Like many people I have been following what has been called Paulson's Authorisation for the Use of Financial Force. One of the most interesting developments around it has been a counter-proposal by Chris Dodd, Chairman of the US Senate's banking committee.

I have found Paul Krugman's blog very useful and I encourage you to read his analysis. Here I'll just quote his reaction to Paulson't and Dodd's plans.

I hate to say this, but looking at the plan as leaked, I have to say no deal. Not unless Treasury explains, very clearly, why this is supposed to work, other than through having taxpayers pay premium prices for lousy assets.

...

And there's no quid pro quo here -- nothing that gives taxpayers a stake in the upside, nothing that ensures that the money is used to stabilize the system rather than reward the undeserving.

I hope I'm wrong about this. But let me say it again: Treasury needs to explain why this is supposed to work -- not try to panic Congress into giving it a blank check. Otherwise, no deal.

I've had more time to read the Dodd proposal -- and it is a big improvement over the Paulson plan. The key feature, I believe, is the equity participation: if Treasury buys assets, it gets warrants that can be converted into equity if the price of the purchased assets falls. This both guarantees against a pure bailout of the financial firms, and opens the door to a real infusion of capital, if that becomes necessary -- and I think it will.

Jerome has written against the Paulson plan today, as have many others which you can see linked in that thread. Here I want to focus on how the Dodd plan plugs the holes in the Paulson plan, how it's supposed to work, and how it might yet fail.

I just read George Soros' latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means. My original interest was in reading about his theory of Reflexivity and his associated model for financial bubbles. Then I thought I would quote what he has to say about Market Fundamentalism and how the current Crisis might spell the end of it. But I think today I'll just quote him on what he calls "the Postmodern Idiom" and how it makes Popper's "Open Society" vulnerable.

Yet, in spite of my preoccupation with the concept of reflexivity, I failed to recognize a flaw in Popper's concept of open society: that political discourse is not necessarily directed at the pursuit of truth. I believe Popper and I made these mistakes because of our preoccupation with the pursuit of truth. Fortunately, these errors are not fatal because the case for critical thinking remains unimpaired and the mistakes can be corrected: we can recognize a difference between the natural and social sciences, and we can introduce the pursuit of truth as a requirement for an open society.

I'm reading JK Galbraith's The New Industrial State, whose 3rd Chapter ends on the following note:

The modern large Western corporation and the modern apparatus of socialist planning are variant accommodations to the same need. It is open to every free-born man to dislike this accommodation. But he must direct his attack to the cause. He must not ask that jet aircraft, nuclear power plants or even the modern automobile in its modern volume be produced by firms that are subject to unfixed prices and unmanaged demand. He must ask, as just noted, that they not be produced.

While I finish the book and digest it and other recent readings such as Veblen's The Theory of Business Enterprise, I thought I would throw the quotation out there and ask for your reaction/interpretation of it. I see a large number of handles to go into favourite themes of ET.

Brought across by afew

I don't know why the World Oil Congress is being held in Madrid but, given that it is, the Spanish press has access to the participants. Here's an interview published by El Pais today, in which the Secretary General of OPEC blames everyone except themselves: speculators, US foreign policy, US environmental policy, the subprime crisis, you name it... But he also claims that this is not a supply-and-demand problem as there is no unsatisfied demand.

"Muchos se están haciendo ricos con el mito de que falta petróleo" · ELPAÍS.com		"Many are getting rich with the myth that there is an oil shortage" - ElPais.com
ENTREVISTA: La nueva crisis energética		INTERVIEW: The new energy crisis
ALEJANDRO BOLAÑOS - Madrid - 02/07/2008		By ALEJANDRO BOLAÑOS - Madrid - 02/07/2008
El Congreso Mundial del Petróleo que se celebra esta semana en Madrid se ha convertido en un zoco en el que todos tratan de vender la misma mercancía averiada: que la culpa de la brutal subida del precio del oro negro es de otro. Abdalla Salem El-Badri, secretario general de la Organización de Países Exportadores del Petróleo (OPEP), rebate a los que, como algunos Gobiernos occidentales y varias multinacionales, culpan a la falta de producción. Para El-Badri, libio de 68 años, el precio coge impulso en el exceso de especulación financiera.		The World Oil Congress held this week in madrid has become a souq in which everyone tries to sell the same broken merchandise: that the brutal rise in the price of black gold is someone else's fault. Abdallah Salem Al-Badri, secretary general of OPEC, refutes those who, like some Western governments, blame lack of production. For Al-Badri, a 68-year-old Libyan, the price is propelled by financial speculation.

