Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Bernanke's Re-Confirmation TestimonyWith opposition from the left (from Bernie Sanders, who promised to put an "official hold" on a floor vote for Bernanke's re-confirmation) and from the right (by two Republicans, as yet unnamed, according to FireDogLake, via NakedCapitalism).Meanwhile, here's the New York Times account of Bernanke's testimony, where he concedes that the Fed "could have done more" to avert the crisis. Here's a nice discussion on The Big Picture of whether Bernanke will get re-confirmed, should get re-confirmed, and whether we the people have any say whatsoever (one commenter claims that Bernanke's approval rating is at 21%). And here's an op-ed from left-ish economist Dean Baker and libertarian Mark Calabria arguing that an agreement on Fed transparency should precede Bernanke's re-confirmation. Sounds good to us. Labels: Ben Bernanke, Bernie Sanders, Federal Reserve, firedoglake, Monetary Policy, Naked Capitalism Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On the StimulusPaul Krugman's column in today's New York Times is on the stimulus and the deficit, and how Wall Street is scaring the Obama administration into not doing the right thing with a second stimulus to create jobs.This article from Saturday's Times indicates that there's now a consensus among economists that the stimulus was a good idea (and that more would be better). (Today's Times, however, has an article that worries about U.S. government debt repayments.) And the lead article on our website, John Miller's "Up Against the Wall Street Journal" column, argues that the deficit isn't as worrisome as the alternatives. And here is a piece on these topics by Edward Harrison, guest-blogging at Naked Capitalism, arguing for a focus on job-creation--direct if possible. Labels: deficit, Edward Harrison, John Miller, Naked Capitalism, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Pay Czar's Ruling on CompensationThe Wall Street Journal, and (scroll down) Naked Capitalism, on compensation czar Kenneth Feinberg's ruling on executive pay at seven bailed-out financial firms:Pay Czar to Slash Compensation at Seven Firms Read the rest of the article. Yves Smith of Naked Capitalism is skeptical: Pay Czar Decides to Collect a Few Scalps, a Sign of Weakness Read the original post. Labels: ceo pay, compensation, Kenneth Feinberg, Naked Capitalism, Wall Street, Wall Street bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Civil Rights Movement for the Middle ClassA guest post on Naked Capitalism. Hat-tip to Ben C.A New Civil Rights Movement is Afoot for the Middle Class By John Bougearel, Director of Futures and Equity Research at Structural Logic. Tuesday, October 21 2009 The core of America is the middle class. And Harvard Law Professor and chair of the Congressional Oversight Panel COP (the COP is to oversee TARP, the Troubled Assets Relief Program) Elizabeth Warren tells us that the core of America is being carved up, hollowed out. In her words, "I Believe Middle Class is Under Terrific Assault...Middle class became the turkey at the Thanksgiving dinner" of the financial elite. Elizabeth Warren is more than just right. Call it for what it is. It has more names than Satan. Call it plundering. Call it pillaging. Call it extortion, Call it fraud. Call it racketeering. Call it the financial raping of the middle class. Call it criminal. Consider the following. Middle class never consented to this financial rape. They vehemently protested it when the gov't first proposed a $700 bailout of the financial system called TARP in Septermber 2008. Yet what did Congress and our government do? They went ahead and did it anyway. This boils down to one thing, taxation without representation. Our votes do not matter anymore. This is happening because the US government is allowing it to happen. It is one thing for the government to raise the social safety nets for the poor, elderly and such. It is entirely another to raise the social safety nets for the financial elitists at taxpayer expense. But that is exactly what the government has done in the past year. They have rescued a financial system at the expense of everyone else. Mythical constructs and messages that financial companies are Too Big to Fail, systemic risk is too great, No More Lehman Brothers have been created by the powers that be. And it is in the name of No More Lehman Brothers and Too Big to Fail that Middle Class America is being carved up and hollowed out. Appearing in Michael Moore's "Capitalism: A Love Story, Michael Moore asks Elizabeth Warren (regarding the $700 billion dollar taxpayer funded bailout of the financial elite) "Where's are money? And Warren takes a deep breath, looks briefly over her left shoulder (as if she might find it there), and exhales "I don't know." Washington Post's Lois Romano asked Elizabeth Warren, "Why don't you know?" WARREN: We don't know where the $700 billion dollars is because the system was initially designed to make sure that we didn't know. When Secretary Paulson first put this money out into the banks, he didn't ask for ‘what are you going to do with it.' He didn't put any restrictions on it. He didn't put any tabs on where it was going to go. In other words, he didn't ask... US Secretary of the Treasury Hank Paulson did not ask the banks what they were going to do with our taxpayer money. The US treasury, given Congressional blessing, simply gave the banksters hundreds of billions of taxpayer dollars with no questions asked. This is wholesale taxation without representation. So Romano asks Warren, "Are we, as an [economy] are we better off systemically now? Have we put things in place to prevent this from happening?" Warren replies "This really has me worried." And it should have Warren worried because our Humpty Dumpty financial system had a great fall, and Humpty was put together again by all the King's horses (read the US Treasury and Congress) and all the King's men (read Uncle Sam's taxpayers), Yet, Humpty Dumpty is still the same old fragile egg he was when he sat on a wall right before he had his great fall.
