I've recently read a number of articles blaming Bitcoin's notorious volatility on deflation. In reality, deflation in no way implies price volatility.  Consider the Great Deflation. Prices sagged from 1870-1890 due to a slow increase in the supply of money (gold) and a rapid increase in total economic production brought about by the 2nd Industrial Revolution. Prices weren't volatile, they just dropped at a steady rate of about 2% per year.

This may well parallel the situation Bitcoin will face as it matures, as the supply of new Bitcoins slowly increases and the Bitcoin economy grows. Before that can happen, the markets will have to go through a process of discovering things like how widely it will be used for transactions and especially how governments will respond.

The cause of Bitcoin volatility is not deflation, it's caused by speculation under conditions of extreme uncertainty. For better or worse, that uncertainty will eventually be resolved.

One possible indicator that Bitcoin is worth taking seriously is that financial companies have a growing interest in the crypto-currency. While financial laws prevent hedge funds and investment banks from investing in alternative assests like Bitcoin unless they are formed into a licensed financial product. Individuals do not have to abide by these finance regulations.

Even so, Reuters reports that "Workers at Morgan Stanley and Goldman Sachs in London and New York have been visiting online Bitcoin exchanges as often as 30 times a day, according to documents seen by Reuters." So it seems that there is interest, but they are constrained in multiple ways that individuals are not. For example, the total value of all mined Bitcoins is on the order of ~$1 Billion--the entire value of the currency is trivial to large financial companies.

In any case, Bitcoin is a technology worth watching. Expect to see it covered here in the future.



Under the new health insurance regulations rolling out this year, businesses face harsh penalties for not providing health insurance to their employees. Since employees who work less than 30 hours a week are exempt for the requirements, many business owners are simply hiring people to work 29 hours (or less) per week.

Low-wage workers can't get by on less than 30 hours a week, so they are forced to get second jobs, often in the same industry:
It's already happening across the country at fast-food restaurants, as employers try to avoid being punished by the Affordable Care Act. In some cases we've heard about, a local McDonalds has hired employees to operate the cash register or flip burgers for 20 hours a week and then the workers head to the nearby Burger King BKW or Wendy's to log another 20 hours. Other employees take the opposite shifts.
 Unintended consequences abound. The short version is: employers aren't actually going to pony up to provide health care. As usual when a price-floor is introduced, the lowest-cost producers are hardest hit.

It's a tough time to be working class.



Recently a dazzling meteor strike hit the Russian city of Chelyabinsk, near the Ural Mountains. Video of the celestial light-show, which lasted only a few seconds, was captured from dozens of angles--mainly from video cameras embedded in car dashboards.



Why do so many Russians have cameras in their cars? Apparently insurance fraud is a major problem, and drivers seek protection from falsified insurance claims by taking video to prove they weren't at fault. In addition, police officers have been known to accept bribes when assigning blame in traffic accidents, and Russians like to have video available to prove their innocence when falsely accused.

Hopefully Americans will get on board with this car-camera technology. Not only will it make false-insurance claims a thing of the past, it might just capture some amazing footage!

The Sub-Prime Mortgage Crisis of 2007 occurred when the bubble in the United States housing sector, which began growing after the 2001 recession, began to recede and home prices began to decline. As home prices declined, home owners began defaulting on their mortgages, rendering mortgage-backed securities much less valuable. Many financial institutions had purchased securities backed with sub-prime mortgages, believing that they were safe assets. Some institutions avoided these toxic assets completely, while others divested themselves of the assets before the housing bubble collapsed. The failure of many of the country’s most prestigious financial firms to correctly evaluate the risk inherent in packages of sub-prime mortgages illustrates the importance of correct evaluations of risk and reward for firms and consumers alike.

When the Federal Reserve decided to cut interest rates in response to the early 2000’s recession, low interest rates and lending standards encouraged a wave of home buying by sub-prime borrowers. According to Princeton economist Paul Krugman, low interest rates “promote spending on housing and other durable goods.” Sub-prime borrowers took advantage of adjustable rate mortgages with low introductory rates. Many of these borrowers accepted these loan terms because they expected to refinance their home at a favorable rate once the home’s value increased due to the boom market in the housing sector.

