Photograph by Lucasfilm/20th Century Fox/Ronald Grant/Everett Collection

Is that Han Solo? Or Ben Bernanke at the controls sending the market into hyperdrive?

Bloomberg’s Whitney Kisling earlier this week looked at the U.S. stock market and found a notable milestone: the Standard & Poor’s 500 Index gains over the last 50 months match the gains of the late 1990s. That raises the implicit question: is a crash right around the corner? The likely answer, based on measures of valuation that Kisling looks at, is no. Her story carefully analyzes the differences between the market today and in the 1990s. The increases then were driven by one sector, technology, and weren’t matched by a similar rise in corporate profits.

The rally now is much broader than the 1990s technology boom. You can see that in the chart below. That shows the S&P 500 (the white line) rising neatly in tandem with the Dow Jones Industrial Average (yellow). That’s very different from what you would’ve seen in the 1990s, when Nasdaq technology companies pulled away from the rest of the market.

There is one sector that, tellingly, has outperformed the rest of the market. It’s financials; the S&P 500 Financial Sector is the purple line. Obviously one reason for this is that banking crashed harder in the first place. Another reason, though, is that part of what has fueled the market boom has been monetary stimulus. That has benefited financials most–but it has also propped up the rest of the market. The real test of whether current prices are sustainable will come when that support disappears.

When I originally posted this in the TMN newsletter, I ended here. There is another question, though, that’s worth thinking about: if shared prices aren’t about to fall, how much further does the stimulus-fueled ascent have to go?

One useful way of thinking about that comes in the work of two economists at the New York Fed, Fernando Duarte and Carlo Rosa. Duarte and Rosa look at the current equity premium, the excess returns that stocks offer over bonds. In their post “Are Stocks Cheap?” they find the premium stands at a historic high. So if interest rates on bonds rise to their long term average and share prices stay where they are, then that equity premium will return to the long-term average.

If that’s the case, then as Fed support disappears then the S&P’s climb can taper off gently. Note the “can” there. It’s also possible that the cycle of Fed stimulus and market momentum pushes the market into what Appaloosa Fund Management LP’s David Tepper recently called “hyperdrive.” In that case, all bets are off, and, much like in Star Wars, “hyperdrive” catapultes you to locales that mostly turn out to be dangerous.

An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe.

Photograph by Victor J. Blue/Bloomberg

Union Square in New York on May 1, 2012, a last hurrah for Occupy Wall Street.

May Day came and went last week, and despite the occasional signs on New York lamp-posts promising a return for Occupy Wall Street, downtown wasn’t exactly gripped by the kind of International Workers’ Day rage that gripped some other world cities. In the months leading up to the presidential election last year, the protests filled the airwaves and the 99 percent chants seemed to define and crystallize the national debate. So what happened?

For one thing, there was the response of authorities. At its home in Zuccotti Park in New York Occupy faced an ever-tightening net of aggressive policing. In other places, like Oakland, Calif., the response made protests a dangerous place to be–and probably succeeded in sending the message that attending the protests would put you in direct confrontation with cops. You can watch the video here if you’ve forgotten that part.

Nonetheless, the basic 99 percent vs. 1 percent theme of the Occupy protests remained a significant factor through the election. The modest recovery after the financial crisis actually made things worse for the 99 percent: If you look at the latest numbers from Emmanuel Saez and Thomas Piketty, the economists most associated with the inequality discussion, you’ll see in the years 2009 to 2011 their real income actually shrank. That’s why Mitt Romney’s crack about the “47 percent” of unproductive Americans struck such a chord, and proved to be one of the pivotal moments of the election.

Then the meme atrophied. The language of Manichean battle between rich and poor mobilized protesters in the street and energized the latent resentments of those watching them at home — on both ends of the political spectrum. It didn’t do anything to define what should happen next. It turned out that being angry at the rich or the institutions that fund their wealth is not the same as agreeing on what to change or how to change it.