And it is not just the Humpty Dumpty financial system that is so fragile. WARREN: The way I see it is that the financial system itself is quite fragile, and that the underlying economy, the real economy, jobs, housing, household wealth, is still in a very perilous state. So Lois Romano asks Warren, "Are we going to look back in two or three years at this TARP expenditure and say well, it worked." WARREN: "What is so astonishing about the first expenditures under TARP was that taxpayer dollars were put into financial institutions that were still, um, left all of their shareholders intact, that were still paying dividends, that paid their creditors 100 cents on the dollar. We put taxpayer money in without saying ‘you've got to use up everyone else's money first.' And once that's the case, I don't know how you ever put the genie back in the bottle. I don't know how you ever persuade either a large corporation or the wider marketplace that if you can just get big enough and tie yourself to enough other important people, institutions, that if something goes wrong, the taxpayer will be behind you. Aaron Task interviewed Elizabeth Warren at The Economist's Oct 15-16 "Buttonwood Gathering" In that interview, Warren says, The big banks always get what they want. They have all the money, all the lobbyists. And boy is that true on this one. There's just not a lobby on the other side. The Buttonwood Gathering event took place over the weekend following Q3 earnings announcements from the big banks. Because of the taxpayer bailout of these big banks, some of them, namely JPM and GS are now enjoying record profits and will enjoy record bonuses this season. The irony is overwhelming that this is happening in 2009. Because of the failure of the financial system, more than 7 million middle class jobs have been lost, and the US economy is confronting double digit unemployment for the first time since 1982. Without taxpayer dollars, these record profits and record bonuses in 2009 would not even be possible for the big banks. Hell, without taxpayer dollars zombifying them with congressional and White House sanctioning, they'd have gone the way of the dinosaurs, the way of the buggy whips. That is the way history should have gone. But no, that is counterfactual now. There is something very wrong in America, the very way it is being run by government, and run over by the big banks. It is high time for middle class America to push back, precisely because our elected officials have not only failed to do so, but have legislated all of this to make it happen. Our government has become an active agent in the gutting of the middle class. Commenting on Wall Street' record 2009 bonuses Elizabeth Warren says she is
Read the rest of the post. Labels: Elizabeth Warren, financial regulation, John Bougearel, middle class, Naked Capitalism, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Preliminary G20 Financial Reform MeetingYves Smith cautions us to view the communique with caution. She also says this on the quibble on the Basel II (which were wholly ineffective in the run-up to the crisis, and indeed contributed mightily to it) capital adequacy standards between the US and France.Simon Johnson says that assumption that we need modern (characteristic of the last 30 years) finance for economic growth, which all the G20ers seems to assume as gospel, is misconceived. He also says that modern finance has provided, more than anything else, a means for the wealthy to capture state power. The former point cannot be made emphatically enough after the bogus recapitalization of the banks. Finally, perhaps to illustrate the latter point in a particularly enraging way, here's what some of the creative minds in finance have been up to lately. Labels: bailout, banking regulation, Baseline Scenario, financial crisis, G20 summit, insurance industry, international finance, Naked Capitalism, securitization, shadow banking system, Simon Johnson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Is What We Get for All the Bailout MoneyTwo related posts here: Simon Johnson of Baseline Scenario looks at the shakeout in the banking system that he says is leading to the creation of a two-tier economy that benefits connected-insiders of virtually Naomi Klein proportions (that's him, not me). And here's also a FT piece from early July that goes into the matter in more detail.And Yves Smith discusses one way in which this is being done, via the use of forms of leverage that contributed to the blowup last year. Seems like we really saved the banking system only to increase the likelihood that we'll be hit by it again. I hope, if that happens, we don't repeat this mistake again next time. Labels: bailout, Baseline Scenario, financial crisis, Naked Capitalism, Naomi Klein, Simon Johnson, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Environmental Stuff (Not Pretty)Peak Water? Thanks to Naked CapitalismThe "Great Pacific Garbage Patch" pinpointed at last. Thanks again to Yves Smith. Ever-more bizarre geoengineering proposals. Why can't we just consume sustainably instead? Finally, speculators and oil markets. Thanks to Economist's View. Labels: Economist's View, energy, Environment, environmental crisis, geoengineering, Naked Capitalism, natural resources, oceans, pollution, water, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Labor Leader To Head New York FedYves Smith thinks it's a gimmick, but one that may have some unexpected consequences.Tuesday, August 25, 2009 Naked Capitalism Labor Leader Chosen to Head of New York Fed Board of Directors Joseph Stiglitz has said that labor should have a voice in the setting of interest rate policy. Is this change at the New York Fed, teh appointment of the AFL-CIO's Denis Hughes as the replacement to ex Goldman co-chairman Steve Friedman as chairman of the New York Fed, a step in that direction? If it proves to be, it will only be by dint of miscalculation. This is clearly an image-burnishing move by the Fed, throwing a bone to critics, But letting labor into the tent may have unexpected consequences, simply by allowing someone who has not drunk the financial services industry Kool-Aid more influence (Hughes was on the board, but as vice chairman). This appointment is only until year-end, but if the Fed continues to be under political pressure, it isn't hard to imagine this appointment being extended. The Journal's Deal Journal voices the opposite possibility, that labor is being co-opted. The branding of labor as monolithic and radical is a bit of a canard. In the 1930s, the old AFL, which was a craft union, was comparatively conservative and regarded more favorably than upstart and aggressive CIO, for instance. From the Wall Street Journal (hat tip reader LeeAnne): Denis Hughes, president of the New York state branch of the AFL-CIO, had been serving as acting chairman of the New York Fed board since May, when Stephen Friedman stepped down from the position. Mr. Friedman, a former Goldman Sachs Group Inc. chairman and adviser to President George W. Bush, had faced questions about his purchases of Goldman stock while serving on the New