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Credit ratings agencies don't exactly have the strongest of reputations these days, and for good reason. But to single them out for blame in the euro-trainwreck that is currently unfolding before our eyes, as Merkel and Sarkozy have done, is pretty weak sauce. Reuters:

"French President Nicolas Sarkozy and German Chancellor Angela Merkel took aim at major ratings agencies on Thursday, saying the European Union should look carefully at whether they had worsened the Greek debt crisis.
"The decision by a ratings agency to downgrade the rating of Greece even before the programme of the authorities and the amount of the support plan were known prompts us to consider the role of the ratings agencies in the spreading of crises," the leaders wrote in a joint letter to European Council president Herman Van
Rompuy."

Sorry, I'm calling bullshit on this one. The credit ratings agencies are merely confirming what everyone who has taken a hard look at the numbers already knows: this is a mess. As Tony Barber points out, this is simply one more of a long series of cases where European politicians find it more convenient to blame "The Markets" for problems largely of their own creation.

- Shanghai Expo: Yawn.

- China's central bank continues to turn the screw, gently, by raising lending requirements

- Francisco Blanch of BoA/Merril Lynch presents his theory for why emerging markets have a greater capacity than the rich world to absorb higher oil prices.

- 'Switzerland Should be Dissolved as a State' - That would be none other than Col. Ghadhafi, bringing the AAA-rated Crazy to the table once again. There is some truly fantastic bullshit in here - too much to quote here - so I encourage you to check it out.

- Greece offers to repay loans with giant wooden horse. Suspicious.

- Hey look! Belgian politicians can agree about some things after all: cultural intolerance.

- What makes charities special?

Bill Gates announced today that the Bill and Melinda Gates Foundation will spend $10bn over 10 years on developing vaccines for the world's poorest countries. They aim to vaccinate over 90% of children in these countries, and could save over 8.7 million young lives as a result. Gates and his wife are arguably the greatest philanthropists of modern times, using their wealth and influence to address some of the world most under-resourced problems.

Gates also has a sharp sense of humor, as evidenced by the following shot he took at epic blowhard, sometimes assault victim and eternal IPE Journal whipping-boy Silvio Berlusconi:

'Rich people spend a lot more money on their own problems, like baldness, than they do to fight malaria...Dear Silvio, I am sorry to make things difficult for you, but you are ignoring the world's poor.'

In other words, 'I drink your milkshake.'

According to FP Passport, Italy's foreign aid budget was approximately 0.11% of GDP in 2009, one of the lowest in the developed world and half its 2008 amount. This contrasts starkly with the amount of money Berlusconi spends on his own image, which my conservative estimates put at 4,000% of his GBI (gross Berlusconi income).

The Italian premier has grabbed headlines in Italy this week for a disappearing, then reappearing, then disappearing head of hair. The bald Berlusconi is a known purveyor of the art of hair restoration, but the country is gripped by his latest, some might say insufficient, attempts at scalp renewal (I might exaggerate a tad, but it's my blog, so it must be true).

In contrast, Bill Gates spent a great deal of his time and money this week helping the world's poorest and most vulnerable.

Well blow me down. I don't think one needs three dozen interviews to figure that one out: it's pretty obvious that the various US financial regulatory bodies didn't see this coming, nor did those in the other major financial centres. However, as Arnold Kling points out, neither did most of the suits at the very banks within which the risks were being taken. I think it's fair to say that it has been a learning experience all around.

But exactly what kind of lessons are we learning from this crisis? It's very important that we learn the right ones. Even if we acknowledge that there was a collective cognitive failure on the part of our regulators, there are a couple of different ways to run with this.

If we're of the mindset that we should see bankers hanging from Blackfriars bridge, or have their heads on pikes or whatever, I don't think the discussion will go very far. Despite the obvious excesses of financial sector, I am still waiting for evidence that performance bonuses to Goldman Sachs employees has been the cause of our financial crisis.

But let's agree that the Fed F'd up. What should we do about this? One option is to use this argument to argue against the re-appointment of Ben Bernanke as Chairman because of his obvious failures to mitigate the crisis. While there is merit in digging up all the mistaken decisions by the Fed in the past decade, scapegoating will not address the problems of tomorrow. John Maynard Keynes is reported to have said: "When the facts change, I change my mind. What do you do, sir?" When the facts changed for Bernanke in late 2008, he also changed his mind. Although late to the party, the Fed's willingness to adapt to the crisis over the last 16 months has been a crucial part of slowing the economy's decline and stimulating what is, to date, modest signs of recovery. (I think Rory agrees) (wait, so does TIME)

But even if we accept that the Fed has learned from some of its past mistakes, this has not addressed the fundamental problem with financial regulation: the regulators don't have the capacity to know everything that's going on. They never will. The people who work at investment banks, hedge funds and the like are too smart and too motivated. There will always be loopholes, and those loopholes will be found. That said, it should still be possible to avoid the kind of crisis that we just experienced, with huge sums of money (your money, my money) being used to prop up the balance sheets of our financial giants. I see at least three possible avenues for the future:

First, concentrate the US regulatory system into fewer bodies. I couldn't find the organizational chart I wanted, but you can get a sense of it from this summary. Compared to many other industrialized countries, this is madness. Having one financial entity regulated by so many different government bodies will leave gaps in coverage. It's hard enough for one government entity to share information with itself - multiplying entities will multiply the problem.