The Atlantic’s Derek Thompson discusses a new study (Saez is one of four authors) that helps demonstrate that difference. The study is genuinely surprising, and it’s worth looking at Thompson’s post. The short version  is that as people are given more information on the history of the income gap — some of it with a frankly propagandistic pro-tax, pro-redistribution slant — they become more likely to agree that inequality is a problem. Persuading people that inequality is a problem, however, will not persuade them to raise taxes on the rich. In fact, in some cases it actually made poorer respondents less willing to support redistribution.

Leave aside the psychological explanations of the study (Thompson doesn’t find them convincing and neither do I) and focus on the result: anger at the rich does not necessarily lead folks to conventionally left-wing or right-wing viewpoints.

That matches what we’ve seen in the actual debate around inequality. In politics, the rhetoric of rage at the 1% can be–and indeed, has been–marshaled with equal fervor by both the left and the right. The moneyed elites attacked by the left morph easily into liberal elites scorned by the right. One man’s “Wall Street fat cat” is likely to be another man’s “New York limousine liberal.” Movements like the Tea Party are as anti-1% as Occupy Wall Street. They just see taxes and income redistribution as hobby horses of the elite.

This may be the crux of the issue: Occupy Wall Street found its focus not in changing things for the 99 percent (or the bottom 47 percent, or 20 percent; it doesn’t matter where you draw the percentile line) but in sticking it to the one percent.

To some degree, when it came to making cuts at the top, the income gap crusade, which preceded the Occupy movement,  succeeded. That’s especially evident in Europe, where the “rip-off initiative” passed in a landslide in Switzerland and Eurozone bonus caps are close to reality. These measures have advanced with the support of (largely conservative) shareholders who have seen high CEO pay as an investor protection issue.

The bad news for those who focus on inequality is that the somewhat awkward alliance with shareholders will not take them any further. Look at the chart at the right. It comes from a study by University of Chicago professor Steven Kaplan.  The chart shows chief executive pay as a share of big companies’ stock market value. That has stayed stable for decades; outsize as CEO pay has become, it’s still a small part of the total value of the typical company. There are good arguments for why running a company with a market value that’s ten times bigger doesn’t mean you should get paid ten times as much. They don’t matter because ultimately shareholders don’t have enough skin in this game to care all that much.

That’s why the CEO pay fight won’t yield more than symbolic changes in the broader income gap. What the Occupy movement, as well as vigorous critics of inequality like Saez and Piketty, wanted was not just a few cuts at the top, but a major transfer of wealth to those lower down. The experiment that Thompson cites demonstrates how hard it is to get from riling people up about inequality to persuading them to back that kind of change.

The general approach of Occupy and its sympathizers mirrors that of Franklin D. Roosevelt’s famous first inaugural address. Roosevelt attacked the banks and those who ran them with a religious fervor: “The money changers have fled from their high seats,” said Roosevelt, “in the temple of our civilization.” You can see the similarities with the anti-bank jeremiads of Occupy. For the Occupy movement, the lingering memories of the 1930s, down to the Hoovertowns, were clearly one of the key inspirations.

That rhetoric doesn’t resonate in the same way now. The attack on the rich struck a chord both with the right and the left; in the “Obamacare” debate both sides claimed to represent the real America opposed to Wall Street and Washington. For Occupy, the “Wall Street” half of that equation matters more; for the Tea Party, the “Washington” half. Neither has found it easy to turn the principle of opposing the establishment into policy.

Saez and Piketty have often pointed out that the share of income going to the top 1% is greater now than at any time since the 1930s. That theme had a powerful resonance for the Occupy movement, who believed that the class-war tinged rhetoric could be deployed again today to garner support for a new war on poverty. So far, a year and a half after the Occupy protests, the evidence is that it can’t.

Photographer: Michael Goldman/Getty Images

Corporate love is more likely to come with an open palm.

