|
Softpanorama |
May the source be with you, but remember the KISS principle ;-)
|
| Jan | Feb | Mar | Apr | May | June | July | Aug | Sep | Oct | Nov | Dec |
| Capital must protect itself in every way... Debts must be
collected and loans and mortgages foreclosed as soon as possible.
When through a process of law the common people have lost their
homes, they will be more tractable and more easily governed
by the strong arm of the law applied by a central power of leading
financiers. People without homes will not quarrel with their
leaders. ... By dividing the people we can get them to expend
their energies in fighting over questions of no importance to
us except as teachers of the common herd.?
J.P. Morgan a private communication to a group of US Bankers in 1934 |
September 29 2008 19:14 | FT.com
Anger runs deep. It is aimed at financiers, who first earned huge and conspicuous bonuses and now successfully force taxpayers to pay for their mistakes. It is also aimed at financial markets, whose merits have been oversold.
The mantra that financial markets always allocate resources better was never true. Financial markets suffer from very serious failures, chiefly information asymmetry. The subprime saga started with beneficial risk diversification until it became a channel for contagion. The saga also revealed the depth of herding among financial institutions – the exact opposite of risk diversification among them. Having followed the same strategy, they all suffered simultaneous losses.
Financial operations are about risk-taking, which means uncertainty and, occasionally, crashes.
On this ground, anger is universal. US congressmen compete with themselves to lash out at the financiers who created this mess. But, outside the Anglo-American world, we see an outburst of resentment against the US and British approach to finance and banking. With people angry and scared at what may happen next, political leaders find it more difficult than usual to resist populist tendencies and seek to distance themselves from a possibly serious downturn. With market failures crudely in the limelight, they feel pressed to reassert the role of government. Nationalism is always a convenient spare wheel for difficult times.
Once again, Anglo-American capitalism is a bad word and globalisation is next in line. Speeches at this year’s United Nation General Assembly by leaders from every continent reveal the depth of contempt that has been lying low, buried underneath the apparent success of the globalisation process.
A first reason for this backlash is the delicate balance between individualism and solidarity. Americans are famously known to encourage and practise individual responsibility. In many other countries, solidarity is more highly valued and individualism is seen as the other side of egoism. Generous welfare states do not just reflect this view, they also create incentives to support collective insurance arrangements, even if they are inefficient. Adam Smith’s invisible hand, the assertion that individualism delivers the common best, is not popular: we know that his assertion is only approximately correct because it assumes that markets are perfect, which is not the case in practice.
Where individualism is considered a virtue, deviations from the ideal outcome are seen as a regrettable side-effect. But in most parts of the world, where individualism is considered morally wrong, the law of the market is tolerated as long as it delivers prosperity. When it fails, its legitimacy is soon questioned. The world’s major financial markets are in New York and London. No wonder, then, that anger is aimed at Anglo-American capitalism.
The second reason is related to the way financial markets operate. The US and the UK have championed arm’s-length finance, the financing of corporations through issuance of shares and bonds to anonymous stakeholders. Continental Europe – and south-east Asia – has long favoured face-to-face deals between entrepreneurs and bankers. Deals can be shoddy and cliquish, but they provide for some stability. Over the past two decades, arm’s-length finance has made headway in continental Europe, beating back the old boys’ networks. No wonder that the old boys are now hitting back.
Strikingly, Nicolas Sarkozy, the French president, and Peer Steinbrück, the German finance minister, have both announced the end of Anglo-American financial supremacy. It is not clear what their prediction is based upon.
They have denounced excesses, such as bonuses, but that does not even begin to address the root cause of the crisis. They have described financial markets as unregulated. This is simply wrong. Financial markets are tightly regulated. The problem is not just that the regulation is inappropriate, but also that supervisors have not enforced it.
We knew of the hundreds of billions of dollars in dubious claims parked off bank balance sheets in a clear effort at circumventing existing regulations. Regulatory arbitrage, as this is called, has gone unchecked for years.
Both leaders had harsh words for “speculation”, but this misses the fact that finance is speculation. Both zeroed in on short selling. Short selling is like cars. Drivers can be reckless; disciplining them seems more reasonable than banning cars. Denouncing market short-termism runs against evidence that markets better predict companies’ long-term performance than their own managers.
Mr Sarkozy and Mr Steinbrück may be simply captured by their own old boys, but the fate of Fortis, the Belgo-Dutch banking and insurance group, may give them second thoughts. Pain is travelling across the Atlantic and could hurt more good European banks. Mr Sarkozy promised that no French depositor would ever suffer any loss from any French bank. He might soon find the price tag pretty steep.
So will Anglo-American capitalism fade away? Maybe, but that will be decided in Washington, not Paris and Berlin. One thing is sure, neither France nor Germany can mount a serious challenge, at least as long as their people and leaders mistrust and misunderstand finance.
