Conventional wisdom watch, bond market edition:

James Carville on the bond market, circa 1993: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Karl Smith on the bond market, circa 2011: "I used to think if there was reincarnation, I wanted to come back as the bond market. But now I want to come back as the repo market. The repo market even intimidates the bond market."

Karl didn't actually say that, of course. But acting as his PR agent, I'm making his view a little more user friendly. In any case, he's right. Sovereign bonds are the backbone of the repo market, and the repo market is the backbone of the shadow banking system. So when sovereign bonds fail, the shadow banking system fails and there's a run. And as we all know, there's no FDIC insurance for the shadow banking system.

At a guess, the shadow banking system makes up about half of the entire banking system these days, and right now the shadow banking system is looking distinctly wobbly in Europe. Somebody needs to prop it up to stop a run, and that somebody is the European Central Bank. So far, though, they aren't stepping up to the plate. The best case scenario is that Noah Millman is right, and they're just playing a very high-stakes game of chicken in order to advance German interests:

One way of looking at the sequence of events is to say that the ECB was willing to permit contagion in order to wring out inflation. I think a better way of looking at it is to say that the ECB was willing to threaten Italy with insolvency in order to give Germany more formal control over Italy’s finances. That’s incredibly hard-ball politics, but if you are not accountable to anybody (which the ECB, basically, is not) then you can play really, really hard-ball politics.

When somebody eventually makes a movie about this, perhaps it will be called Seven Days in December. I hope it has as happy an ending as the original.

Via Stephanie Mencimer, Christopher Conover at the conservative American Enterprise Institute recently highlighted a well-known fact: in any given year, 1% of the population accounts for a fifth of all healthcare spending and 5% accounts for nearly half of all spending:

We have become so accustomed to health coverage that functions as prepaid healthcare rather than as insurance against unknown risks that this distinction escapes many people (including policymakers). In a perfect world, we would have universal coverage against the risk of landing in the health spending 1 percent. Most people would gladly pay $1,161 to avoid facing bills of $116,000. But not everyone can afford to do so. ...[This is] why one Republican presidential candidate observed, a half decade ago, that "Health is about 30 times more difficult than national security." Perhaps it’s worth having a Republican presidential candidate debate on this issue alone.

Yes, perhaps it is.

Tuesday's Headlines

Here are the headlines that have greeted me in my first few minutes of consciousness this morning:

American Airlines files for bankruptcy as losses mount

States face a crushing economic outlook, fiscal survey says

Home Prices Decline

Businesses Scramble as Credit Tightens Across Europe

‘I fear German power less than I am beginning to fear German inactivity’

Militants Turn to Death Squads in Afghanistan

Radiation covers 8pc of Japan

On the bright side, Facebook seems to believe that it's worth $100 billion. That's good news for about 500 shareholders, anyway.

I shall now go to the breakfast table and see if I can do something about my blood sugar level. Maybe things won't all seem so bad when I get back.

Last week I blogged about a new paper suggesting that the European and the U.S. economies are more interconnected than most people think. The basic story had to do with credit conditions: Starting around 1999, European banks began to supply (or recycle) a lot of America's credit, and this means that when European banks start deleveraging it's likely to produce a severe credit contraction in the U.S. as well.

That conclusion was a little speculative, but you may recall that last week I also posted a chart showing that industrial orders had plunged 6.4% in the eurozone in September. Today, Tim Duy overlays U.S. industrial orders on the same chart and produces some sobering news:

Not a perfect match, but enough to suggest the idea of substantial decoupling looks like more myth than reality, especially in the face of a severe recession....Bottom Line: Don't take US resilience for granted this time around — Europe is getting ugly, and it is far too late to prevent severe recession. The best policymakers can hope for at this point is too avoid a depression.

Correlation is not causation. But whatever the reason, it sure looks as if the U.S. and European economies really are linked closely in some fundamental ways — which shouldn't be too surprising since Europe is our biggest trading partner and their banks are pretty tightly joined to the U.S. market. If Europe tumbles — and it sure looks likely that it will — we're likely to tumble too.

A friend points me to a TNR article subtitled "The peculiar anger of Mitt Romney," and it's peculiar all right. There's a lot of theorizing about where Romney's anger comes from, but there's not much evidence of this supposed anger in the first place. Despite his long and public career, the piece is only able to dredge up four examples of Romney losing his temper over the course of 30 years. In fairness, three of those examples are from the past decade, which suggests that maybe he loses his temper once every two or three years.

Something tells me this isn't something to worry about too much. Let's get back to talking about his hair and his flip-flopping, OK?