When it comes to Kenneth Langone and the titans of finance, there is rarely a shortage of affection. For JPMorgan Chase & Co. chief executive Jamie Dimon, Langone provided a double helping today on Bloomberg Television. “I love Jamie, I know him well personally,” Langone told Bloomberg’s Erik Schatzker and Sara Eisen, “I love Jamie.”

That’s two “loves ” in less than a minute for the man Langone calls “probably the finest CEO across any business in America.” Is this a good omen for Dimon? Based on past experience, it feels like it might be, because over the years there seems to have been some correlation between Langone’s love and fabulous and/or humongous wealth.

The New York Times‘s Landon Thomas Jr. wrote that Langone ends most business calls with “a throaty ‘I love you, pal.’” That was in 2004, back in the days when among U.S. corporate directors, Langone was among those most willing to put their money where their hearts were. The investor, co-founder of Home Depot Inc., and active philanthropist has been associated with some of the most amazing pay packages in U.S. history.

Langone chaired the New York Stock Exchange compensation committee that authorized ex-NYSE chief Dick Grasso’s infamous $190-million exit payment (which, incidentally, Grasso ultimately got to keep). And Langone was the prime mover in bringing General Electric Co.’s Robert Nardelli to run Home Depot. Even when things don’t turn out perfectly in Langone’s efforts,  the all-around atmosphere of affection persists. “The board loved [Nardelli] and hates the way this ended up,” an anonymous source (maybe not Langone) chimes in when  Nardelli and Home Depot split up.

The issue at hand with Dimon is whether, after the multi-billion dollar loss on derivatives in the “London Whale” trades, JPMorgan should split up Dimon’s chief executive and chairman role. That’s likely a theoretical discussion. All the evidence is that JPMorgan’s board is not eager to take the chairman title away from Dimon, and Dimon is not rushing to give it up. Should things ever turn less friendly, Langone is in less of a position to give Dimon an alternative than he used to be. Now 77, he is no longer on the boards of Home Depot and the old NYSE doesn’t even exist in anything like its old form. He’s now more in the business of funding hospitals (the NYU Langone Medical Center bears his name) than choosing CEOs.

Still, it has to be heartening for any chief executive to get the kind of praise Langone is capable of meting out. Here’s Langone on the Whale trade: “You know what that did for me? It proved what a great bank Jamie runs. He still had record earnings.” Would that we were all loved in such a way that even our multi-billion dollar fiascos turn into evidence of our worth.

Photographer: Kostas Tsironis/Bloomberg

A closed store in Athens, Greece.

Greece’s gross domestic product shrank 14 percent from the end of 2009 to the end of 2012. That’s already a sharp drop, but it doesn’t include the contraction that might have been suffered by the country’s big shadow economy. Below, another view of Greek economic decline: retail sales. Those peaked in December, 2007. From there to December, 2012 they fell 32 percent.

In other words, almost a third less money is actually being spent in stores, double the nominal drop in GDP. What’s going on here? Much of Greece’s economic activity takes place outside the reach of taxation, government regulation and the official GDP figures. The damage there may be even worse than most of the figures for the official economy indicate. Money from the shadow economy gets spent in the legal economy, and though it may not be reflected in GDP numbers we see the effects at the storefront level, pummeling disposable income and sales.  That would jibe with other evidence of the gravity of Greece’s suffering, like the number of poeople going without food and heat.

It’s worth saying here that this may be precisely the kind of post that makes some people roll their eyes and say, “People are suffering! Who cares about retail sales?” That has been the tenor of some of the discussion of the Rogoff-Reinhart math error. Obviously, real stories of suffering matter. The numbers do, too.

It’s not a given that every well-meaning policy is a good one: some of Europe’s economic problems now come from policies that were well-meaning to start. And those who want to demonstrate the failures of Europe’s austerity-driven policies need to be able to do it not only to those who already agree with them, but to those at the central banks and other institutions who disagree. Whether Greece’s economy shrank by 14 percent or 32 percent may not matter to most folks, but it does to Europe’s central bankers — or at least should.

