For a whole lot of different reasons – some simple, and others not – banks still aren’t lending money to borrowers often enough and corporations are hoarding unprecedented amounts of cash. These conditions have conspired to create enormous investment opportunities for one specific type of organization: organized crime syndicates.

Bloomberg reports:

The mafia has cranked up money laundering activities in Italy after the credit crunch prompted banks to stop lending, leaving a funding gap that criminal capital has filled, according to the Bank of Italy.

“The crisis has given organized crime room to thrive because access to credit has become more difficult,” said Anna Maria Tarantola, the central bank’s deputy general director, in a July 12 interview in her Rome office. “Whoever holds large amounts of cash, like crime groups, can make investments that aren’t possible for others. They can now invest in fully legal businesses.”

I think this — mobsters having attractive investment opportunities in legitimate businesses, thereby making money-laundering activities much, much easier to execute — is what economists call an externality.

As a writer and press contact news peddler, I’m not qualified to argue with the doomsday analysis pushed forth on Calculated Risk during the past few days. But years of listening to executives at financial services companies and funds give interviews to reporters ensures I can come pretty close to understanding it.

Today’s installment continued the series’ focus on the potential for sovereign debt. Specifically, it covers the likelihood of massive, debilitating, catastrophic sovereign debt default:

So, out of the multitude of potential scenarios, I have settled upon one which is really bad, but doesn’t involve asteroids, mass extinctions, or apes taking over. It is consistent with prior bad episodes of sovereign debt default.

Here is the Really Bad scenario. It’s not a worst possible scenario. It is more like the Long Depression or the Great Depression reoccurring under 2010 conditions.

In the Really Bad scenario, 45% of the countries with large outstanding sovereign debts are in default within a 2-3 year period.

As the author points out, the models that led to these conclusions center on economic conditions very similar to ones that actually existed in the recent past. So this isn’t exactly fear-mongering; it’s … well, it’s something else I can’t quite put a label to.

Regardless, the entire series, written by a Calculated Risk reader, is worth reading. (Sidebar: Inviting readers to write posts is an awesome way to maintain a blog.)

The series:

Joseph Fuller’s new piece about computer-based trading channels a couple of points I see a lot of market observers missing:

Investment firms will wrangle with the challenge of tying their models to a better understanding of market behaviors. Regulators will struggle to adjust market rules to curtail the explosive effects of existing models. Meanwhile, new types of computer-based trading programs will emerge as technologies driving them continue to evolve. At the cutting edge of modeling science, researchers are trying to move away from relatively crude rules-based models toward models that approximate the processes of human reason.

Such artificially intelligent models might be able to consider numerous different data streams, interpret them, and look for patterns rather than simply trying to fit market behavior into a fixed algorithm. Given the torrid pace at which both processing power and data storage continue to improve, some of the technological barriers to such advanced models should fall in the coming years.

– The Terminator Comes to Wall Street, The American Scholar

The conventional wisdom is that an effective regulator needs to “get out in front” of a given industry. See the precise nature of what’s coming down the pike and regulate it before it happens, because reactionary decadence creates a demand for quick, hasty decisions. This view works for some areas of public policy but not for others.

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I don’t know how I got on the mailing list of the London Business School — and not that I mind having the occasional newsletter or list of academic links in my inbox – but this morning’s update from the School was rather contradictory.

First, a brief post from one professor about the general nature of problem-solving. It’s take on the relative inability of decision-makers in the business world to identify the problem they seek solutions for is intriguing. “If you look at engineering or architecture the ability of people to explain the problem they’re working on, and ask questions so they can get feedback is very high without their need to resort to either dogma or trivia.” Et cetera.

Then, the obligatory post from another professor about the financial crisis and how maybe we ought to do something to make sure it doesn’t happen again. Generalities – bring under control those who caused the problem; take a look back in order to inform for the future; et cetera – are stated. But … uhh … what’s the problem in the first place? Are there no prospects for meaningful reform on a global scale? Do international regulations not work well? Are contemporary financial instruments inherently dangerous? Is it greed? Is it indifference? Is it ignorance?

I guess both posts are provocative, but for completely different reasons.

A journal article in The National Interest this month gives a decent interpretation of the current state of oil geopolitics. I write “decent” because the piece makes a lot of intuitive sense before coming to a dangerous conclusion: oil markets serve a useful purpose, it argues. Instead, diplomats need to work with lawmakers to reduce the overall exposure to oil markets, not to joyfully participate in them.

The premise of the author, Michael Klare, an academic at Hampsire College – that the United States will be forced to import more and more oil from authoritarian countries it would rather not deal with in spite of a recent nudge toward reducing oil dependence – is pretty benign. It’s accurate that output from Canada and Mexico is predicted to slow dramatically, and that Brazil’s developing economy may cannibalize some of its oil exports, though the author fails to point out that because of state mandates, ethanol fuels roughly half Brazil’s passenger automobiles, which positions it very favorably as an exporter despite its growth. These aren’t unusual things to write.

And, despite the wailings that come around every earnings season, the Exxons and Chevrons of the world are not the dominant oil companies. The vast majority of the world’s oil capacity is nationalized, mostly by countries high on corruption and low on human rights enforcement.

Klare names 14 countries where the United States can realistically count on for oil going forward. About these countries, he continues:

[N]one are truly allies in the sense that Canada or Britain or Norway is a friend of the United States. Some are truly antagonistic—think Sudan and Russia—while others maintain “proper” ties with Washington yet allow the expression of virulently anti-American views by semiofficial voices within their territory; the government-financed Wahhabi clergy in Saudi Arabia is a perfect example.

Fair enough. This is a dilemma. Klare and I disagree about how to react.

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