Featured StoryThe Nobel Prize panel granted its top award to seven leading economists - whose theories went on to cost investors trillions of dollars in losses.
This story - as well as some of the other top financial fiascos through the ages - is detailed in the new book, "Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System," which was written by Martin Hutchinson, a former merchant banker and Money Morning columnist, and Kevin Dowd, an economist and respected academic.
Money Morning Executive Editor William Patalon III recently sat down with Hutchinson, to talk about the book. Here are some excerpts from that discussion.
Money Morning Mailbag: Tobin Tax the Only Solution to Problems Posed by High Frequency Trading
An episode of the television news program "60 Minutes" that aired Oct. 10 highlighted investors' fears over the growing trend of high frequency trading (HFT) run by a world of "supercomputers."
The "60 Minutes" piece prompted this letter from a reader wondering if the technological shift means it's time to readjust investment strategy.
Sunday night on "60 Minutes" they had a story about high-speed computers that are out-trading humans. Is it time to refocus on the world stage and find tangible rather than paper investments to put your money in? A partnership in a retail or manufacturing venue surely is more transparent than the stock market.
--RomanMoney Morning has been examining the effects of high frequency trading for years. In August 2009 Contributing Editor Martin Hutchinson said high frequency trading systems were front-running the market.
The Defeat of the "Shadow Shogun" Means it's Time to Buy Japanese Stocks
Japanese Prime Minister Naoto Kan's narrow Tuesday victory over Ichiro Ozawa for the leadership of the Democratic Party of Japan wouldn't normally get investor pulses racing - after all Japan has had five prime ministers in four years.
However, the Bank of Japan's heavy intervention in the currency markets this week confirmed my view that this political twitch was really very different.
The upshot: As investors, we should pay attention ... and should look to increase our allocation to Japanese stocks.
To understand why it may be time to buy Japanese stocks (and to see what stocks to buy), please read on...
Investing in Canada: The World's Safest Economy
I've said it once, and I'll doubtless say it a few dozen more times before the U.S. economy returns to health: Just because you have to endure recessionary conditions doesn't mean that your money has to.
That's the argument I make when I urge Americans to search for investments outside U.S. borders. Ironically, your money doesn't have to travel all that far: What's arguably the world's "safest economy" is actually located just north of the border.
I'm talking, of course, about investing in Canada.
For the five ways to profit from Canada, please read on...
Money Morning Mailbag: There's No Way Around the Dangers of Municipal Bonds
Money Morning Contributing Editor Martin Hutchinson last month introduced readers to the dangers of municipal bonds. While many investors assumed munis offered a safe haven in turbulent times, the battered condition of state and local finances has left many munis running the risk of default.
"Brokers will tell you that particular state and municipal bond issues are 'safe,' meaning that they are rated highly by the rating agencies," said Hutchinson. "However, the rating agencies got it wrong on subprime mortgage instruments, and it seems pretty clear that they are getting it wrong on states and municipalities."
On the municipal level, local property taxes are the primary revenue source. Declining home prices and increased mortgage delinquencies are creating a housing market that offers little local revenue. Municipalities are then left struggling to make ends meet.
Hutchinson said the vicious cycle could send municipal-bond defaults soaring past 2009's $6.4 billion.
The Tobin Tax: The Deficit-Busting Levy Wall Street Hates
After the Nov. 2 midterm elections, the Obama administration and Congress are going to have to scramble to fill a trillion-dollar hole in the U.S budget, and tax increases may be the only option.
A tax increase won't be good news for an already wheezing economic recovery that seems to get weaker with each new report or indicator that's issued. But the type of tax that's chosen will go a long way in determining just how much damage the U.S. economy will have to endure.
With a deficit in excess of $1 trillion, there aren't a lot of options. One possibility would be to allow the 2001 and 2003 Bush tax cuts to expire, which would have a depressing effect on the economy and most people's pocketbooks.
But a better option would be to devise some new taxes that may prove less damaging. Indeed, there's even one possibility that might even do some economic good if it's implemented correctly.
It's called a "Tobin tax."
To see how a reasonably set "Tobin tax" could help U.S. leaders to fix the nation's finances, please read on... Read More...
How Washington Should Handle the Bush Tax Cuts
The big political issue for the remainder of this year will be the so-called "Bush tax cuts" engineered by U.S. President George W. Bush in 2001 and 2003.
Those tax cuts are scheduled to expire on Dec. 31, with taxes reverting to their 2001 levels.
It's not at all clear which of the cuts will be extended and which will be repealed.
But one thing is clear: The outcome of the Bush-tax-cut debate will have major implications for the U.S. economy.
To understand the economic implications of extending the Bush tax cuts, please read on... Read More...
The Headline You Never Expected: Foreign Growth Could Bail Out the U.S. Economy
During a period of increasingly worrisome headlines about the U.S. economy, there is one bright spot.
The rest of the world appears to be doing much better than we are.
In the long run, that's good news for the United States. Rapid world growth will eventually rekindle the economic fires here, producing a growth that is more balanced than the bubbles of 1995-2008.