York Fed's board. The Fed decision formalizes Mr. Hughes's role as chairman through the end of 2009. The Fed board in Washington will announce in November or December who will serve as chairman in 2010. Columbia University President Lee Bollinger was named deputy chairman, a position that Mr. Hughes previously held. Mr. Bollinger has been a New York Fed director since January 2007. The New York Fed chairmanship typically has gone to prominent Wall Street executives or academics. The ascension of a labor leader is a new twist for the New York Fed and a sign of the public pressure the Fed has been under to loosen its close ties to Wall Street. Labels: AFL-CIO, Bureau of Labor Statistics, Denis Hughes, Federal Reserve, Monetary Policy, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith: Banks Sitting on Bad MortgagesMore reason to view Case-Shiller data with caution: increased buying activity is only one side of the problem.Naked Capitalism Tuesday, August 25, 2009 Banks Sitting on Bad Mortgages, And They Aren't Getting Any Better Fitch released an analysis that shows that mortgage cure rates, meaning the proportion of borrowers who manage to get current once they fall behind, have tanked. From the Wall Street Journal: The report from Fitch Ratings Ltd., a credit-rating firm, focuses on a plunge in the "cure rate" for mortgages that were packaged into securities. The study excludes loans guaranteed by government-backed agencies as well as those that weren't bundled into securities. The cure rate is the portion of delinquent loans that return to current payment status each month. Fitch found that the cure rate for prime loans dropped to 6.6% as of July from an average of 45% for the years 2000 through 2006. For so-called Alt-A loans -- a category between prime and subprime that typically involves borrowers who don't fully document their income or assets -- the cure rate has fallen to 4.3% from 30.2. In the subprime category, the rate has declined to 5.3% from 19.4%. "The cure rates have really collapsed," said Roelof Slump, a managing director at Fitch. Because borrowers are less willing or able to catch up on payments, foreclosures are likely to remain a big problem. Barclays Capital projects the number of foreclosed homes for sale will peak at 1.15 million in mid-2010, up from an estimated 688,000 as of July 1. Ouch. On top of that, Greg Weston looked at the underlying New York Fed data for Fitch's comment, and found another sobering factiod, namely that banks are not foreclosing. The reason most often given is that the bank doesn't want to write the mortgage down even further (we've heard it bandied about for loss severities is 60% and Weston had a chart that shows it is worse for subprime, at 70%with Alt-As not as bad at 50%), so 60% is a representative level) but another reason is that if the bank does not take possession, the taxes are still the owner's responsibility. Read the rest of the post Labels: financial crisis, foreclosures, housing market, mortgage cure rates, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'Sham' Bailouts Help SpeculatorsNaked Capitalism has a couple of nice posts about comments made by Michael Patterson, head of a private equity firm, to the Telegraph that reflect very poorly on TARP. Here is the story from the Telegraph (which has since been yanked from their site, apparently because Patterson objected to it; it is preserved at zerohedge.blogspot.com):US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson Here's what Yves Smith at Naked Capitalism had to say about the piece: The TARP elicited a firestorm of criticism at its inception, and at various points of its short existence, particularly the repeated injections into "too big to fail" Citigroup and Bank of America, plus the charade of Paulson forcing TARP funds onto banks who were eager to take them once the terms were revealed. Now, however, conventional wisdom on the program might be summarized as, "it's flawed, but still better than doing nothing." And this more recent post (from a larger project she has of showing how the business press airbrushes negative economic news): We posted last night on a Telegraph story, in which one Michael Patterson, head of a private equity firm that used TARP funds to buy a Michigan bank, said some less than positive things about it at an conference. —cs Labels: Naked Capitalism, private equity, TARP program, Telegraph, Timothy Geithner, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Geithner Plan Smackdown WrapFrom Yves Smith at Naked Capitalism:I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP, which showed utter contempt for Congress and the American public was in some ways less troubling. Paulson demanded $700 billion, nearly $200 billion bigger than the Department of Defense, via a three page draft bill, nothing more that a doodle on a napkin, save that it did bother to put the Treasury secretary above the law. But high-handedness was the hallmark of the Bush Administration; it was only the scale and audacity of the TARP that was the stunner. And the TARP initially did have some supporters (perhaps most important, among the media, who trumpeted the "Something must be done" case). Fans are much harder to find for the latest iteration of the seemingly neverending "let's throw more money at the banks" saga. As we, and increasingly others, have said, the Obama economic team is every bit as captive to Wall Street's interests as the Bushies were. The differences increasingly look stylistic, not substantive. Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan. I now understand why he is so loath to have government run banks. He presumably sees himself as an elite bureaucrat, as his glittering resume attests. Yet the man has a deadline to come up with a proposal, yet puts off presenting it twice (the "oh he has to work on the stimulus bill" is as close to "the dog ate my homework" as I have ever seen in adult life). What he served up as an initiative is weeks to months, depending on the item, away from being operational (if even then; the public-private asset purchase program will either not see the light of day, or be far narrower and smaller than what is needed). And in case you think I am being unfair, yesterday I got an e-mail from a political consultant who got a report on the Senate Banking Committee briefing by the Treasury the night before the announcement. No briefing books, no documents. He deemed it to be no plan. That assessment was confirmed today by a participant at the session, who said that the details were so thin that one staffer asked, "So what, exactly, is the plan?" and