An excellent comment in the Financial Times by Wolfgang Munchau discusses how the gold standard for handling banking crises, the Swedish model, would take even more discipline to implement in the US and how we are dong the reverse of what is needed.It is a levelheaded analysis which stands in stunning contrast with a bit of advocacy masquerading as economics from Larry Summers in the same section of the FT today.
But in the course of his discussion, Munchau makes the observation that none have dared face up to: the financial system is too big for governments to rescue. We've given the weaker form of that argument: the US, or even the US plus all the world's central banks, cannot keep a massive, multi-market asset bubble from deflating. But not only can the current financial system not be saved, it shouldn't be saved. The debt binge means it is at an unsupportable, bloated scale. It needs to be trimmed down to a more viable size, and only that level should get government support.
From Munchau:Last week’s dramatic events hold two transatlantic lessons in opposite directions, one from Europe to the US and one the other way. The first comes from Sweden, which suffered its own financial crisis during the early 1990s. The Swedish lesson is that bank bail-outs should be handled conservatively and should come in the form of direct capital injections.
As in the US, the Swedish financial crisis was also preceded by a property bubble, which was pricked by a rise in real interest rates. Severe stress in the financial system and the economy were to follow. In each of the three years 1991, 1992 and 1993 Swedish gross domestic product fell in real terms, at an accumulated rate of about 5 per cent.
In response, the Swedish government set up an agency to recapitalise the financial sector. Bank shareholders were not compensated. But the Swedish government did not bail out all banks, only a subset. They used a microeconomic model to determine which of the banks had a chance to survive, and which did not. Those that did not were liquidated or merged. And those that were bailed out had to write off their bad debts first. All depositors were covered by an explicit government promise of compensation. The goal was to minimise the cost to the taxpayer, and it succeeded. It turned out as one of history’s most successful financial system bail-outs.
There are naturally important differences between the situation in Sweden then and the US today. The most important is that our most recent bubbles surpassed anything we have ever seen before. We do not only have to deal with a bursting property bubble, but also with the huge leverage effects through the credit markets.
The US has a much bigger problem today than Sweden did then. Like Sweden, the US needs to shrink its financial sector before saving it. The difference is that the US needs to shrink it a lot more, and wants to shrink it a lot less.
In this context, Daniel Gros and Stefano Micossi last week made an astute observation on these pages: several European banks have become so large that their governments could no longer save them. Banks once considered as too big to fail have become too big to save. Unlike the German government, the US administration is in a position to save its largest bank, but is not big enough to save its entire financial system...
September 29, 2008 | Times Online
The US is already in a recession that, even if financial conditions returned to normal today, would still be very unpleasant. In the quarter that ends tomorrow, it seems almost certain that US total output declined. Consumer spending and investment have been alarmingly weak in the past two months. On Friday we are quite likely to get another depressing report on the labour market, expected to show the ninth straight month of job declines in September. The housing market still seems to be getting worse, with sales falling faster than new construction, adding to the excess supply.
Worrying about inflation in times like these is like worrying about how you’re going to borrow the money you need to get out of town when the hurricane hits. If you wait too long, you may not survive in any case.
... ... ...
It is already too late to avoid a period of real economic misery. But there may still be time to avoid a catastrophe.
In the wake of the Enron bankruptcy—which was briefly the biggest failure in U.S. history—two key lessons were obvious: Financial regulators needed lots more funding and personnel, and derivatives markets that were allowed to operate without proper regulatory oversight and reporting paved the way for financial engineers to privatize profits and socialize costs.Today, less than seven years after Ken Lay and his accomplices drove their once solid company into the ground, the United States is facing a financial disaster that makes Enron look quaint. The bankruptcy of Lehman Brothers Holdings, America's fourth-largest investment bank, involves a whopping $613 billion in debt. When Enron failed, it claimed assets of just over $63 billion.
The implosion of Lehman—along with the federal takeovers of mortgage giants Fannie Mae and Freddie Mac and insurance behemoth AIG—is symptomatic of the same lack of oversight that existed in December 2001 when Enron failed. And that lack of oversight can most easily be understood by looking at the budget of America's single most important financial regulator, the Securities and Exchange Commission, which oversees financial markets worth tens of trillions of dollars.
June 16, 2008 | Newsweek.com
But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.
As it seeks to regain its footing in the second half, the U.S. economy faces two significant obstacles, neither of which was evident in 2001. The first is entirely homegrown: the self-inflicted wounds of the promiscuous extension and abuse of credit in the housing and financial sectors. The second is a global phenomenon that has comparatively little to do with American behavior: rampant inflation in commodities such as oil, food and steel. These trends have conspired to inflict genuine economic pain and deflate consumer confidence. The Conference Board's Consumer Confidence Index in May slumped to a 16-year low.