Monetarists are at it again...

[Murdoch Alert] Mervyn King moves to calm fears of imminent rate rises

Mr King re-iterated that the Bank still expects inflation to rise to more than 4 per cent before the end of the year and highlighted that controlling inflation was the Bank's only concern.

"I am confident that we will bring inflation back to the target, but I cannot tell you what level of interest rates we will need to set to achieve that, " he said.

Economists say that while there is widely expected to be an increase in interest rates, it is not expected as soon as next month.

(my emphasis)

That's paragraph 9 of the Times' story (which includes a video of King speaking to the Commons), which chooses to obfuscate by headlining the reassurances that no, interest rates will not rise next month while deep in the article we learn that King is getting ready to pull a Volcker.

It seems that European (Union) involvement in sorting out Bush's Iraqi misadventure has become a hot topic again:

• An opportunity for Europe to remove the U.S. from Iraq by Magnifico on June 7th, 2008
  
• On Iraq, it's Time to Call Europe by Joerg in Berlin on June 5th, 2008
  

Jörg's diary especially got me thinking about what could be expected of European Union involvement in Iraq, and what a European strategy should be. My tentative answer is based on two principles: human rights and riding the wave.

I recently got an e-mail inviting me to sign a petition to defend public health care in the Madrid Autonomous Community. I'm translating here the overview section of the website with a minimum of commentary as I don't know much about the specifics and I haven't lived in Madrid for 8 years.

Coordinadora Anti-privatización de la Sanidad Pública de Madrid		Coordinator against the privatization of Madrid's public health service
Desde hace años, la política sanitaria de la Comunidad de Madrid ha estado dirigida a provocar un deterioro continuado del sistema público con el fin de poder justificar, posteriormente, su privatización ante los contribuyentes. Así, en lugar de aumentar el presupuesto sanitario en función de las necesidades y el aumento de la población, se vienen asignando incrementos a todas luces insuficientes, que sitúan a la Comunidad de Madrid en los últimos lugares del Estado en cuanto a gasto por habitante.A la par, se han aumentado de forma continuada las derivaciones a la sanidad privada de todos aquellos servicios que se consideran económicamente rentables, lo que ha permitido la aparición de un sector privado listo para parasitar al sector público.		For years, the health policy of the Madrid [Autonomous] Community has been directed to provoking a continued decay of the public system with the goal of being eventually able to justify its privatization to the taxpayers. Thus, instead of increasing the health budget according to the needs and the population increase, clearly insufficient increases have been assigned, placing the Madrid Community among the last in Spain according to per-capita expenditure. In parallel, there has been a continuing increase of the outsourcing to private health care of all services considered economically profitable, which has fostered the appearance of a private sector ready to become a parasite to the public sector.
Este déficit de financiación, junto con el incremento poblacional y la congelación real de plantillas, ha generado un deterioro asistencial que cualquier ciudadano puede observar y sufrir en los hospitales y centros sanitarios de nuestra Comunidad.		This financing deficit, along with the population increase and the real freezing of staff numbers, has deteriorated the quality of the health care that any citizen can observe and endure in the hospitals and health centres of our Community.

In the comments to my latest diary Where will Peak Oil hurt the most? I took a beating for using Foreign Exchange Reserves as a measure of the ability of a country to purchase oil in the open market in the event of a global oil crunch, thus cushioning the blow from such a shock. I was conceptualizing reserves as a stock that could be spent when apparently it's a side-effect of monetary policy and exchange-rate movements. What this illustrates is my tenuous grasp of international trade, the balance of payments, and the system of national accounts.

In yesterday's open thread, Francois in Paris wrote

Developing countries have historically a much larger demand elasticity than developed countries and likely still have [but] don't see it as a superior "virtue" that "poor, frugal countries" would hold against "rich, wasteful countries". It doesn't mean that poor countries are more adaptable to high oil prices, quite the contrary.

It means that they are far more dependent on oil, oil purchases representing a much larger share of their GDP, and that, as a consequence, prices have a much larger effect on their activity, a rise creating a much larger demand destruction aka recession. They don't have a output "surplus" they can reallocate to oil purchases that would allow them to weather a price increase for a long time while they switch to other sources by infrastructure changes as developed countries can do.