Still, getting to that point will be a challenge, since - economically speaking - the home fires don't appear to be burning all that brightly.
To see how foreign growth could bail out the U.S. economy, please read on...
The Global Double-Dip Recession: Which Markets to Hold… And Which Ones May Fold
Last week's stock-market meltdown was a worldwide affair, and was touched off by trader fears of a global "double-dip" recession.
However, the truth is that the odds of a recessionary reprise are high in just a few countries - primarily those that have experienced excessive fiscal and monetary "stimulus," or that have real inflation problems.
The rest of the world is recovering just fine.
To find out which markets to hold - and which ones may fold - please read on...
How to Profit From Europe's Stealthy Resurgence
European countries - both inside and outside the Eurozone - are slashing their budget deficits.
Greece, Portugal and Spain - three of the so-called "PIGS" - have to do so, of course. But Germany - generally reckoned to be in excellent shape - is also cutting its deficit, as is France, which hasn't run a budget surplus in 40 years. Britain, too, with no need to protect the euro (it's not a Eurozone member) just introduced a budget that cut the deficit by $140 billion over four years.
U.S. President Barack Obama and other Keynesians warn that Europe may push its own economy - or even the global economy - back into recession.
But here's the surprising reality: Europe may gain from its fiscal pain - and its deficit-trimming actions offer the best hope for a lengthy recovery.
To see which European countries are expected to rebound - and which ones to invest in - please read on...
China's Inflation Higher Than Target Rate, Could Be a Sign It's Time to Tame Rapid Growth
China's inflation rate rose 3.1% in May from a year earlier, exceeding the government's 3% target rate for 2010 and stirring speculation on whether or not Beijing will attempt to slow the nation's rapid growth pace.
The consumer price index climb was the fastest in 19 months and was higher than the 2.8% rate in April. The National Bureau of Statistics also posted increases in industrial production, retail sales, and property prices, which contributed to analysts wondering whether or not China will make moves to tame growth to avoid higher inflation.
"Officials seem confident that price pressures will ease later this year, attributing much of the recent positive trend to base effects, but there are plenty of reasons to think that inflation can keep moving higher," Royal Bank of Canada (NYSE: RY) economist Brian Jackson told The Wall Street Journal.
How to Cure Western Bankers of "Bad-Banker" Behavior
Masayuki Oku, the new head of the Japan Bankers Association, recently said that Western bankers did not understand self-control the way Asian bankers did, which was a major cause of the 2008 crash and the Great Recession.
I think he has a point.
Oku's main purpose in denouncing Western bankers for their lack of self-control was to object to the tougher proposed capital rules from the Basel Committee, the global body that sets banking regulations.
To understand how to fix the Western banking sector, please read on... Read More...
Money Morning Mid-Year Forecast: Oil Prices Down but Not Out
While it looked like they were headed towards the $90 a barrel level, oil prices hit a wall in the spring. Rattled investors who worried about the direction of the global economy shunned black gold in favor of real gold as a means of preserving capital.
But don't be fooled. The spring retreat simply set the stage for a second-half rally.
After starting the year at about $81 a barrel, prices climbed as high as $86 a barrel before plunging to $64 on May 25.
- The Case for $5,000 Gold: And How to Profit The gold bug is unstoppable. Prices are up four-fold since 2001... and they're not stopping anytime soon. Could $5,000 per ounce be in our future? Read this report to find out why gold is being pushed through the roof - and four ways to profit from gold's rise. Read More...
Money Morning Mailbag: Investors Show Growing Concerns Over Deflation
The threat of deflation has been making its rounds as inflationary measures like the consumer price index (CPI) fell for the first time in 13 months in April, dropping 0.1%. Core CPI - which excludes food and energy prices - rose only 0.9%, its smallest gain since 1966. The producer price index (PPI) also dipped 0.1%.
"The recent trend in inflation has been swiftly to the downside," Eric Green, chief U.S. rates strategist at TD Securities, told Reuters. "All measures of inflation are decelerating."
Investment behavior has shown an anxious but mixed sentiment of hedging against both inflation and deflation: Demand for gold metal is outstripping supply by more than 1% per year and has pushed gold prices to record highs, while others have sought out both corporate bonds and U.S. Treasuries for safety.
Two Energy Stocks For a Post-Oil-Spill World
With the failure of the BP PLC (NYSE ADR: BP) "top kill" strategy, the Deepwater Horizon oil spill takes on a more serious hue, both for the Gulf of Mexico environment and for BP itself. If it indeed proves impossible to cap the oil flow before August, public anger against BP and against deep-sea drilling in general may put BP out of business and set deep-sea drilling around the United States back for years.
The business fallout from the oil spill could be widespread. As was true of the Three Mile Island nuclear accident of 1979, the Deepwater Horizon oil spill could end up causing massive damage to companies that were in no way involved with the BP tragedy. Risks of different types of operation will be reassessed, new rules will be enacted, and the energy business will change radically.
Smart investors will anticipate these changes.
To discover two stocks poised to thrive in a post-oil-spill world, please read on... Read More...