repeated questions from one persistent Senator got "absolutely no answers". Thus Geither's belief that government can't manage assets is sheer projection of his own inability to deliver. The FDIC winds up banks all the time. During the S&L crisis, as William Black reminds us, FSLIC appointed receivership managers that later research determined did reduce losses. Sweden, Norway, and Chile all nationalized (and relatively quickly reprivatized) dud banks during their financial crises. This isn't like trying to go the moon (which was a government initiative, lest we forget). There are plenty of models and lots of good proposals. What is lacking is will. History says that an aggressive, take-out-the-dead-banks program is the fastest and all-in cheapest way out of a financial crisis. But if you believe that something will not work, as Geithner does, it isn't at all hard to produce that outcome. Read the rest of the post. Labels: bailout, financial crisis, Naked Capitalism, Timothy Geithner, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Banks That Got TARP $ Reduced LendingFrom Yves Smith at naked capitalism; hat-tip to LP. I just realized that the name of the blog may be a reference to that famous quote from Warren Buffet about how you can't tell who's naked until the tide goes out (or however he phrased it). Is Yves suggesting that all the capitalists are naked? Or the whole system? No arguments here.Quelle Surprise! Big Banks Who Got TARP Funding Reduced Lending Monday, January 26, 2009 Before we get to the particulars of tonight's Wall Street Journal story, we need to step back a second. Just like the war in Iraq, which had a ton of justifications served up by the Bush Administration, none of which added up (and the most obvious one, that the Bushies wanted to control the second biggest oil reserves on the planet, somehow never gets mentioned in polite company in the US), we've also had too many rationales offered for the TARP in its very short life. The one that has stuck with Congress and in the public's mind is that it was meant to get banks lending again. And the Journal tells us that measured against that benchmark, it hasn't worked. Like the war in Iraq, it's a given that the stated rationales for the TARP were not the real one. Cynics see it as a plutocratic transfer, son of the grossly inflated outsourcing contracts to Halliburton and friends in the Middle East, a last opportunistic looting of the Treasury (literally, in this case). But this may instead have been the a recycling of Paulson's bazooka notion. Remember when he asked for and secured authority to increase Fannie's and Freddie's credit lines with the Treasury and buy equity: If you've got a squirt gun in your pocket, you probably will have to take it out. If you have a bazooka in your pocket and people know it, you probably won't have to take it out. That, as we now know, proved to be patently untrue, as the markets called the Treasury Secretary's bluff. But Paulson is a very stubborn man and also seems to have remarkably few ideas (his initial plan for the TARP funding was a rejiggered version of his failed "rescue the SIVs" MLEC plan of the previous fall). Recall also that Paulson is a deal guy out of Goldman. Anyone who has been in the deal business knows that the verbal representations are meaningless, and what counts is what is in the contract, or in his Treasury role, in the legislation. And Congress approved a huge blank check. Thus I suspect the real rationale behind the TARP was that Paulson would have so much money at his disposal that he could credibly rescue the banking system, and in Bazooka version 2.0, he would not need to use it in a major way (although he would need to be perceived to have ready access to it, hence his protests over having only $350 billion for his immediate use). The existence of the funding capability would (presumably) restore confidence in the banks. That theory would be consistent with the shifting rationales and plans. Paulson saw this as emergency authority to be used as needed and figured with that much money, he could punch above his weight (recall that $700 billion seemed simply enormous back in October, we've now become inured). But anyone who was up on the work from Bridgewater Associates, or connected the dots from what bank analyst Meredith Whitney was saying, or took Nouriel Roubini seriously (to name just a few) would know that $700 billion wasn't sufficient to plug the leaks the banking system had ALREADY sprung. But that aside, why should we expect that the TARP would lead to more lending? First, there should be less lending, independent of the economic contraction. We know now that TONS of credit was extended to people who shouldn't have gotten it at all or should have been granted much less than they got. Those balances NEED to shrink, ideally by paying them down, although a fair bit will be via defaults and writedowns. Second, in case you somehow missed it, the economy stinks. Even among the solvent, far fewer businesses and consumers are keen to borrow than in "normal" times. Thus, as bankers know well, those who want more credit now are likely to have a higher level of adverse selection than you'd see most of the time. Now offsetting that to a fair degree is that a lot of businesses are dragging out payments, which puts financial stress on their vendors. They could really use more financing now, if you assume that the business itself is viable and the customers won't default on their obligations. But banks aren't set up to do that level of credit investigation. If you fit in the right box on their grid, great, otherwise, you are toast. That is a long-winded way of saying it's no surprise the banks aren't lending. If their assets were valued realistically, most doubtless need even more equity than the TARP provided. Shrinking their balance sheets is part of their effort to get their equity back to healthy levels (memo to regulators: why isn't there more in the way of formal regulatory forbearance right now? It's standard bank recession practice to let banks officially run with lower equity levels as they try to get themselves back on their feet. It's better to admit banks are undercapitalized and give them a temporary waiver than play blind with balance sheet games than undermine investor confidence). Read the rest of the post, which is a discussion of the WSJ piece she mentions at the top. Labels: Henry Paulson, Naked Capitalism, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why So Little Self-Recrimination? (Yves Smith)This is from Yves Smith at Naked Capitalism. It's a long post, worth quoting in