If oil prices stay high, we must expect a very, very deep recession in the bottom half of the world economic ladder. We'll hurt too but it'll be nothing compared to them.

This is related to a discussion I was having with kcurie the other day off-site, in which I was wondering about where the immediate impact of Peak Oil would be strongest. My impression was that the countries now undergoing a strong bout of oil-fuelled industrialization should be the ones most vulnerable to an oil shock, because of the disproportionate fraction of GDP taken up by oil imports. This would include most countries in South-East Asia. I noted the fact that recently Indonesia announced its intention to quit OPEC as it is becoming a net oil importer. On the other hand, China is known to be swimming in currency reserves, and so could buy oil in the international markets if necessary (which would drive prices up for everyone, including them, but at least initially they could buy their way out of a pinch).

But this is the kind of question that cannot be answered from first principles and where received ideas about various countries' economic structure can be dangerously misleading, especially as they get out of date and out of line with the evolving reality. So, I got ahold of the IEA's 2007 key statistics [PDF] (2005 data), imported the summary table at the end of the document into R, and made supplemented them with Wikipedia's data on world currency reserves (2007-8 data from the IMF). The result is in three charts, below the fold, with some unexpected conclusions.

I commented after the recent Spanish general election that Rajoy, the PP leader, had won everything except for the election itself: more votes, higher vote percentage, more seats than in 2004. However, the party is planning a Congress for next month, and those faithful to Aznar, the hardliners on nationalism and terrorism, and their allied press, have been questioning Rajoy's leadership and laying the groundwork for a challenge to his leadership by Madrid regional president Esperanza Aguirre. Yesterday, former PM Aznar joined the fray on the side of the hardliners, as expected.

Aznar apoya a los 'duros' del PP frente a un Rajoy que quiere "mover" el partido · ELPAÍS.com		[Former Spanish PM] Aznar supports the hardliners of [Spain's] PP against [party leader] Rajoy who wants to "move" the party - ElPais.com
La crisis del Partido Popular		The crisis of the [Spanish] People's Party
[...] El ex presidente reivindica la confianza y los principios del PP, como hizo San Gil - El líder del PP cree que el PSOE no da motivos para criticar su política antiterrorista		[...] The former PM defends the PP's self-confidence and principles, as [the leader of the Basque PP, Maria] San Gil did - The PP leader [Rajoy] thinks that the PSOE is not giving reasons to criticise its counter-terrorism policy

Maria San Gil is a prominent Basque politician who takes a very confrontational stance against Basque nationalism, partly motivated by the fact that ETA murdered her mentor gregorio Ordóñez in her (and others') presence years ago.

Hasta ahora, Mariano Rajoy tenía como rival a un creciente y voluntarioso equipo de miembros del sector duro. Desde ayer, todo el PP sabe que el líder tiene enfrente a un miembro de la primera división, un miura casi imposible de controlar: José María Aznar. El ex presidente, que había mantenido un discreto silencio incluso después de la crisis de María San Gil -fue su esposa, Ana Botella, quien defendió a la dirigente vasca-, lo rompió ayer con estruendo: "En la vida política, la confianza y la defensa de los principios es siempre esencial". Palabras casi calcadas a las de San Gil, que ha lanzado un órdago a Rajoy porque, según le dijo a la cara, ya no confía en que él defienda los principios del PP.

Up to now, Mariano Rajoy was facing a growing and willful team of hardliners. Since yesterday, the whole PP knows that the leader is facing a top-division opponent, a raging bull difficult to control: Jose Maria Aznar. The former PM, who had maintained a discreet silence even after the crisis involving Maria San Gil - it was his wife, Ana Botella, that defended the Basque leader -, broke it yesterday with a bang: "In political life, self-confidence and the defence of one's principles is always essential". Words almost copied from those of San Gil, who is betting the house against Rajoy because, as she told him to his face, she no longer trust him to defend the PP's principles.

Below the fold, a full commented translation of the El Pais piece.

