Before and after:

It’s been another terrible day for the pound as markets punish the British government for stepping in to prop up… the markets:

Analysts said the [latest bailout]… shone a particularly unflattering light on the state of the British government’s finances as it was forced to take an ever-increasing role in the private sector.

James Hughes at CMC Markets said: “Any support seen through yesterday’s session for sterling is looking to be little more than wishful thinking as currency markets take on board the fact that the UK government is risking looking like a huge bank with some legislative functions attached, as RBS now seems to be teetering on the brink of full nationalisation.”

Credit ratings agencies are also enjoying the party, despite being utterly discredited. When they downgrade the UK’s credit rating, the current devaluation (which has upsides) may turn into a rout (which won’t):

The Commonwealth Bank of Australia lowered its forecast for the pound to $1.50 by the end of June from a previous estimate of $1.60, citing a high risk of a cut to the UK’s credit rating outlook. Richard Grace, CBA’s chief currency strategist, warned in a note on Tuesday that UK debt may now be greater than forecast due to the government’s additional bank bailout plans and cited the “high risk” of a downward revision to the ratings outlook for the UK.

Any downgrade wil force many investors to sell their UK government debt, raising the government’s cost of borrowing. The FT’s Lex thinks there’s one thing that will stop a run on the pound – all the world’s other major currencies are screwed too…

Chris Blattman is experiencing a moment of epiphany.  As he notes, Africa suffers from the fact that much of its road and rail infrastructure was built during colonial times, to shift raw materials from the interior to the outside world; there’s rather less infrastructure that runs between African countries, which makes regional trade a whole lot harder.  So, Blattman continues,

What is a poor landlocked country to do? There was a time when I imagined roads, rail and regional integration were the answer. Now I know I dream too small. I need to dream like… an engineer.

And what might that look like in practice?  Well, perhaps a bit like this.

The map comes from a 1954 book that Blattman has discovered, entitled Engineers’ Dreams: Great Projects That Could Come True. And lo, some of them actually have (like the Channel Tunnel).  But as for the concept depicted above, well, that was

a plan to totally reconfigure the interior of Africa by creating a series of huge inland seas. The plan was originated by the German architect and engineer Herman Sörgel in 1935. His plan was to dam the Congo River where it passes through a string of deep, narrow gorges after it merges with one of its tributaries, the Kwa River. It would create a lake 350,000 square miles in area – larger than the areas of California, Nevada and Oregon combined.

For Blattman, this leaves the question, “What were they going to do with all those Congolese and Chadians? Give them beach-side holiday properties? Millions of USAID water wings?”

As for me, I’m reflecting anew on the point explained to me by a friend at the British Embassy in Beijing, who explained to me  few months ago that “what you have to understand about Chinese government is that it’s run not by political scientists and lawyers, as in Britain, but by engineers“.

Former US Deputy Treasury Secretary Roger Altman has a piece in the new edition of Foreign Affairs on the Great Crash of 2008, which takes the following as its opening premise:

The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe. Over the medium term, Washington and European governments will have neither the resources nor the economic credibility to play the role in global affairs that they otherwise would have played. These weaknesses will eventually be repaired, but in the interim, they will accelerate trends that are shifting the world’s center of gravity away from the United States.

(more…)

As David noted on Saturday, all the signs are that we’re now about to do some kind of ‘bad bank’ arrangement here in the UK.  As he says,

Valuation remains controversial, with banks scrabbling to extract as much as they possibly can from the taxpayer. One option (following the Swedes again) is to use an independent board to have a go at guessing what all the crap is worth.

But, David concluded, an alternative option would simply be to to nationalise the whole sector – an approach that former Bank of England Monetary Policy Committee member Willem Buiter was already mooting on his FT blog at the end of last week. 

Well, yesterday Paul Krugman came out and said exactly the same thing in the New York Times:

What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.

Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that [troubled banks] are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.

Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.

Which poses the question: is the UK going to spend hundreds of billions on a new bank bail-out just as expert opinion concludes that its proposed approach is useless?