Update:  Over at the New Yorker, James Surowiecki takes a similar approach to measuring the U.S. economy, pointing out that U.S. consumption and retail sales have gone up faster than GDP. Surowiecki also point to the shadow economy as an explanation (I hadn’t read his piece before posting this); obviously–as Surowiecki himself points out–it’s an even bigger factor in understanding Greece.

One reason cited for the historic collapse of gold this week was investor fear that Cyprus’s central bank would sell its gold holdings, and other  countries could follow. Last week the bank denied the rumor up and down. This morning, Cyprus’s finance minister, Haris Georgiades, said that yes, Cyprus does plan to sell gold after all. So much for the denial cycle.

Bigger question here: why don’t governments sell some of their gold? Even after the recent plunge, the price, and with it the value of international gold reserves, has more than tripled in a decade.

Gwynn Guilford at Quartz  probes into international central bank holdings and unearths a couple of answers. The first is that they do. Guilford points out that Spain has sold off 46 percent of its gold since 2000. She also explains that since 2009 other countries have actually been buying gold, trying to take advantage of the price run-up and realize a return on their investment.

Despite the rise in the price of gold, the share of international reserves that gold makes up has been roughly stable since 2000 at about 13 percent, according to the World Gold Council, a gold industry trade group. That number, though, is a little deceptive because it reflects a big rise in the total of all central bank reserves. from 2000 to 2011, That has been led by China, which holds relatively little gold. China’s central bank reserves  reserves went from $172 billion to more than $3.2 trillion, in part from efforts to keep the yuan from rising.

The biggest gold reserves are those of the United States, which has about 8,100 tons of gold* (worth $327 billion at current prices) and Germany, which are held mainly in gold, and have appreciated. Why do we hold so much gold? Check out the video above, in which Congressman Ron Paul, the Texas Republican and longtime goldbug, asks Ben Bernanke precisely that question. The Federal Reserve chairman’s answer is simply, “Tradition.” Take a look at that video and decide for yourself if his expression says, “There’s no very good reason at all.”

There is one very good reason why the U.S. and Germany wouldn’t want to trade in some of their gold reserves for dollars or euros. It’s that they would instantly drive down the price dramatically. If the prospect of Cyprus selling gold could panic the markets, imagine the result if the U.S. or Germany started dumping even a small part of their gold. One common conviction among gold’s defenders is that it gives them protection against wily central bankers who’ll debase other currencies. Ironic, isn’t it,  that nothing is easier for those wily bankers than obliterating the gold market?

PS:  One interesting thing about watching Congressional hearings is that the structure makes sure that the questioners always manage to get the last word–as the Congressman does here. The last word, it turns out,often doesn’t sound especially clever.

*Correction: An earlier version of this post listed incorrect values for U.S. and German gold holdings. U.S. reserves are 8,133.5 tons, according to the World Gold Council.

Photographer: ZenShui/Yves Regaldi/Getty Images

Need a reliable store of value in case of economic calamity? Look no further.

On Monday, gold futures fell 9.3 percent, the biggest one-day drop in 33 years. With two-day losses of 13 percent, gold’s steady decline since October 2012 has turned into an almost unprecedented rout.

Is there an explanation for this? You bet. Actually, there’s no shortage of explanations. The Wall Street Journal and Bloomberg Businessweek‘s Peter Coy point to lowered inflation expectations. Commodities brokers see a broad drop in metals driven by a weakening China. Goldman Sachs & Co. analysts, who presciently cut their gold forecasts last week, cite fears that central banks will cut their gold reserves. If you want more, John Cassidy has a list over at the New Yorker.

All of the explanations of why gold has fallen come on the heels of many recent predictions that gold was set for a rebound. Witness, for instance, the way-off-base forecasts from Merrill Lynch’s technical analyst in February. The gyrations of the gold market have proven themselves to be  impervious to analysis. As JPMorgan Chase & Co. economist Joseph Lupton put it to Businessweek, “Gold is an animal unto itself.”