I have just found out about this upcoming event:

Spain is due to host the 4th World Congress of Agronomists and Agriculture Professionals with the motto "The Agronomist as technical and scientific nexus for conserving the Environment on the basis of rural development and food demand". The Congress, which will be held in Madrid from 28 to 31 October 2008, is organised by the Official Association of Agronomists of Central Spain and the Canary Islands (Colegio Oficial de Ingenieros Agrónomos de Centro y Canarias) and the World Association of Agronomists (Asociación Mundial de Ingenieros Agrónomos -AMIA-) in collaboration with the Spanish Ministry of Agriculture, Fisheries and Food, and counts on the support of numerous institutions including schools of agricultural engineers and agronomist, companies and professional associations.

So the Spanish Parliament voted Zapatero PM for a second term on Friday, and he seems to have hit the ground running: the first policy news we have from his government is a public-works Keynesian stimulus to absorb the unemployment from the sagging housing sector. It doesn't get any better than that, or does it?

Autopistas contra el parón - Público.es		Highways against the slowdown - Público.es
Más inversión en infraestructuras para compensar el efecto del parón constructor de viviendas. Ésa es la solución propuesta por los constructores que el Gobierno ha asumido para tratar de amortiguar el efecto de la crisis inmobiliaria en la riqueza económica y en el empleo. El Ministerio de Fomento ha sacado a estudio informativo la ampliación de las autopistas Radial 3 hacia la Comunidad Valenciana y la Radial 5 hacia Extremadura, según fuentes del sector. Estos Estas vías complementan el eje básico de comunicaciones norte-sur y este-oeste ya que van paralelas a la A-3 Madrid-Valencia y la A-5 Madrid-Badajoz. La fase de estudio informativo (para recibir alegaciones) es la previa al concurso, con lo que las constructoras y concesionarias adjudicatarias presentarán oferta en unos meses y podrían empezar las obras este mismo año, siempre que los trámites sean rápidos.		More infrastructure investment to compensate the effect of the slowdown in home construction. That is the solution proposed by the developers that the Government has adopted to try to cushion the effect of the housing crisis on economic wealth [sic] and employment. The Ministry of Public Works has opened an information study for the expansion of the Radial 3 highway towards the Valencian Community and the Radial 5 towards Extremadura. These roads would be complementary to the basic North-South and East-West axes as they run parallel to the A-3 Madrid-Valencia and the A-5 Madrid-Badajoz. The consultation phase (to receive public comments) is previous to the public tender, so that the constructor and operator companies awarded the projects could present their offers in a few months and work could begin already this year, assuming the formalities are dealt with quickly.

In a probably futile effort to make myself less unemployable, I'm reading Fabozzi's Bond Markets, Analysis, and Strategies. In it, there's the following list of sources of risk for bond holders:

Bonds may expose an investor to one or more of the following risks: (1) interest-rate risk, (2) reinvestment risk, (3) call risk, (4) credit risk, (5) inflation risk, (6) exchange-rate risk, (7) liquidity risk, (8) volatility risk, and (9) risk risk.

Risk risk? WTF is that? A typo?

It would appear that we don't have enough people committed to the Brussels visit for it to go ahead, so I'll probably e-mail the Commission soon saying that I'm very sorry but we've had a couple of cancellations and the size of the group has fallen below 15 so we can't make a reservation.

There is a Paris meetup being planned for the first weekend on May, so we'll go with that for the Spring ET meetup.

Well, not exactly, but look at this:

FT.com: Lunch with the FT: Nassim Nicholas Taleb (March 28 2008)

I put my two tape recorders on the table, feebly joking that I want to protect myself against a "Black Swan event" where one failed to work. He quickly corrects me, saying I have misunderstood the central idea of his latest book. It is not about events that are merely improbable and unpredictable. But about those that have a massive impact.

I thought the journalist managed a pretty good joke to break the ice, and Taleb pounced on him and called him clueless in so many words.

The interview is, nevertheless, interesting, and though it is Colman and not me that has read The Black Swan (well, he listened to the audiobook - I instead went and read his 1997 book Dynamic Hedging: Taleb on Risk from which I quoted here among other places) I responded to Jérôme's request for one of us two write a diary with a diary-length e-mail reply.

So, here it is, a Jérôme's request. All credit to him, all flaws are mine.

Time for another update on ET's European Commission visit on (tentatively) Friday the 13th of June, 2008.

I just got the following e-mail from the Commission's Visits Service:

Before we can confirm a visit for your group, we would need some more information on the participants as well as the purpose of your visit and a preliminary list of topics your group is interested in. I would be grateful if you could fill in the attached form and return it to me as soon as possible.