If there's one silver lining on an otherwise unremittingly bleak cloud over the economy, it is the possibility that the crisis will change the obscene culture of self-enrichment among the top echelons of financial institutions. Both on Wall Street and in London's square mile, soaraway remuneration has closely correlated with a shift towards reckless financial "innovation" over the last decade.
The figures are absurd - when Merrill Lynch's Stan O'Neal was ditched last year for encouraging a culture of risk which led to $12bn (£6.6bn) of losses on mortgage-related securities, he took $161m of stock and options with him into retirement.
Citigroup's Chuck Prince, who went a similar way, took $39.5m. Even Lehman's Dick Fuld, whose bank has actually gone bust, received $35m to reward him for his wonderful work last year.
About the only one who could truly claim he had a successful year was Goldman Sachs' boss, Lloyd Blankfein, who duly scooped $68.5m, as the bank profited by betting that lots of struggling families would lose their homes.True to its laissez-faire philosophy, the Bush administration has been extremely reluctant to do anything about this. This reluctance must have a little bit to do with the fact that both Paulson and the White House chief of staff, Joshua Bolten, are former senior executives at Goldman Sachs.
At Congressional hearings this week, some of the wriggling on the issue was truly ludicrous. At one point, the Senate banking committee's Democratic chairman, Christopher Cox, asked the Federal Reserve's chairman why pay limits weren't in the government's initial draft of its plan to buy up distressed assets from struggling banks.
"We can't impose punitive measures on institutions which choose to sell assets," replied Bernanke. "That would discourage companies from participating and it would cause the program to fail."
Let's analyse that for a moment. Bernanke was suggesting that senior bankers might jeopardise the future of their organisations by refusing to participate in a rescue plan simply in order to protect their personal pay packages. What worse indictment could there possibly be of the habit of doling out big bonuses?
Given that the banking sector has been highly instrumental in wrecking the US economy, it has become impossible to defend nonsensical pay policies. The US Chamber of Commerce gave up - its vice-president of government affairs, Bruce Josten, admitted this week that remuneration would need to be addressed. He told the Wall Street Journal: "If we're taking huge infusions of your money and my money, there's got to be some limitations."
... ... ...
Tim Johnson, a fellow Democratic senator, said the government's bail-out should not simply be a "gift". It was right and proper, he argued, to ask for something in return: "When you make mistakes, as many of these companies have, you should be held responsible for those decisions."In the face of scepticism, Paulson, Bernanke and the White House's press secretary, Dana Perino, have kept up a constant (albeit deliberately vague) mantra about the "dangerous" and "devastating" economic consequences of failing to act quickly.
To some, it was an all too familiar message from an administration which has cried wolf before. Luis Gutierrez, an Illinois congressman, said it reminded him of the all-out propaganda war waged by the White House to bully Congress into backing the Iraq war.
"It's hard being trusting," he said. "You feel like you're always getting hoodwinked, because they say the consequences if you don't do it is a complete demise and collapse of the system."
So did HSBC's chairman, Stephen Green, who told the BBC: "There has been far too much focus on payments that are very short-term focused, people who pick up the tab for short-term profits, without having to bear the costs of long-term impairments."
Anger about Wall Street's excesses has been palpable for years - and it spilt over this week. Sherrod Brown, a Democratic senator from Ohio, demanded: "Why are we bailing out companies whose leaders got rich while gambling with our economy?"
It was, according to accounts filtering out of the White House, an extraordinary scene. Hank Paulson, the US treasury secretary and a man with a personal fortune estimated at $700m (£380m), had got down on one knee before the most powerful woman in Congress, Nancy Pelosi, and begged her to save his plan to rescue Wall Street.
... ... ...
"This sucker could go down," Bush is said to have told the group - referring to the teetering US economy.
... ... ...
By yesterday afternoon, angry Democrats were accusing McCain of sabotaging the deal to further his own presidential campaign - and even some Republicans were inclined to agree. "Clearly, yesterday, his position on that discussion yesterday was one that stopped a deal from finalising," the Republican whip, Roy Blunt, told reporters.
From Professor Nouriel Roubini: Why the Treasury TARP bailout is flawed
Specifically, the Treasury plan does not formally provide senior preferred shares for the government in exchange for the government purchase of the toxic/illiquid assets of the financial institutions; so this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the firms; with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money
Moreover, the plan does not address the need to recapitalize badly undercapitalized financial institutions: this could have been achieved via public injections of preferred shares into these firms; needed matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; suspension of dividends payments; conversion of some of the unsecured debt into equity (a debt for equity swap).
The plan also does not explicitly include an HOLC-style program to reduce across the board the debt burden of the distressed household sector; without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession
Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.