Indeed. When gold is going up, any explanation will do to explain the advance: a world economy in crisis, central banks printing money. And when it goes down, suddenly a slowing economy in China explains the drop.

The deeper issue here is that the most common explanation for gold’s ascent — that it’s a hedge against inflation and monetary debasement — hasn’t held water for a long time. That explanations seems to reflect a belief built up some 30 or 40 years ago. From 1973 to 1980, a period in which inflation was generally over 6 percent in the U.S., gold skyrocketed.

What happened next is worth looking back to. Gold plummeted in 1981, a year in which prices rose 8.9 percent. Notably it fell right through the very sharp recession of late 1981 and early 1982. It offered no particular protection against either rising pricing or economic contraction. Much the same is turning out to be the case now.

As gold has risen through a period of low inflation, the notion that gold is a “hedge against inflation” has been replaced with the more general thesis that “gold is a hedge against economic uncertainty.” The last days have blown that up. Nothing has happened to reduce the world’s economic uncertainty. You might think that the Cypriot crisis would have shaken investors’ confidence in other currencies enough to send gold up. It hasn’t. The New Yorker‘s Cassidy calls the price of gold a “fear index.” That’s true: Gold rises in periods of turmoil. But the link between the price of gold and real economic conditions is weak. Investors who one moment see a world economic panic and rush into gold can as another moment see a gold panic and rush for the exits.

Now, after the collapse of the last few days, there doesn’t seem to be any more  reason to think that gold is a hedge against anything. If your aim is to protect against erratic and unpredictable turns in the world economy, gold seems like the last instrument for doing so. The exception may be if you think that we’re in for a worldwide apocalypse in which nations and currencies disappear. If we are, yes,  gold could well rise in value, though shelf-stable canned meat is likely to rise more.

Above, a chart of the recent performance of canned fruits and vegetables (I couldn’t find canned meat at the Bureau of Labor Statistics) versus the inflation rate. As you can see, in the last years of economic dislocation you would have done fairly well stockpiling canned goods, nicely beating inflation, as well as many other asset classes. Over the long haul, that’s not such a great investment.

Investors in gold seem to fall into two categories. On the one hand are those, like George Soros, who believe that the last few years of gold prices reflect a speculative bubble — which they’ve been happy to ride. On the other end of the spectrum are those, like John Paulson, are those who believe that gold is a reliable store of value in a period of monetary debasement. Notably, Paulson, in the second camp, is still heavily invested in gold as it falls, while Soros seems to have largely gotten out.

Photographer: Chris Goodney/Bloomberg

A community college, probably more typical view of the U.S. college experience than ivy-covered walls.

In an absorbing story today, Bloomberg’s Kathleen Howley reports on how super-sized student loan debt has locked 30-something Americans out of the housing market. It’s an unusual look at how the pieces of the consumer economy intersect, and how problems in one place turns into damage in another.

Howley highlights the burden on people with hefty private student loans; they owe more money than those with just government-guaranteed loans–and pay higher interest, too. That’s worth a closer look. Contrary to what many would guess, the volume of private student loans has actually fallen since 2008 (chart’s below, courtesy of the Consumer Financial Protection Bureau).

The credit crash, as well as public backlash, took some of the air out of the private student loan market. In particular it cut the high-interest rate financing at for-profit schools, as lenders realized that they were unlikely to be repaid. Much of the private loan meltdown we’re seeing now is the overhang of loans coming due, often with years of capitalized interest.

One other important aspect of the problem: By far the worst crisis is not the cost of graduating from college. It’s the cost of not graduating. The Atlantic‘s Derek Thompson  has pointed out repeatedly, and correctly, that college remains an excellent investment. It’s not, though, if you don’t finish it. Many of those in the worst boat are those who went to for-profit schools that have (or, at least until recently, had) a heavy share of high-rate loans and a low graduation rate. That is not a very big share of students–but subprime wasn’t the biggest share of the mortgage market, either.