full. She quotes from a post by Jeff Madrick (editor of Challenge) at The Daily Beast. I was asking myself the same question at the ASSA. Hat-tip to D&S collective member Ben Collins. —CSWhy So Little Self-Recrimination Among Economists? Why is it that economics is a Teflon discipline, seemingly unable to admit or recognize its errors? Economic policies in the US and most advanced economies are to a significant degree devised by economists. They also serve as policy advocates, and are regularly quoted in the business and political media and contribute regularly to op-ed pages. We have just witnessed them make a massive failure in diagnosis. Despite the fact that there was rampant evidence of trouble on various fronts—a housing bubble in many countries (the Economist had a major story on it in June 2005 and as readers well know, prices rose at an accelerating pace), rising levels of consumer debt, stagnant average worker wages, lack of corporate investment, a gaping US trade deficit, insanely low spreads for risky credits – the authorities took the "everything is for the best in this best of all possible worlds" posture until the wheels started coming off. And even when they did, the vast majority were constitutionally unable to call its trajectory. Now of course, a lonely few did sound alarms. Nouriel Roubini and Robert Shiller both saw the danger of the housing/asset bubble; Jim Hamilton at the 2007 Jackson Hole conference said that the markets would test the implicit government guarantee of Fannie and Freddie; Henry Kaufman warned how consumer and companies were confusing access to credit (which could be cut off) with liquidity, and about how technology would amplify a financial crisis. Other names no doubt belong on this list, but the bigger point is that these warnings were often ignored. Shiller has offered a not-very-convincing defense, claiming that economists were subject to "groupthink" and no one wanted to stick his neck out. That seems peculiar given that many prominent policy influencers are tenured. They would seem to have greater freedom than people in any other field to speak their mind. And one would imagine that being early to identify new developments or structural shifts would enhance one's professional standing. But if a doctor repeatedly deemed patients to be healthy that were soon found to have Stage Four cancer that was at least six years in the making, the doctor would be a likely candidate for a malpractice suit. Yet we have heard nary a peep about the almost willful blindiness of economists to the crisis-in-its-making, with the result that their central role in policy development remains beyond question. Perhaps the conundrum results from the very fact that they are too close to the seat of power. Messengers that bear unpleasant news are generally not well received. And a government that wanted to engage in wishful, risky policies would want a document trail that said these moves were reasonable. "Whocouldanode" becomes a defense. But how economists may be compromised by their policy role is way beyond the scope of a post. To return to the matter at hand: there appears to be an extraordinary lack of introspection within the discipline despite having presided over a Katrina-like failure. Jeff Madrik tells us: At the annual meeting of American Economists, most everyone refused to admit their failures to prepare or warn about the second worst crisis of the century. Madrik goes on in the balance of his piece to offer a list of things economists got wrong. Unfortunately, it's off the mark in that he contends that economists (in effect) had unified beliefs on a lot of fronts. It's a bit more accurate to say that there was a policy consensus, and anyone who deviated from the major elements had a bloody hard time getting a hearing (Dean Baker regularly points out that the New York Times and Washington Post still keep quoting economists who got the crisis wrong). The particulars on his list need some work too, but at least it's a start (reader comments and improvements on it would be very much appreciated). But Madrik does seem spot on about the lack of needed navel-gazing. I looked at the AEA schedule and did not see anything that questioned existing paradigms. And one paper that did was released recently, "The Crisis of 2008: Structural Lessons for and from Economics," fell so far short of asking tough questions that it proves Madrik's point. The analysis is shallow and profession serving. And that is not to say the author, Daron Acemoglu, is writing in bad faith, but to indicate how deeply inculcated economists are. For instance, one of the three (only three?) ways in which he says economists took too much comfort in the Great Moderation; The seeds of the crisis were sown in the Great Moderation... Everyone who patted themselves or others on the back during that time was really missing the point... The same interconnections that reduced the effects of small shocks created vulnerability to massive system-wide domino effects. No one saw this clearly. Huh? The problems with the Great Moderation were far more deeply rooted than this depiction suggests. Acemoglu's take is that the economy became more susceptible to shocks (that is, absent the bad luck of a shock, things could have continued merrily along). Thomas Palley argues, persuasively, that it was destined to come a cropper: The raised standing of central bankers rests on a phenomenon that economists have termed the “Great Moderation.” This phenomenon refers to the smoothing of the business cycle over the last two decades, during which expansions have become longer, recessions shorter, and inflation has fallen. Palley wrote this in April 2008, although he had touched on some of these issues earlier. Did this view reach a wide audience? No. Understanding why might help us understand better why the economics profession went astray. Acemoglu's paper had a couple of other eye-popping items: Even though he gives lip service to the idea that the economics was unduly infused with ideas from Ayn Rand, he then backtracks: On the contrary, the recognition that markets live on foundations laid by institutions— that free markets are not the same as unregulated markets— enriches both theory and its practice. "Free markets" is Newspeak, and the sooner we collectively start to object to the use of that phrase, the better. Because it is imprecise and undefined, advocates can use it to mean different things in different contexts. I cannot take any economist seriously who uses "free markets" in anything more rigorous than a newspaper column (and even there it would annoy me). It has NO place in an academic paper (save perhaps on the evolution of the concept). We also have this:
