Goldman Sachs CEO Lloyd Blankfein

P.T. Barnum, the great American circus showman, may or may not have actually said of his customers, "there's a sucker born every minute," but it's a maxim that could just as well have applied to the recent financial crisis.

I'm reminded of the apocryphal quote after reading Gretchen Morgenson and Louise Story's somewhat convoluted, but nonetheless interesting report in today's New York Times on how the investment bank Goldman Sachs allegedly played both sides of the market for mortgage-backed securities and is now being scrutinized by various regulators looking to determine whether any laws or industry rules were broken:

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

I'm no lawyer, but my take is that it's not Goldman's fault if its customers were suckers; the bank correctly saw that the U.S. housing sector was headed south and adjusted accordingly, while less prudent financial institutions were still making big bucks on complex securities tied to mortgages and couldn't wean themselves away in time to save themselves from disaster. As the firm's spokesman says in the story, it's not like these customers, pension funds and insurance companies, were rubes who didn't know what they were getting into. They were sophisticated financial players looking for high returns and willing to take risks.

Still, Goldman stands accused of some breathtakingly cyncial behavior here: selling products it didn't believe were worthy investments and then betting against them. It's as if McDonald's were caught investing in defibrillators and plus-size clothing companies. Nobody can deny, however, that Goldman made very smart moves and has come out far ahead of its competitors.

One thing I'm struck by in recent accounts of the financial crisis is the extent of "Goldman envy" among other Wall Street firms. Executives at J.P. Morgan, Lehman Brothers, Merrill Lynch, Bear Stearns, Morgan Stanley, and other big banks were obsessed with emulating Goldman's huge profits and resented its employees' reputation for being the smartest, boldest players on Wall Street. In some cases, the interfirm jealously was kind of like that of the character Jan on The Brady Bunch; just replace "Marsha, Marsha, Marsha!" with "Goldman, Goldman, Goldman!"

Yet somehow, with the possible exception of J.P. Morgan, which avoided the worst of the mortgage junk thanks to smart risk management by CEO Jamie Dimon, the other banks didn't follow Goldman's lead when in December 2006 the firm turned bearish on the mortgage sector. Why didn't they catch on?

UPDATE: Be sure to read Felix Salmon's informed analysis. Money quote:

The real lesson here isn’t that Goldman did anything scandalous. It’s just that if you’re making a bet and Goldman is your bookmaker, don’t be surprised if you end up losing.

See also Goldman's response and Salmon's custom answer to my last question.

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A "scurrilous idea" -- better known as the Tobin tax, a levy on foreign-exchange transactions -- seems to be taking on a life of its own.

This week U.S. Rep. Peter DeFazio is expected to propose a tax on all financial transactions (like stock purchases -- excluding those connected to health, education, and pensions). The idea of funding job creation in this way has the backing of a variety of groups, including the NAACP, AFL-CIO, and the National Council of La Raza.

Although the idea of a financial transactions tax has been floating around since Nobel economics prize winner James Tobin proposed it in the 1970s (to stabilize currencies), it has gained recent traction since Britain's Prime Minister Gordon Brown brought it up at a meeting of G20 finance ministers meeting earlier this month. He discussed using some form of a tax on all financial transactions, to stabilize whole markets.

Much of the debate focuses on justice, the idea seems to be to tax the bad guys and use the money for any number of just causes. It's hard to argue with that sort of logic. As Brown pointed out, the banks should have to bear some of the costs of the massive bailouts they received.

It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us."

At the request of the G-20, the IMF is preparing a report on the tax -- despite opposition by IMF Managing Director Dominique Strauss-Kahn. Opponents avoid philosophy and stick to economics, arguing that countries instituting such levies might risk pushing financial operations into friendlier markets and that it would be technically difficult to implement.

In the meantime, Brazil has unilaterally implemented a tax on currency transactions, intended to stabilize the real by reducing speculation.

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Today, the International Energy Agency said that global carbon emissions shrank 3 percent in 2009, due to the Great Recession. The Guardian reports that for only the fourth time in the past 50 years, the world emitted less of the greenhouse gas than it had done the year before, because of declining industrial production.

Which means, alas, that the world will likely be back to increasing emissions soon. Indeed, the IEA report notes that to avoid climate change and all the catastrophes it promises, countries don't have to shrink their economies, but do have to "[build] more than 350 new nuclear plants and 350,000 wind turbines in the next 20 years. [It] also estimates that by 2020, three-fifths of cars will need to use alternatives to the traditional internal combustion engine."

The IEA report reminded me of a fascinating study out of the London School of Economics, released last month. It found that promoting contraceptive use could be a lynchpin to combating climate change: fewer babies means fewer carbon-emitters, and fewer carbon-emitters means less climate change. 

That, in turn, reminds me of this. Oh dear.

Last week, the Hurun Report released the top two on its 2009 China rich list, a ranking of the wealthiest people on the mainland: Wang Chuanfu at $5.1 billion, whose company makes electric cars and batteries, and Zhang Yin at $4.9 billion, whose company produces recycled paper products. The rest of the list comes out this month.

A few things about these two titans and the rich list and its older versions interested me. First, as the United States' billionaires are getting fewer and poorer, China's are getting more plentiful and richer. There are now 131 dollar billionaires in China -- compared with around 350 in the United States.