Chances are you’ll already have seen media coverage of Generation Kill – HBO’s outstanding new mini-series based on Evan Wright’s book on his time as an embedded correspondent with a US Marine Corps reconnaissance battalion as they invaded Iraq. The series comes from David Simon and Ed Burns, the creators of The Wire (here’s an audio interview with Ed Burns, Wire fans).  Lest you haven’t already sampled the extensive selection of clips on YouTube, here’s a small sample to whet your appetite:

Book and series alike both give close-up perspectives on the failures of counter-insurgency doctrine that typified the early Iraq campaign.  Even then, it’s clear that the more thoughtful marines portrayed in Wright’s account become steadily more aware of the hearts and minds dimensions of their campaign – especially in the case of Lt. Nathaniel Fick, who led the platoon in which Wright was embedded.  Fick has since left the USMC for the Center for a New American Security, where he’s now co-authoring research with long-time 4th Generation Warfare expert John Nagl. (more…)

Donald Luskin has long held the position of  ’stupidest man alive‘ – but Larry Kudlow has surely now taken the crown. 

A couple of days’ ago, I posted a run-down of Kudlow’s mindless optimism about the economy, sustained over years of shamelessly abasing himself before George Bush. But now the man has surpassed himself, declaring that rampant deflation is just the boost the American consumer needs. It’s even better than a tax cut. Yes – seriously.

The plunge in consumer prices is a great thought. It is a tax cut of massive proportions. The drop in retail gas prices alone has been variously estimated at $350 billion in new consumer purchasing power. In fact, real average weekly earnings have now risen four straight months on the back of the CPI drop. Over the past year, this key measure is up nearly 3 percent.

And while consumer prices are deflating, producer prices — which represent wholesale costs to business — have been deflating even faster with the plunge in energy and other commodities. Consequently, corporate profit margins are improving as costs drop faster than prices. This important development is also overlooked.

Inflation is the cruelest tax of all. It is a prosperity killer. But the inflationary decline is the most pleasant tax cut of all, and is a key part of the recovery process. 

Now British readers probably just think that Kudlow is some fringe crank, but in fact he’s an esteemed mind on the American right. Esteemed enough that he was part of a select group that Obama chatted up over dinner the other night. (Kudlow couldn’t help gossiping about what went down, despite the meeting beingg strictly off the record.)

Of course, it’s not up to me to declare Kudlow the stupidest man alive – only Brad de Long has that right. But i trust he’ll make a prouncement as soon as he takes a break from the various other feuds he’s engaged in..

So it looks like we’re getting close to an announcement of a ‘bad bank’ here in the UK, with signs that this move has been co-ordinated with the new US adminstration.

According to the Telegraph:

The bad bank plan has climbed the political agenda in the past couple of weeks as the Government has become aware of the extent of the lenders’ bad debts.

Sources said that a bad bank would have to take on about £200 billion of toxic assets. That would take the Government’s total commitment to solving the banking crisis to almost £1 trillion in taxpayers’ money that has either been spent or pledged.

Valuation remains controversial, with banks scrabbling to extract as much as they possibly can from the taxpayer. One option (following the Swedes again) is to use an independent board to have a go at guessing what all the crap is worth.

Willem Buiter has a simpler suggestion – privatise the whole sector, with the government then making whatever valuation it likes as it transfers toxic assets into a new vehicle. Buiter, who thinks that even HSBC is now toast, points out that the current half-way house (partial state ownership) may be the worst of all worlds:

Ironically, by partially nationalising some of the banks, by making this injection of public capital expensive financially and as regards other conditionality, and by holding the threat of possible future (partial) nationalisation over the remaining banks, the authorities created an incentive structure that is biased strongly against bank lending, and against bank risk taking generally.  The best escape from this unfortunate halfway house is to go to temporary full public ownership of all the banks.  It would be cheap.  It should not cost more than £50bn for the state to buy the rest of the UK high street banks.  It could wait a while and get them even cheaper – possibly for nothing. But time is more precious than money in this case.