking scientific journals not to publish details of certain biomedical experiments, for fear that the information could be used by terrorists to create deadly viruses and touch off epidemics.

In the experiments, conducted in the United States and the Netherlands, scientists created a highly transmissible form of a deadly flu virus that does not normally spread from person to person. It was an ominous step, because easy transmission can lead the virus to spread all over the world. The work was done in ferrets, which are considered a good model for predicting what flu viruses will do in people.

Merry Christmas, everyone.

ECONNED EXCERPT Smith gives an overview of some of the, ahem, innovations in finance and then writes on pp. 243-4 (emph. in orig.):

All three of these innovations turbo-charged an explosive growth of credit arbitrage strategies by investment banks and hedge funds, which produced the “wall of liquidity” that fueled profligate lending. Greenspan’s super-low interest rates post-2001 provided the impetus for these new approaches. Together, these innovations and strategies led to an acceleration in the growth of debt that was not fully recognized by regulators, and to the extent that it was, they saw it as the result of market forces and therefore salutary. And yet, these new activities nevertheless were backstopped by the authorities when hit by a classic bank panic. Understanding of the role of credit trading strategies is therefore essential to interpreting what came to pass.

Consider this classic Wall Street joke. On a slow day, some market-makers decide to start trading a can of sardines. Trader A starts the bidding at $1, B quickly bids $2, and several transactions later E is the proud owner of the tin for $5.

E opens his new purchase and discovers the sardines have gone bad. He goes back to A and says, “You were selling rotten sardines!”

A smiles broadly and says, “Son, those aren’t eating sardines. They are trading sardines.”

Let’s say a large-scale market in trading sardines developed, where the price was $5. But the price of sardines in the real world of eating sardines is only $1. What would happen?

You’d see makers of sardines care only about making trading sardines. They’d ramp up production to satisfy demand at the new miraculously profitably price. According to orthodox theory, the influx of supply would lead to prices to drop from the $5 level.

But in the world of trading sardines, the price is $5 not due to normal supply/demand considerations, but due to dynamics within that market. As long as cheap funding persists, there is a virtually unlimited demand for trading sardines at $5. In fact, remember how asset prices and loans interact. If banks are willing to fund a lot of the purchase price of trading sardines at $5, prices could rise even further, since new investors might want to get in on the action. What happens in that scenario?

Anything that can plausibly be called a sardine will go into the can. The can of rotten sardines in the classic story is thus no accident. It is precisely the outcome you expect when manias or other mechanisms that produce sustained price distortions take hold.