For the last month or so, Team Obama has been pummeling Mitt Romney. The DNC's latest is on the right, and Andrew Sullivan has a shorter version here. He also links to J.P. Green, who says:

I gather the strategy behind the ad is that Mitt Romney is the GOP's most formidable opponent for President Obama, and weakening him now could help one of the more vulnerable Republican candidates get the GOP nod, thereby improving Obama's reelection prospects. The strategy is a bit risky in any case. The GOP has other candidates who are electable in a declining economy, despite the clown show of recent months.

I confess that I'm a little curious about this. Are they really trying to rough up Romney enough that a patsy like Gingrich ends up with the nomination? Or are they doing it because they want to run against Romney and they know that attacks from Obama make him more credible in the eyes of the tea party? Or maybe because they think Romney is going to win the nomination regardless and they just want to set the narrative early?

This is mostly just idle curiosity on my part. I don't really care all that much, and the big picture is pretty simple: modern campaigns simply attack earlier and earlier every cycle. Still, I do wonder what the real strategy is here.

How 2008 Radicalized Me

Now that Bloomberg has peeled another layer off the Federal Reserve onion, we know a bit more about just how much money they spent rescuing the banking system in 2008. Matt Yglesias sums up his reaction, and I think he gets it exactly right:

NOT SCANDALOUS—Lending vast sums in a banking panic.

DUBIOUS—These weren't penalty rates.

DEFENSIBLE—Erring on the side of activism.

THE REAL SCANDAL—Abandoning activism for the rest of us: If I had fully understood what the Fed was doing in the fall of 2008 and the winter of 2008-2009, the truth is that I would have defended it all…The real scandal has only emerged with clarity in the subsequent years. Having ensured the basic stability of the banking system, monetary policymakers in America proceeded to forget all about their go-getter attitude and ability to reach deep into the practical and legal toolkit in order to get what they want. We're heading into the winter of 2011, with three years of mass unemployment under our belt and no end in sight. That's not happening because the Fed was too generous with the free money for banks at the height of the crisis. It's because once the acute phase of the banking crisis ended, suddenly we returned to small thinking and small-c conservatism. But it can't be both. If in a time of crisis, the right thing to do is to get "crazy" then there's plenty more crazy stuff the Fed could be doing to boost overall spending in the American economy. Or if the right thing to do is to stay orthodox and ignore the human consequences, then there was no reason not to stay orthodox three years ago and refuse to lend at anything other than a penalty rate.

Yes, we aimed a big bazooka full of money at the banksters in 2008. That's galling, and there's a good case to be made that we should have done it differently. Maybe more executives should have been fired, maybe the Department of Justice should have tossed more Wall Street traders in jail, and maybe a couple of big money center banks should have been placed in temporary receivership. But even conceding all that, the Fed and Congress (kicking and screaming, but eventually doing the right thing) saved the banking system, and that had to be done. There's a certain amount of unfairness that's inherent in any banking rescue, and I can live with that when the alternative is a second Great Depression.

But hoo boy, what a contrast with how the rest of us were treated. Things like principal write-downs, second waves of stimulus, aid to states, and mortgage cramdown all got a bit of idle chatter but were then left to die. For some reason, it would have been unfair to hand out money to profligate homeowners, state and local workers, and the millions who have been unemployed for more than a year.

And yes, in some cosmic sense, perhaps it would have been unfair. Massive financial crashes always produce some inherent unfairness. For some reason, though, we were willing to overlook that unfairness when it was Wall Street that came begging but became obsessed with it when all the rest of us came begging.

This is how 2008 radicalized me. It's one thing to know that the rich and powerful basically control things. That's the nature of being rich and powerful, after all. But in 2008 and the years since, they've really rubbed our noses in it. It's frankly hard to think of America as much of a true democracy these days.

Front page image: Jacob Anikulapo/Flickr

Fat Kids, Skinny Kids

If you take populations as a whole, you find that they become fatter as they become more developed. That's because they have more money, their lifestyles are more sedentary, and they eat more processed food that's high in fat and sugar.

But what about individuals? What explains why some kids are overweight and others aren't? Sarah Kliff gives us a tutorial:

Studies have found that, of the many home-environment factors at play, maternal obesity is the best predictor of childhood obesity, even more so than low family income or less cognitive stimulation.