From 2001 to 2006 median new home prices increased from $150,000 to $260,000. However, due to the increased prices of housing, real estate developers began rapidly increasing the housing supply to profit from the higher prices. The increase in housing inventories eventually caused home prices to fall. As home prices fell for the first time in more than a decade, many buyers realized they could no longer refinance their adjustable-rate mortgages at a favorable rate. When the higher rates kicked in, buyers began walking away from their homes, leaving them in foreclosure. As the number of foreclosures increased, this caused housing inventories to rise even more, which caused home prices to fall even farther. From 2007 to 2010 home prices fell by 26%. As the number of borrowers who had negative equity increased, foreclosed homes flooded the market.

In 2007, the UK bank Northern Rock, which had invested heavily in sub-prime mortgages, was nationalized by the UK government. Even though the bank was otherwise financially solvent, they couldn’t raise money in the short term. They had failed to anticipate the “liquidity risk” they faced.
Financial firms were weakened by the subprime crisis and exotic financial products like Credit Default Swaps and Collateralized Debt Obligations were revealed as being dramatically overvalued. As George Soros described it, “The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.”

 
The essence of the problem, according to Soros, was that risk was incalculable, and exotic products were bought and sold based on complex formulas, which provided evaluations which failed to take into account the extreme situation of the sub-prime crisis. Normally, a variety of complex business insurance policies help manage risk. However, the situation was so new, rare, and extreme, that no insurance policies were available to contain the extraordinary risk in the market.

Proper evaluation of risk and reward are essential to the proper functioning of the any firm. Examining the causes of the financial crisis, it is clear that failure to evaluate liquidity risk and market risk can have negative consequences for financial firms and for individual families as well. Families which lost their homes in the financial crisis learned the crucial importance of balancing the risk and reward of investments such as homes, and financial decisions such as what kind of mortgage to purchase.


While various government officials continue to claim that the ongoing protests sweeping the Middle East are directed solely at the makers of a poorly made YouTube video criticizing Islam, it seems increasingly clear that the general unpopularity of US policy in the Middle East is the real reason for the widespread targeting of the US embassies in the region.

To start with, videos critical of Islam are posted frequently on YouTube. While The Innocence of Muslims may have provided the match, the powder keg of anger had been building for a long time.
People in the Middle East have experienced decades of American interference with their affairs. Even before the invasions of Afghanistan in 2001, the United States had a long and shameful history of overthrowing governments, arming dictators with weapons of mass destruction, and betraying local allies.
Of course, since 2001, US involvement has only escalated, with thousands of civilians dying in American drone strikes, major invasions of Mideast countries, and US support for various uprisings and rebellions. 

The Obama administration's is attempting to place the blame for the current explosion of rage in the Middle East on a poorly made and insubstantial film made by someone nobody had ever heard of before. That's a lot easier than accepting that the real cause of the anger is America's historical and ongoing oppression of the people in the region.



Investment banks are quite different from the retail banks with which most people are familiar. Instead of accepting deposits and issuing loans and mortgages, investment banks help corporations issue securities and help investors purchase them. Market-making and financial analysis are two important functions performed by investment banks.
 
Investment banking and commercial banking functions have been legally separated in the United States since the Glass-Steagall Act was passed in the 1930s, but most countries permit these functions to coexist in the same financial institutions. Because of this, most of the largest financial institutions in terms of total assets under management are located outside of the United States.

However, while none of these enormous hybrid-banks are located in the United States, most of the largest and most profitable investment banks are US-based.  

1. JP Morgan Chase
2. Bank of America Merrill Lynch
3. Goldman Sachs
4. Morgan Stanley
5. Credit Suisse

Under heavy lobbying from the financial industry, the number of activities prohibited by Glass-Steagall was gradually reduced, until the act was considered practically meaningless by most experts. By 1998, Bill Clinton had declared Glass-Steagall "no longer relevant". The remaining "affiliation" provisions of Glass-Steagall were repealed by Congress in 1999.

In the wake of the Financial Crisis of 2008, investment banks received substantial criticism for their role in marketing risky Mortgage-Backed Securities that caused a number of financial institutions to collapse. Critics called for increased regulations of investment banks, an idea that appealed to many frustrated voters.

Ironically, the rise of the essentially unregulated shadow banking system may make any attempts to impose order via i-banking regulation essentially pointless.

Gold and Silver Coins were the first inspiration for Gresham's Law.
I've decided to take a quick break from my coverage of the turmoil surrounding the Euro currency to talk about an economic concept that may soon prove relevant to understanding the crisis: Gresham's Law.

