Tuesday Morning Links

This and that for your Tuesday reading.

- Christopher Ragan writes about the lessons we should be drawing from the 2008 financial meltdown - as well as so many similar bubbles before it:

Contrary to what many people seem to believe, financial crises like the one that began five years ago are neither rare nor inexplicable. They have been occurring for centuries, and while each one has its own fascinating details, they also have much in common.
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First, there always appears to be some new kind of investment or financial instrument to get investors excited. In Amsterdam in the 1630s, it was the arrival of tulip bulbs from foreign lands. A century later, publicly traded “joint stock” companies were the new thing, and the promise of far-away profits added an exotic twist. In the 2000s, the process of “securitization” and the creation of mortgage-backed securities seemed to offer both high returns and the safety of diversification.

The complexity of many financial instruments gets us to the second common element: The belief that money and intelligence travel together. It is probably natural to think that only really smart people can make it in the complex world of financial markets. When we see these people doing so well, we naturally conclude that they know a lot more than we do and, since they’re so smart, maybe we should do whatever they’re doing. And so the bandwagon starts rolling.

The third element is something very old: By borrowing a lot to purchase investments, investors become highly “leveraged.” The wonderful thing about leverage is that for good investments, the return on equity gets highly magnified because the investor starts with so little equity in the first place. The terrible thing is that for bad investments, the same magnification happens in reverse – and many investors then find themselves with few assets but mountains of debt. In 1630s Amsterdam, individuals borrowed massively to finance their tulip investments. A century later, investors did the same to purchase shares in the Mississippi and South Sea Companies. In the 2000s, individuals purchased houses with enormous mortgages and investors then borrowed money to purchase the associated mortgage-backed securities. The tulips and company shares and houses were all purchased with the expectation of ever-rising prices. But prices didn’t keep rising – they never do.

The fourth element is the assignment of blame after the fact. Maybe it falls on the founder of the company whose share prices collapsed, or the land developer whose real estate values evaporated, or the “predatory” mortgage lenders or the agencies that rated the riskiness of the mortgage-backed securities. There’s rarely a shortage of people to blame. But Mr. Galbraith noted that we never blame “the system,” because to do so would be to question the basis of a market economy – and who wants to do that?

Yet market systems have been prone to financial crises for hundreds of years. We can regulate the extent of leverage, the nature of bank lending, mortgage conditions, corporate governance, and much else. And we are right to do so, because financial markets do not work efficiently in the absence of such regulations. But let’s not delude ourselves into thinking that we can prevent the intrinsic behaviour that fuels financial euphoria and leads to financial booms, collapses and occasional crises. These are an unfortunate but unavoidable part of a market economy.

Mr. Galbraith’s final common element is our painfully short memory preventing us from learning from previous errors. So, maybe the most important lesson to be drawn from the past five years is that we should be less ignorant of our history. Our tendency to neglect the past, and to repeat crucial mistakes, will hasten the arrival of the next financial crisis.

- Anne Kingston writes about the developing Toronto Centre by-election campaign. And while some observers have raised questions about her fawning portrayal of the Libs as a party, the developing themes look to be ones which operate in Linda McQuaig's favour: a candidate with the "home-turf advantage" and a focus on income security versus a "habitué of the Davos think-tank circuit" whose message lacks much appeal beyond a business-school crowd.

- Stephen Maher and Glen McGregor's report on the participation of the Cons' primary counsel in interviews with Michael Sona and other Robocon figures has received plenty of attention. But I'll highlight the fact that Arthur Hamilton's intervention was purely in his capacity as the Cons' counsel - meaning that to the extent he managed to interfere with an investigation into election fraud, he did so in the name of (and the legal interests of) Stephen Harper and company.

- Finally, Nick Taylor-Vaisey and Aaron Wherry both discuss the NDP's use of Twitter to ask the questions the Cons are avoiding by shutting down Parliament. And it may be worth noting the effect that plan will have in getting responses - not from the Cons (who don't figure to be any more responsive than in the real Question Period), but from the public in determining which #QPQ questions receive the widest distribution.

[Edit: fixed typo as per comments.]

Friday Morning Links

Miscellaneous material to end your week.

- John Moore points out why the Canadian public is mourning Jack Layton with as much sincerity and energy as we've seen over the past week:

He wasn’t the only nice guy in politics, but he was one of the few to ever achieve such heights. He was on a permanent charge fuelled by an eternal optimism. At the core of the public’s reaction to his death is the recognition that he had a vision of Canada and of a society, and he was unwavering in his advocacy for it. Other politicians might pander with foolish and populist policies, or denounce things they actually believe in for political gain. Jack stayed the course. Is principal (sic) now so rare that a man who stands firm for those things he believes in is seen as vainglorious, self-serving and stubborn?
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People liked Jack as a man and his sunny celebration of our country was infectious. The Prime Minister has recognized this unique bond by making the unprecedented offer of a state funeral. There’s a reason why Canadians mourn this week. It’s the appreciation of personal qualities and uncompromised political vision that they wish all politicians drew on.

- And Nick Taylor-Vaisey notes that politicians of all political stripes who have participated in keeping Layton on the front pages can largely been to have done so as a result of the public outpouring of grief:

At some point, someone suggested a candlelight vigil that evening, so it happened. Ottawans weren't alone. People across Canada coalesced around similar vigils.

Layton's other home, Toronto, reacted similarly. Its people flooded Nathan Phillips Square with a chalk memorial, and when rain washed it away, they wrote even more tributes. No one choreographed that routine. Later, a Facebook group popped up that urged the CN Tower to beam out orange light on the night following Layton's funeral. Soon enough, Gord McIvor, the vicepresident of Canada Lands Corp., said the tower would go orange for the night.

Even the lights on Niagara Falls, more than an hour's drive from Toronto, will shine orange that evening - another response to public wishes.

Each of these campaigns was driven by the crowd, and each memorial, or tribute, saw authorities of some kind reacting to that crowd. It's not what we're used to. Often, when we hear news about crowds doing things, it skews negative. They're rioting in Vancouver or, more recently, some parts of the United Kingdom. They're irrational, or at least ill-meaning. Left to their own devices, they're not to be trusted. They're why we have authority figures, elected or otherwise, in the first place, right? Don't we need them at times like these? Isn't that why we have protocol? So that people can follow direction?

The last few days at least make the case that it doesn't have to be so. The crowd that lined up on Parliament Hill to pay respects to Layton was sombre, and patient. They joined hundreds of strangers in that line, and advanced forward in unison. The sea of people set the tone. They took control of their Parliament, peacefully and respectfully, and then gave it back.

Next month, the people we elected will again take their seats. Let's hope they're as respectful as those who mourned the only MP who won't be back.

- There's been plenty of fabricated outrage over the NDP's work in making sure that Canadians can live up to the Layton family's last request for donations to the Broadbent Institute.

But it's worth pointing out how the workaround to run donations through the party first - while perhaps necessary when the institute still has some structural decisions to make - may serve to limit how much seed money it has to work with. After all, the direction of donations through the party also makes them subject to the annual individual limits under the Canada Elections Act - while donations directly to the institute wouldn't face any caps at all.

- Finally, Jay Rosen's take on how media coverage of politics should work is well worth a read.