This reveals that Acemoglu has been corrupted by Rand more than he seems willing to recognize. No one would have dared write anything like that even as recently as ten years ago. Let us consider the definition of greed, from Merriam Webster: a selfish and excessive desire for more of something (as money) than is needed Greed is different than, say, ambition. "Greed is good" was famously attributed to criminal Ivan Boesky, and later film felon Gordon Gekko. Put more bluntly, greed is the id without restraint. Psychiatrists, social workers, policemen, and parents all know that unchecked, conscienceless desire is not a good thing. Acemoglu calls for external checks ("the right incentive and reward structures"), when the record of the last 20 years is that a neutral to positive view of greed allows for ambitious actors to increasingly bend the rules and amass power. The benefits are concentrated, and the costs often sufficiently diffuse as to provide for insufficient incentives (or even means) for checking such behavior. Like it or not, there is a role for social values, as nineteenth century that may sound. The costs of providing a sufficiently elaborate superstructure of rules and restrictions is far more costly than having a solid baseline of social norms. But our collective standards have fallen so far I am not sure we can reach a better equilibrium there. Labels: ASSA, economics, financial crisis, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why Should We be Surprised? (Yves Smith)We noticed the article in today's NY Times that the GAO will be releasing the first audit of the TARP program. Here is what Yves Smith of Naked Capitalism has to say about it:Here's what the Times had to say: Read the rest of the article. Labels: bailout, financial crisis, GAO, Naked Capitalism, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Not Looking Good for CitiEven amidst yesterday's stock market rally, Citigroup's shares fell; it lost more than half its value in four days. Here is what today's New York Times has to say:With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company's executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.Read the rest of the article. The fact that there is no run on Citi, though, indicates that there needn't be a government bailout, as Yves Smith has pointed out on Naked Capitalism: The market shrugged off the prospect of a Citigroup meltdown and focused instead on the leak that Timothy Geithner was Obama's pick for Treasury Secretary. Citi fell another 20%, its shares dropping below $4. Have banking catastrophes become so routine that it is now assumed that the officialdom will clean up the broken china and put the bill in the post? I recall when Citi nearly failed in the early 1990s (the big culprit then was junior loans on a lot of commercial development in Texas that wound up being see-throughs) and it was white-knuckle time.Read the rest of the post. Labels: bailout, Citibank, Citigroup, financial crisis, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The High Priests of the Bubble EconomyDean Baker via Yves Smith of Naked Capitalism; hat-tip to Ben Collins.Dean Baker goes full bore after two deserving targets, Bob Rubin and Larry Summers, at TPM Cafe. Key excerpts: Along with former Federal Reserve Board chairman Alan Greenspan, Rubin and Summers compose the high priesthood of the bubble economy. Their policy of one-sided financial deregulation is responsible for the current economic catastrophe. Labels: Dean Baker, financial crisis, housing bubble, larry Summers, Naked Capitalism, Robert Rubin, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Letters of Credit and Trade Finance FreezeFrom Naked Capitalism, another excellent, sobering post. Gives you an idea of the increasingly all-embracing extent of the crisis:Confirmation of the Role of Financing Difficulties in Collapsing Trade Volumes One of our pet themes in recent weeks is that the fall in trade traffic, indicated and possibly overstated by a dramatic fall in the Baltic Dry Index, is due at least in part to difficulties in arranging and getting other banks to accept buyers' letters of credit. For those new to this topic, international trade depends to a large degree on letters of credit. While they can help finance shipments, an even more fundamental role is that they assure the shipper that he will be paid for the cargo sent. Without banks using letters of credit as the means to send payment to exporters, parties that are new to each other or conduct business with each other infrequently could never trade with each other (one type, a documentary letter of credit, requires that forms, often a very long and elaborate set of them, verifying that the goods have been inspected and certified, that customs, have been cleared and all relevant charges and duties paid, be presented and vetted before payment is released). Some readers scoffed at the idea that a fundamental element of trade could be breaking down and yet attract more notice; a few argued that the L/Cs were being used as an excuse for buyers to break commodities deals struck when prices were higher. However, as has been discussed in gruesome detail, banks are reluctant to take credit exposures to other banks on the most plain vanilla. short term exposures, namely interbank lending. It has been a struggle for central banks to get banks to lend to each other for longer than overnight. Trade financing is a backwater, operationally intensive, low profit area that simply does not register on senior managements' or regulators' radars. And problems in this area would have virtually no impact on banks, so even acute problems here would simply not register, particularly in comparison to all the other fires that central banks are struggling to smother. Read the rest of the post Labels: Baltic Dry Goods Index, financial crisis, letters of credit, Naked Capitalism, Trade, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). NOT a Slow News DayThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Assuming we're all becoming inured to the idea that greater-than-five-percent losses on US and global stock markets are becoming an everyday occurrence, a couple of things happened today that simply demand our attention if we're going to maintain a handle on this crisis. First, Wachovia. Wachovia announced today that it lost $24 BILLION--that's billion--in a single quarter. This is simply staggering. Added to the second quarter, the company has lost the equivalent of the GDP of Guatemala, as Reuters