Gresham's Law is the economic principle that says that bad money (money that is worth less than its government created official value) drives out good money (money that has retained more of its value).

Sir Thomas Gresham, a financial advisor to King Edward VI, established this principle when he noticed that defaced coins (which had been scraped or notched to remove valuable metal) tended to stay in circulation, while money that had not been defaced quickly stopped being exchanged. This was because people knew the metallic value of a defaced coin was worth less than the price the government stamped on the coin. Because foreigners ignored the price declared by the king, and cared only for the weight of the gold or silver, they would give buyers a fair price for coins that had not been defaced. Because of this, "good money" tended to be traded to foreigners, permanently leaving the country.

A more recent example of this process took place in the 1960s, when the United States stopped using silver in quarters and dimes. For a while, the silver coins minted before 1965 stayed in circulation, because the value of the silver in the coins was worth about as much as the amount marked on the coins. Eventually inflation drove the value of the dollar down so much that whenever people found silver coins, they usually kept them: because their official value was worth less than the silver metal used to make them. Because of this, the older silver coins left circulation, and today it is extremely rare to find a silver quarter or dime in your change. Most of these coins have either been melted down or are sitting in a vault somewhere. These "good coins" were driven out by the newer coins that were made from base metals.

These days, few people are aware that dimes and quarters minted before 1965 are 90% silver, and are worth about 20x their face value. Because of this, silver coins occasionally re-enter circulation, giving an opportunity to knowledgeable people to make some money buy withdrawing large sums of money from their banks (in quarters or dimes) and hunting for the occasional silver coin. This gives us the opportunity to watch Gresham's law in action--enjoy!

JP Morgan boss Jamie Dimon took a bit of flak in front Congress last week over his bank's $2 billion dollar loss. The net loss was caused, Dimon says, by a mistake in the massive firm's "Value-at-Risk' formula.

Dimon has been noted as one of the loudest voices against the Volcker rule, a regulation that would prevent banks covered by Federal deposit insurance from engaging in risky proprietary trading (speculating with depositors' money). The error made by JP Morgan allowed them to make massive bets, hedging against current investments instead of simply decreasing the size of their investments in risky assets. If the strategy had worked, JP Morgan (and by extension, Dimon) would have made a lot of money. Unfortunately for JP Morgan stockholders, the strategy didn't work as planned and billions of dollars were lost.

Bank of America took a smaller loss this week, when it was revealed that a problem with their ATM system allowed Detroit native Ronald Page to withdraw $1.5 million dollars from their ATMs even though he only had $200 in his accounts at the time. It's unlikely Bank of America will ever get their money back--Mr. Page (55) seems to be even worse at managing money than Jamie Dimon. He lost every dime at Detroit's own Greektown Casino.



A bank run occurs when bank depositors in a partial reserve system begin to suspect that their deposits are no longer "safe". A sudden loss of deposits can trigger a bank failure, shutting down access to capital and causing the economy to grind to a hault. Bank runs are considered so catastrophic that governments feel the need to offer services to prevent bank runs from happening. For example, deposit insurance increases the confidence depositors have in the banking system by offering to cover any deposits up to a certain amount of money (in the United States, up to $500,000). Since the government promises to cover banks that run low on cash, people are less afraid of bank failures, and rarely withdraw their deposits in a panic.

This system works very well... so long as people maintain their faith in the government's promises. But for countries like Greece, where the government is considered insolvent, confidence in government promises is lacking. Capital flight from Greece has been going on for months, with deposits falling and capital leaving the country for more stable countries like Germany.

The present condition for Greece is unsustainable. Things can't continue this way forever, so they won't. Eventually something will have to change. For months the specualation has been that Greece would quit the Euro and start printing Drachmas. Now the popular wisdom is that the Euro will leave Greece before Greece can leave the Euro.



GM is introducing "Super Cruise", a type of semi-autonomous driving in some of its high-end Cadillac models. The cars will be able to essentially drive themselves on highways by using sensors and machine vision to stay within the lines of the lane, while also slowing down when approaching the car ahead of you. Only some of these features will be available on 2013 models, but the entire package of capabilities should be available by the middle of the decade.

Several other groups have been researching this technology for years, including DARPA, BMW, and Google. Hopefully GM's entry into the competitive fray will speed up the rate of progress, and we'll get robot cars in our driveways in just a few years.