Photographer: Simon Dawson/Bloomberg

The lights of Canary Wharf, kept on, perhaps, by bankers working late to justify their bonuses.

For most white-collar workers, there’s a compensation tool that accomplishes almost everything we want from incentives. It comes at the end of a year of good performance. It encourages employees to stay longer to realize its full benefit over several years. It can be deployed as needed to retain key personnel.

It is the “raise.”

Years ago, in the upper echelons of corporate life, the plain old raise gave way to “incentive pay.” To some extent, pay reformers brought it on themselves. Through the tax code, the U.S. in 1993 largely eliminated pay over a million dollars that wasn’t tied to performance. For CEOs, compensation experts like Harvard’s Michael C. Jensen pushed the pay-for-performance line. One of the key justifications for big CEO pay? The need to compete with bonuses on Wall Street.

Now on Wall Street and in the City, the places where the mega-bonus emerged, it seems to be on its way out, helped along by European legislation. And no document explains why better than the report on Barclays’ business practices released last week. Prepared by Rothschild vice chairman Anthony Salz, the report, which hasn’t gotten much attention in the U.S., includes a wealth of detail about how much bankers get paid.*

So let’s get to the good stuff.

Managing directors at Barclays’ investment-banking unit get paid a base salary. It’s typically £150,000 to £300,000. Whether you think that’s high or low may depend on your income bracket. Now here’s what comes on top. For the average managing director, according to the report, the bonus was 350% of base salary in 2011 and 210% in 2012. That means £150,000 to £300,000 turns into £675,000 to £1.3 million for 2011, or just about $1 million to $2 million. That’s down about about 30 percent for 2012. A related data point: In 2010, 728 employees received over £1 million ($1.5 million); 428 did so in 2012.

Maybe the most stunning number in the Salz review is that in 2007 bonuses made up 94 percent of managing director pay. That’s slipped down to 78 percent in 2011** and 68 percent in 2012. The report notes that the change reflects both increases in base pay and reductions in bonuses. It’s hard to unpack the numbers further; there’s no handy clip-and-save guide. It isn’t surprising that Barclays wasn’t eager to provide one.

Here’s what’s clear: Nobody truly believes anymore that those bonuses were anything but just another word for “really big salary.” The clincher: Only 32 percent of Barclays investment-banking employees thought that pay reflected performance. That share is lower than at other Barclays units, a sign that the people getting the big bonuses had a good sense of how thin the fabric of “incentives” was.

All the restrictions now put on bonuses after the recent backlash–longer vesting periods, payment over several years–make them work more and more like raises. So why are investment banks eager to continue them at all? Maybe because the bonus is a way of paying out a much larger share of bank profits as compensation in really good years than the company could afford in ordinary ones. In effect, this gives the senior employees some of the benefits of being part of a partnership, a structure that investment banks abandoned with the Lazard Ltd. IPO in 2005.

Now British bankers are sobbing that new European rules limiting bonuses to two times salary will spell the end of London as a financial center. That’s not the case. As you can see from the latest Barclays numbers, many managing directors are already close to that point. Remember: a bonus that is two times salary means that salary is just one-third of your compensation.

Does all this mean more top bankers and traders will head off to start their own boutique shops and hedge funds? Yes. The big-bonus era gave them the benefits of both public ownership and private partnership. They could sell the cake and eat it, too, going public and continuing to pay themselves as much as they pleased. Now more of those bankers and traders will have to choose between the safety of big shareholder-owned companies and the prospect of ginormous pay.

Here’s what the decline of bonuses will not mean: any substantial shift in the share of money going to the proverbial 99 percent. This blog has already explored the reasons for the massive growth of banking compensation. Investment banks now have a few more people collecting a lot more in fees. That won’t really change. The difference: Where now top employees get a greater share of the profit, more will shift to shareholders. That takes us back in the direction of a status quo that stood for many years before the bonus era.