noted today. And Wells Fargo and Citibank were fighting over it.... Back to the point, though, that announcement was merely the beginning of a slew of poor third-quarter earnings reports that came out today. These indicate weakness spread broadly across the economy, which has reinforced the fears of recession that have been dragging down stocks despite improvements in money and commercial-paper markets, which have been force-fed staggering amounts of money by the Federal Reserve. But the problems don't end there. Regarding the improvements in interbank and commercial-paper markets, Yves Smith, in a post that should be required reading, indicates that the market for credit-default insurance continues to deteriorate, and there is reason to believe that it will do so at an accelerating pace. Seeing that this market, in tandem with the other two troubled ones, has been at the center of the unprecedented freeze-up in credit since the fall of Lehman Brothers, problems here could well reverse what improvement we've seen in the other markets (not to mention having further adverse effects on equity markets, etc.). And if that happens, the game is up, at least until the the free-marketeers at the Treasury and so on decide to socialize more--a lot more--bailout costs. And there's more, much more, afoot on this score, as well. Emerging market currencies are posting huge losses (some have been forced back into the arms of the IMF), even in places like Brazil, which had been considered strong enough to withstand the crisis (in another fantastic post, Smith points us towards the plight of Brazilian and other emerging-market exporters, who hedged their local-currency exposure with currency derivatives, only to see their supposed hedge turn into a problem of vastly larger proportions; and, on this score, Brad Setser's Tuesday post--"The End of Bretton Woods 2"--is also absolutely essential reading) only weeks, or even days ago. And that brings me to my final point. A conference has slated for the 15th of November in Washington, in which the so-called G-20 (which, unlike most similar international groupings, includes important developing countries) group of major economies are to discuss the international aspects of the crisis. Many will probably consider the proceedings a joke, presided over as it will be by one of the most unpopular US governments ever, and one set to leave office within two months. But I wonder: it seems virtually certain that Bush will go down as the worst president in US history unless he can pull some rabbit out of the hat in his mercifully few weeks left. The administration has, after all, been making major overtures to North Korea (taking it off the list of sponsors of terrorism--making Cuba, by implication, more of a threat to the US than North Korea). Now, especially with this administration, will can by no means be confused with ability or competence. Still, I can see a faint possibility of a major initiative being taken at the conference, especially if events (like a reverse spike in interbank rates, or a currency crash in a major emerging market) intervene; in fact, the conference (not to mention the US elections) may turn out too late to prevent something of this sort from happening. And, it's hard to see how any initiative could even be taken up by Congress before it recesses and is replaced by the next (almost certainly overwhelmingly Democratic) Congress in January. But any initiatives will probably center on somehow extending to the developing world some means to attain dollar support which they are lacking now (and which prevents them from flooding their markets with a cash defense, as the developing countries have been able to do). So we've been through quite a day. Be ready for tomorrow. A quick note: barring a "major event" I'm not planning to blog for a few days: I hope to post a longer piece on the D&S website (not the blog!) early next week on the historic events of the last few weeks. Labels: Brad Setser, financial crisis, Larry Peterson, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Monday's DevelopmentsThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Here's the skivvy on the government interventions that triggered huge stock rallies (as for US stocks, Dow up some 750 points, S&P nearly back at 1,000, with about 15 minutes left in the trading day) worldwide (with the notable exception of Japan), from Reuters. But notice especially the following: That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies. Global bank rescue aims to halt crisis I'll close by citing two blog posts that pick some holes in the new arrangements. From Yves Smith's excellent Naked Capitalism: The reader/investor who sent the link to this Bloomberg story provided the comments below. No, he does not resort to capital letters casually: And this, from the fine Across the Curve: In the previous posting I noted that the German government rescue plan which includes guarantees and capital injections totalled 470 billion euros. Labels: Across the Curve, george bush, Gordon Brown, john mccain, Larry Peterson, Naked Capitalism, Paul Krugman, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Ownership Society We Can (Are Forced To) Believe InThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, the "plan," such as it is, is finally on the table. A three-page document outlines the Treasury Department proposal, hints of which set markets worldwide skyrocketing late Thursday and into Friday, to buy as much of the questionable (to put it politely) assets held by private banks, investment companies and insurers as is necessary (up to $700 billion, anyway; after that, Treasury will have to go to Congress for a top-up) to get banks--spooked by the pile-up of potentially toxic assets into hoarding cash with an abandon not seen since the days of the London Blitz--to each other again. Indeed, talk now is that foreign banks will be invited to sell their dud loans to the American taxpayer as well. Next week the plan will go to Congress, where legislators must amend and approve it by the end of the week, as well as expanding the budget deficit ceiling to account for all the new government borrowing. Otherwise they (many of whom face re-election) will go home to their constituencies with nothing to show for their efforts. Lobbyists are swarming all over the Washington trying to influence the outcome (with campaign cash that will no doubt be even more enticing to lawmakers in the waning days of their campaigns than it ordinarily is). The basic plan is three-fold (only the first of which is directly addressed in the proposal): first, as