But with a more concentrated financial regulator, the information-gathering problem will not disappear. This is why I find Paul Volcker's vision for the US banking sector to be persuasive. Since we cannot prevent financial innovations and we cannot expect our regulators to understand all the risks associated with them, we should at least prevent our "systemically important" financial institutions from playing with them. The risks and rewards should be realized by firms which are able to fail.

Third, let's beef up the regulatory standards for our core financial industries - the ones we can't afford to see fail. The Basel Committee on Banking Supervision recently released its list of five suggestions for doing just that. This is an excellent place to start the discussion, and efforts to coordination internationally will help address concerns about competitiveness.

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I think that it's crucially important to learn the right lessons from this financial crisis and avoid being side-tracked by the promise of a quick fix (think: banking bonus supertaxes or the Tobin tax). From where I'm sitting, one of those key lessons will focus on cognitive limitations - the limited ability of our government officials, regulators, banking execs and individual investors to understand complex realities of the markets they interact with. Once we accept this, we can begin to build buffers against the problems that will inevitably arise.

Now if you'll excuse me, in recognition of my own cognitive limitations, I have a stack of holiday reading to attend to.

- "We have not yet achieved self-reinforcing recovery... We are on a government support system, both in the financial markets and in the economy." Paul Volcker is interviewed by Der Speigel.

- The Catholic Church gets all up in Berlusconi's face. The Economist explains.

- The award for healthiest teeth in the OECD goes to the British. The British!?

- The rate of return on cancer research: looks good. Now if only we had some numbers like this for green technology...

Brought to you by none other thannnnn...... Silvio Berlusconi!

"I sincerely believe I am by far the best prime minister Italy has had in its 150 year history (since unification in 1861),"

And it actually gets better. Read the rest here.

Here's a quick follow-up on Rory's assessment of Ben Bernanke's re-appointment as Chairman of the US Federal Reserve: The Economist looks at the challenges facing Bernanke in his second term.

While the technical challenges for the Fed are ongoing, the political aspects of their work are growing in importance. One thing is certain: they face an uphill battle in the public relations department. According to a Gallup poll conducted in July, the Fed's approval rating was about 30% - below the CIA, IRS and Homeland Security. Dan Drezner quips:

When your agency is less popular than the federal institutions responsible for torture..., tax audits, and the requirement that you take your shoes off at the airport, you know you have a public image problem.

In a FT op-ed, Stephen Roach presents 'The case against Bernanke.' Roach calls the reappointment 'short-sighted'; I think his criticism is too fixed on the now distant past.

He argues that despite Bernanke's aggressive and creative response to the crisis, his weaknesses and ideological orthodoxy helped create this mess:

It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure.

He goes on to say that the jury is still out on whether the Fed's crisis response will work in restoring growth and stability. This is a sensible argument, but surely Bernanke deserves the chance to finish the job. A more appropraite criticism would be that Bernanke's 'philosophical conviction' is ill-suited to influence and implement financial sector reform. But even on this point Roach's argument falls short, as Bernanke has demonstrated an incredible intellectual flexibilty and ability to depart from the pre-crisis orthodoxy.

A second-term should not be seen as rewarding the failures of pre-crisis Bernanke. Instead, it should be welcomed as a vote of confidence in a man transformed by the crisis and using every measure in his monetary toolbox (and making some new tools up along the way) to end it.

Poor Lord Mandy...



Note: I am, I confess, a fan of Mandelson (which I know is an unpopular position in many, ok most, circles). Despite his immense shortcomings, he is an architect of one of the late-20th century's greatest political innovations in the western world, the "third way"; which, despite its role in the present economic and financial crises, remains the most pragmatic approach to politics in the US, UK and much of the EU. Also, his performance as European Commissioner for Trade was applauded by even his most ardent critics (with the exception of Super Sarko, of course), under incredibly difficult conditions (how's that DDA progressing?). Let the backlash commence...

From the BBC:

Japan's finance minister is facing calls for him to resign amid claims he was drunk at a recent G7 meeting.

Shoichi Nakagawa has apologised for his behaviour but blamed cold remedies for a slurred performance at a news conference in Rome at the weekend.

You may recall similar suspicions following Nicolas Sarkozy's "winded" press conference at the '07 G8 in Heiligendamm. Which begs the question: what are they serving at these summits (and where can I get some)??

Update: Nakagawa's gone, can Aso be far behind?

The US Treasury is reportedly considering direct intervention in the mortgage market to stimulate the US housing sector.

Finally!!! Paulson has come to his senses, recognized that our economy is doomed without direct support to subprime mortgage holders, and will stem foreclosures through federal action.

Wait...what? You mean, he wants to respond to the housing crash by re-inflating a housing bubble? He doesn't want to prevent millions of foreclosures? Rather, encourage artificially low rate mortgages and securitization? We don't need to keep people in their homes, but need to get more people to buy more homes they can't afford, in the midst of a recession?

What!?!?!