That’s a real change, just not the kind that many of those in the anti-bonus fight imagined. The campaign against bonuses started out as one for social and economic equality. It’s ending up succeeding as shareholder protection.

*Along with a few hints that might remind readers that it was Barclays that commissioned his work. An introductory note says that “despite the problems, there are many really good things about Barclays — not least that the overwhelming majority of its people are focused on doing their best for its customers.” Undoubtedly. We’ll stipulate that.
** The review says that bonuses were 350% of managing director pay in 2011. I derived the 78 percent from that.

Photographer: Susana Gonzalez

The U.S. twenty-dollar bill: A widely accepted tool for everyday transactions.

Last month, I wrote a post titled “Sorry, Bitcoin Isn’t a ‘Currency’” pointing out that whatever the merits of Bitcoin as an investment, its use as an actual currency useful for buying and selling was minimal. I wrote it thinking that I was largely reminding folks of an obvious point. Apparently not. The post elicited more than 200 comments. Maybe there were two or three people who agreed with me in there; I might have missed them.

By and large, the comments insisted that actually there were plenty of people doing real business using Bitcoins. They pointed me toward retailers like Bitcoinstore.com, a retailer of electronics and other goods that did more than $500,000 of business in March. So far this month, Bitcoinstore, according to its website, has sold $142,250 worth of products. Good for them: hats off to anyone willing to experiment with new business models.

What really matters though is that it’s a tiny fraction even of the $42.7 million in Bitcoin trades conducted in just the last 24 hours at the biggest Bitcoin exchange. There are folks who make purchases with Bitcoin (one commenter claims he now buys all his pizza with bitcoin; yes, it can be done, but it’s faster and cheaper to call Domino’s directly). In the main, though, the folks making purchases with Bitcoin seem to be those using it as an investment.

Listen to Tony Gallippi, the chief executive and co-founder of BitPay, a Bitcoin payment processor. Bitpay last month processed $5.2 million worth of Bitcoin purchases. He contacted me, through his PR folks, after my earlier post and kindly volunteered to walk me through the Bitcoin transaction process. Merchants who use Bitpay generally set prices in dollars or euros. Bitpay then converts that to a price in Bitcoins.

One striking part of this process: Gallippi’s company guarantees a dollar or euro to Bitcoin conversion rate … for 15 minutes. Yes, 15 minutes. That’s what pricing is like when you’re talking about a currency that fluctuates in value the way that Bitcoin does. If you want to know what you can buy tomorrow for the Bitcoins you have stored today, forget about it. Your two Bitcoins might be enough to buy a cheap laptop today, and maybe a powerful computer next week … or maybe just a box of cookies.

Gallippi himself came to Bitcoin as an investor. He saw the value of Bitcoins rise when it first made the news and fall back down again. Says Gallippi: “You had guys like Chuck Schumer going on national TV saying, ‘You can buy drugs with this.’ All that did was drive up the price.” Like many Bitcoin investors, Gallippi himself is now spending some of his Bitcoins, which he got at prices were as low as two dollars. Gallippi calls that a “wealth effect,” in which investors who got Bitcoins at five or ten dollars are now toting up some of their gains. Gallippi thinks that “not a single one” of those is ready to sell all his investment.

Source: Mt. Gox.

In 24 hours, the value of a single Bitcoin on the biggest exchange, Mt. Gox, has gone as high as $266 and as low as $105.

And that’s precisely the problem. Gallippi points out a few uses in which Bitcoin fills a void, like secure international transactions from countries like Indonesia from which merchants are unwilling to take credit cards because of fraud. We can grant that. Is that likely the main clientele for Bitcoinstore.com? I seriously doubt it. I think Gallippi had it right with the wealth effect and the investors cashing in a bit of their winnings. Gallippi’s biggest client? An outfit that takes Bitcoins in payment for precious metals.