mentioned above, it gives Treasury (in the person of the Secretary) unprecedented powers to purchase mortgage-related assets, and also the funding to do so, up to $700 billion. The second part involves short-selling: this practice (in which shares in companies that are expected to underperform are borrowed, sold into the market before they fall in value, and then bought back on the market after any price fall, with proceeds kept by the short-seller before s/he returns the shares borrowed), which has been used by many big investors, like hedge-funds, to capitalize on the difficulties of the financial firms that we've seen threatened--or even disappear--over the last few months, has been effectively banned. Finally, money market funds (previously considered safe as cash, though without a guarantee, and which were coming under pressure last week, seeing large redemptions) will be guaranteed along the lines of bank accounts, with deposit guarantees. As the Financial Times notes, these measures will complement historic supports already put in place to expand the activities of the mortgage-lenders Fannie Mae and Freddie Mac, as well as to keep the insurer AIG solvent. So what we have here is the following: the US taxpayer will buy dodgy loans that private firms wouldn't be caught dead buying, from firms which have been hoarding cash in the fear that they'll (as they should be, in many cases) be on the hook for the losses. This, it is hoped, should have the effect of freeing up that cash, which the firms should make available to potential borrowers, rather than hoarding. This should cause demand for good assets to rise, increasing their prices to such an extent that even loans associated with the duds may come to be seen as bargains, especially if, with the passage of time, many are found to be, in fact, untainted. This will allow the mortgage market to recover, along with it a newly invigorated--and, presumably, highly re-regulated--financial sector and this will ensure recovery for the US economy, even in the face of the job losses, prolonged weakness in demand, and far higher debt the program will invariably cause. What are we to make of this plan? The biggest flaw to my mind concerns the attempt to re-start the mortgage market. This market is still, in many ways, overvalued, and any attempt to create a floor for it seems fundamentally misguided. This is all the more so when one considers that potential consumers will be offered neither the indiscriminate loan availability nor super-low, indeed nonexistent initial interest rates (partially as a consequence of all the government borrowing that's going into the bailout) that enabled much of the home price appreciation that so madly overshot the bounds of sustainability between 2004 and 2006, and still remains in that territory; and the fact that wages are expected to be stagnant (at best, given the persistently rising levels of unemployment), in the face of rising or continued-elevated general consumer price levels, and the delivery of less benefits and social services as public coffers are depleted by bailouts and the implementation of automatic stabilizers to deal with economic downturn, makes the suggestion even more unrealistic. In addition to this (as if anything else were needed), the administration has been far less active in coming up with measures that will help present mortgage-holders hold on to their homes in the face of a major economic downturn. So relief on this front cannot be expected for several months, during which time many more homes may be thrown back on the market, depressing prices. And these developments will increase the already heightened fears that US commercial and regional banks will fail, due to nonpayment of credit card and other debt, assuming all the mortgage debt is absorbed by the government. And we still don't know the extent of the mortgage-related losses; not by a long shot. If they keep piling up, especially assuming the measures to create a floor for mortgage debt don't work, the cost to the taxpayer, already struggling with higher unemployment, and even to corporations, which are seeing their unrealistic profit levels of the bubble years come back to earth, will become even more of a burden, which, in true American fashion, may be foisted on foreign lenders. But many of these countries are following the beleaguered US consumer by retrenching as global growth slows, so their willingness to absorb this debt can no longer be taken for granted. And any pullback in this regard could re-ignite the inflation we've all so effectively forgotten about. The second objection I have concerns the short-selling ban. I'm not exactly sympathetic with short sellers on a class basis, needless to say, and resent mightily the privileges regarding leverage, taxes and so on which they've amassed through the years. But, as Anatoly Kaletsky has written, the attack on short sellers has been in this case totally misdirected, and has ended up hurting potential longer term investors as well as leading to the crisis has resulted in the burden being foisted on all the rest of us. In addition, the fact that many of those who have complained so vocally about short-sellers in the last few weeks have made quite a bit of money in fees serving as prime brokers to them gives us yet another example of how surreal this crisis (and our economy) has become. One last word before summing up: in one of his characteristically incisive and timely posts, Yves Smith cites the following, highly disturbing contribution from one of her readers: I worked at [Wall Street firm you've heard of], but now I handle financial services for [a Congressman], and I was on the conference call that Paulson, Bernanke and the House Democratic Leadership held for all the members yesterday afternoon. It's supposed to be members only, but there's no way to enforce that if it's a conference call, and you may have already heard from other staff who were listening in. In summary, then, it's been an extraordinary week: in the history of finance, it'll have to go down as a kind of "fall of the Berlin Wall" affair. A financial regimen that enjoyed unparalleled sway over much of the earth for a generation has been destroyed by its own contradictions and the abuses it built into itself. Unlike the fall of the Wall, however, there is no liberation to celebrate, and we certainly cannot be confident in the political situation to the extent that we can assume that, even in the long run, something better will come out of the situation. Labels: bailout, Henry Paulson, Larry Peterson, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