Second, an exceedingly obvious point but one to marvel at: Rich people in China own companies which make things. The country remains the organ that produces the world's stuff -- batteries, cars, paper, widgets, tires, you name it. And these companies remain relatively undiversified, vertically, not horizontally. One member of the rich list, for instance, owns a company that produces pig feed. 20 years from now, he might own a conglomerate that makes pig feed, feeds it to pigs, slaughters them, and sells the meat. Then, 20 years from then, he might own a holding company which subcontracts out all of those functions to workers and producers in cheaper markets.

In contrast, the 10 richest people in the United States (in descending order: Bill Gates, Warren Buffet, Larry Ellison, assorted Waltons, Michael Bloomberg, and Charles and David Koch) run diversified companies which trade in finance, technology, information, and real estate.

I also took a bit of interest in the producer of the Hurun Report -- one Rupert Hoogewerf. He's a Luxembourgian alumnus of the accounting firm Arthur Andersen who produced Forbes' China rich list between 1999 and 2003. At that point, it seems that Forbes fired him, possibly due to "public doubts and questions of the accuracy and authority of the wealth ranking year after year," according to state paper China Daily. It added: "It is understood that he received no compensation settlement from Forbes."

The official line is that Forbes simply decided to have a Shanghai editor manage the production of the list. But I like the idea of list-maker Hoogewerf going rogue. Does make you wonder about the accuracy of those lists, though...

European leaders are starting to follow suit; Britain's five largest banks have agreed to publish the pay of their key staff members, and will spread bonus payments over three years. French president Sarkozy has announced a set of even tougher and more broadly applied regulations.

Of course, not everyone thinks that bonus reforms are the way to go. Nobel prize-winning conomist Robert F. Engle III says

We shouldn't ban bonuses, but restructure the way they're paid so they're more commensurate with the risk the company is taking....What's important is we give the banking system the right incentives to figure this out. When companies get too big and too complex to fail, they would face a higher tax rate, which would go into a rescue fund. The banks are not excited about it, they would rather go back to business as usual."

The financial crisis, which has already hit Cuba's economy hard, is about to give the country another big kick, this time in the tuchas. Literally. Cuba is on the verge of a toilet-paper crisis.

Devastating hurricanes have left the state-run company that produces the country's supply, without the raw materials necessary to keep up with demand. In addition to which, President Raul Castro recently announced a 20 percent cut in imports, meaning a lot less goods on state-run store shelves. Cuban officials are saying they may not have sufficient TP supplies until the end of the year.

Worldwide, toilet paper is a booming business, especially in the United States where consumers use up to 50 million pounds of TP a year. It seems American bottoms have a "soft-tissue" fetish, one that's not only costly, but harmful to the environment. In order to get the fluffiest tissue, suppliers take from the world's rainforests. Earlier this year Greenpeace released a toilet-paper guide listing the more planet-friendly products. 

One penny-saving option for Cuba would be to use recycled lavatory paper, a much cheaper alternative on the whole. Indeed, many countries are already using the eco-friendly alternative, even if it is a little ... rough.

For Cuba, this could be an opportunity to take that initiative one seriously brave step further to becoming a leader to an "greener" planet: Go cloth.

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This past week, Vitaliy Katsenelson wrote a great Foreign Policy web feature on the big old asset-price bubble developing in the Chinese economy, called "The China Bubble's Coming -- But Not the One You Think."

Recent news seems to bear the theory out.

The Financial Times reports:

Chinese regulators on Monday ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming.

The new policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of this year as they rushed to extend [around $1 trillion] in new loans, more than twice the amount lent in the same period a year earlier.

I feel a bit strange saying this.

But, over the past year, in the midst of the worst economic crisis since the Great Depression, I've really come to admire the Chinese central bank. 

This fall, it recognized the need for massive stimulus -- and did it. Then it realized it was pushing too much money into the economy, creating bubbles and distorting the lending market -- and so it stopped. The central bank will raise reserve requirements for lenders. And presto, they'll stop lending so much. The bubble will ease, rather than popping.  

Of course, I'm wary of my own oversimplification here. The Chinese economy has some very trying issues ahead of it, particularly as related to its currency, its U.S. reserves, and the quality of its economic growth. Plus, the impact of the lending spree (and its halting) obviously won't be clear for some time. 

But, for the moment, this move just seems really prudent. Another way of thinking of it? Being a command economy has its advantages when there's need for a whole lot of emergency economic commands. 

Elizabeth II has joined the ranks of the credit crunched.

Recent figures reveal that the Queen's estate, the Duchy of Lancaster, has lost £75 million as a result of the recession. Her private portfolio of land and property assets lost a fifth of its value and is now down to a paltry £322 million.

This is further bad news for her Highness, who has had her many, many requests for increases to the royal budget rejected by parliament in the last year. The monarchy's annual expenses currently run at £41.5 million, excluding an estimated £50 million in security costs. Nonetheless, Palace officials continue to engage in talks with the Treasury to elicit more funding for the Crown for, amongst others, planned household refurbishment and the 2012 diamond jubilee celebrations.

The Queen recently dipped into her now-dwindling private funds to pay for a few royal expenses, including Prince Harry's latest trip to New York.

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