It makes sense that one of the few ways folks actually spend their Bitcoins is exchanging them for gold, another investment. In the short term the value of Bitcoins isn’t driven in any way by the actual use of Bitcoin in trade. It’s driven by speculators who see it as an investment that’s going to rise in value. The main interest in Bitcoin comes from people holding a lot of them as an investment–which, come to think, might explain why they’re so loud in insisting on Bitcoin’s many uses.

After the last few hours of Bitcoin trading, it’s hard to imagine that anyone can really imagine that the Bitcoin market is driven in any way by long-term demand for an anonymous currency. The last few hours provide an excellent demonstration that what we’re seeing here is entirely a speculative mania. Yesterday, when I started writing this post, the value of a Bitcoin spiked up as high as $266. Then it fell as as low as $105, and as of this writing trades at about $151. Mt. Gox, the biggest Bitcoin exchange couldn’t keep up with the demand–or, worse, with the selling.

If you bought Bitcoins a month ago, you’ve done very well. If you bought in yesterday it hasn’t been a very nice ride. The Mt. Gox press release explains the sudden drop as a combination of panic and technology problems. People, the release says, “started to panic, started to sell Bitcoin in mass (Panic Sale) resulting in an increase of trade that ultimately froze the trade engine!” Does that sound like a currency you’re eager to switch to for their everyday business dealings?

Photographer:Alex Cid-Fuentes/Bloomberg News

After all the criticism, Bank of America may have tamed the Merrill Lynch bull after all.

Correction: An earlier version of this post referred to “Merrill’s purchase of Countrywide Financial Corp.” As the last sentence correctly said, it was Bank of America that bought Countrywide, before it bought Merrill Lynch.

Bank of America Corp. reported executive pay last week, and for the third year investment banking head and co-Chief Operating Officer Thomas K. Montag got paid more than his boss, CEO Brian T. Moynihan. Montag’s $14.5 million paycheck can be material for plenty of (justifiable) hand-wringing whether bankers are overpaid. Also worth thinking about, though, is what it says about Bank of America’s 2008 deal to buy Merrill Lynch & Co.

When that deal was announced, the markets hated it, slicing off $32 billion of Bank of America’s market cap, and things got worse from there. After the merger was done, Merrill promptly posted (surprise!) a $15 billion loss … and yet paid out $3.6 billion in bonuses. That’s the backstory. Now, three years later, Montag, who came from the Merrill side — he started there in 2008, after a career at Goldman Sachs & Co.– is the highest paid executive at Bank of America.

And you know what? That deal doesn’t look nearly so bad. Bloomberg’s Hugh Son wrote that Bank of America has “relied on Montag’s investment-banking operations to support the company while Moynihan dealt with struggling consumer units that handle mortgages and credit cards.” Some numbers from Bank of America’s last annual report underline this. For last year, Bank of America’s Global Banking, Global Markets and wealth management units — that is, the parts of the company that came mainly from Merrill Lynch — reported $9 billion in profits. Meanwhile, the rest of the bank reported $5.3 billion in profits from commercial banking, and a $6.5 billion loss from real estate. That last part is largely the unfortunate legacy of Bank of America’s purchase of Countrywide Financial Corp, maybe one of the great acts of corporate self-sabotage of all time.

In this context the Merrill purchase doesn’t seem so bad. When it was announced, the deal was worth roughly one-third of Bank of America’s market cap. Now the Merrill side appears to provide the bulk of its profits. Certainly if Bank of America had waited for a fire sale, it would have gotten Merrill at a better price. But then we’re in the realm of hypotheticals, and who knows whether a deal could have gotten done then at all.

In retrospect it looks like Bank of America did get one of the world’s great banking franchises at an opportune time. That’s a lot better than can be said for the company’s other acquisitions. Bank of America chief Ken Lewis did buy Countrywide, once the country’s largest mortgage originator, in a fire sale — and his successor has been paying for it ever since.

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