But more recent research, particularly a highly cited study in the American Journal of Clinical Nutrition, suggested that was more a question of genes than habits. The study, which followed 5,092 pairs of British twins ages 8 to 11, found that the most influence parents have on obesity is actually genetic, a factor of inheritance, rather than the environment. “Contrary to widespread assumptions about the influence of the family environment, living in the same home in childhood appears to confer little similarity in adult BMI [body mass index],” authors Jane Wardle, Susan Carnell, Claire Haworth and Robert Plomin write.

....“Although contemporary environments have made today’s children fatter than were children 20 years ago, the primary explanation for variations within the population, then and now, is genetic differences between individual children,” they write.

This hardly absolves parents from trying to instill good eating practices in their kids or the food industry from assaulting the airwaves with fat-laden crap. But it does suggest that maybe we should ease up on all the brickbats aimed at bad parenting. In many cases, the modern food industry is knocking on an open door.

The chart above is from Bloomberg, and it's an example of how much liquidity the Fed pumped into the banking system during the height of the financial crisis in 2008. Felix Salmon explains what it means:

Ladies and Gentlemen, this is what a lender of last resort looks like....On September 16, 2008, Morgan Stanley owed $21.5 billion to the Fed. The next day, that number doubled, to $40.5 billion. And eight working days later, on the 29th, the bank’s total borrowings from the Fed reached $107 billion. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.

Why is this relevant today? Because the European banking system has gone from bad to worse in just the last few days and Europe desperately needs a lender of last resort now. Unfortunately, it doesn't have one because the European Central Bank is either unable or unwilling to take on the role. Here is Wolfgang Münchau:

In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act — eurobond, debt monetisation, quantitative easing, whatever. I am not so sure....With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens....Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges. First, the European Central Bank must agree a backstop of some kind....

Like Münchau, I've long been a member of the "when things get bad enough" school, but my faith is being sorely tested. This is likely to be a very, very bad week in Europe.

The Wall Street Journal has a piece up this weekend about the difficulty that many companies are having hiring skilled workers in certain areas. I don't doubt that this is true. For a variety of reasons, I imagine that the number of people willing to invest the time it takes to learn these kinds of jobs has declined in recent years. But there's more to this story than meets the eye. Here's a description of some skilled job openings at Union Pacific railroad:

When the railroad had openings for diesel electricians earlier this year, it took [Ferrie] Bailey 10 hiring sessions to fill 24 jobs....Known as "installation technicians," the workers are responsible for putting in and maintaining a sprawling network of cable, microwave relays and related equipment that enables the railroad to monitor 850 trains running daily along its 32,000 miles of track.

This doesn't require a bachelor's degree but demands technical skills gained either through an associates' degree or four years of experience in electronics. And it is grueling work. Technicians have to climb 50-foot communications towers, clamber up utility poles and work outdoors through Wyoming winters and Kansas summers. They put in 10-hour days, in clusters of eight or ten days, and are routinely away from home more than half of each month.

....Standing at the front of the room, Ms. Bailey described the deal. As installation technicians, they would earn $21.64 an hour, or close to $48,000 a year for the railroad's regular work schedule.

Then there's this:

After a website job posting, Ms. Bailey initially drew 58 applicants. Of them, she deemed about two dozen sufficiently qualified so that she invited them to take a $25 aptitude test, at their own expense.

Let me get this straight. Union Pacific is supposedly desperate for candidates and can barely fill all their open positions. And yet, when they identify 24 qualified applicants, they aren't even willing to maximize their hiring pool by ponying up $600 to make sure they all take the aptitude test. Then, later in the story, there's this:

Ms. Bailey faced more stiff competition at a job fair the next day, because then she was up against several other employers looking for the same sort skilled people as she was. "Make $70,000 - $80,000 the first year with FULL BENEFITS," read a sign at a booth right across from Ms. Bailey's at the job fair, put on by the U.S. Army in Fort Carson, Colo., largely to help departing soldiers ease back to civilian life.

So here's the story. Union Pacific is offering $48,000 per year for skilled, highly specialized, journeyman work that's physically grueling and requires workers to be away from home about half of each month. The competition is offering 50% more, but not only is UP not willing to increase their starting wage, they're so certain they can fill all their positions that they make qualified candidates pay for their own aptitude test. And despite all this, they filled all 24 of their positions in ten hiring sessions.

It doesn't sound to me like there's a huge shortage of qualified workers here. It sounds to me like Union Pacific is whining about the fact that it took them all of ten hiring sessions to fill their quota even though this is a really tough job and they aren't paying market rates for workers. It's as if they think that actually having to make a modest effort to attract job candidates is an inversion of the natural order or something. Speaking for myself, I think I'll hold off on breaking out the violins.