- Some readers would have a go at me whenever I'd post articles by the Telegraph's Ambrose Evans-Pritchard. Although he has a tendency to hyperventilate and sometimes oversimplifies, he regularly points to data and research that I haven't seen covered elsewhere.
More important, his major calls this year have been correct. He predicted the oil price decline, was vehement that deflation, not inflation was the risk to the global economy, and pointed to evidence of near zero money supply growth in major economies, an early warning that the credit crunch was intensifying.
Today, Evans-Pritchard and the Financial Times editorial page are in agreement on the the dangers of the debt crisis and the need for swift action, although Evans-Pritchard spends more time on the long-term outlook.
First, from the Financial Times (boldface ours):
- Banks are not to be trusted. This is not just the view of the public and policymakers, but that of the banks themselves. Spreads on unsecured inter-bank lending have reached unprecedented levels, particularly in dollars and, to a lesser degree, sterling. Such stresses cannot continue for long, without serious damage to both the financial system and the economy...
Comments
- Richard Kline said...
The stated fact that the top 20 US banks have $3T worth of 'assets' to offload is exactly why buying these assets is an exceedingly stupid and unproductive way to deal with the capital erosion and in many cases insolvency of those firms. Which is better, $150B of public equity infusion and/or seizure for control with no purchase, or $3T of expense with zero (0) guarantee of the improvement of any significant vector in the US financial economy besides insider profits? The Paulson Bullrush is an attempt to roll the US Government, but it is not a credible engagement with our problems: that is perhaps its worst aspect, its copious delusion where cool heads and shrewd schemas are needed.
Don't bail 'em, fail 'em.
Sept. 27 | Bloomberg.com
Yields on speculative-grade bonds rose to distressed levels for the first time since 2002 as the turmoil sweeping Wall Street led investors to shun all but the safest government bonds.
Investors demand 10.25 percentage points more in yield to own junk-rated securities than Treasuries, according to Merrill Lynch & Co.'s U.S. High Yield Master II index. Bonds that trade at a so-called spread of 10 percentage points or more are considered distressed.
The last time spreads were so wide was in the aftermath of Enron Corp.'s collapse earlier this decade. Now, a slowing economy and failures of some of the largest U.S. financial institutions are driving investors away. Distressed bonds default within one year 22 percent of the time, compared with 1 percent for non-distressed junk bonds, according to Fridson Investment Advisors in New York.
``Any credit perceived as exhibiting a higher level of default risk is at risk of significant price depreciation,'' Peter Acciavatti, a credit strategist at JPMorgan Chase & Co. in New York, wrote in a report yesterday. Acciavatti was the top- ranked high-yield strategist in Institutional Investor magazine's annual poll.
High-yield spreads have climbed 1.89 percentage point this month, the steepest monthly rise since September 2001, as the government seized the two largest U.S. mortgage-finance companies, Fannie Mae and Freddie Mac; Lehman Brothers Holdings Inc. was forced to file for bankruptcy; Merrill Lynch agreed to sell itself to Bank of America Corp.; American International Group Inc., the nation's biggest insurer, was taken over by the Treasury; and Washington Mutual Inc. was seized by regulators in the biggest U.S. bank failure in history.
Rescue Plan
Congressional leaders pressed toward a deal on a $700 billion financial rescue plan proposed by Treasury Secretary Henry Paulson. President George W. Bush said yesterday any disagreements would be resolved.
High-yield, high-risk, or junk, bonds are rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.
Financial industry failures are causing ``massive'' amounts of debt to be downgraded, S&P said in a report yesterday.
``Although credit-quality erosion can be expected during cyclical downturns, the enormity of debt amounts affected is disconcerting,'' Diane Vazza, the head of S&P's fixed income research group in New York, said in a statement.
Default Rate
The default rate among high-yield, high-risk, non-financial borrowers may rise to 23.2 percent by 2010, the highest since 1981, S&P said in a report Sept. 25. The ``worst-case scenario'' estimate suggests 353 junk-rated borrowers outside the financial sector may default in the next two years, S&P said.
Spreads on junk bonds widened 38 basis points yesterday, according to the Merrill high-yield index. A basis point is 0.01 percentage point.
Yields over benchmark rates on investment-grade bonds also widened yesterday, climbing 23 basis points to a record 459 basis points, according to Merrill's U.S. Corporate Master index.
High-yield new issuance this month has fallen to $845 million, from $5.9 billion in the same month last year, according to data compiled by Bloomberg. Since Aug. 1, seven issuers have tapped the high-yield market.
Sep 25, 2008 | Deutsche WelleGerman Finance Minister Peer Steinbrueck deemed the US banking crisis an "earthquake" that will cost the US its role as a superpower of the world financial system. He stressed that German banks can cope with losses.
"Wall Street and the world will never again be the way they were before the crisis," said Steinbrueck in a speech to the German parliament, the Bundestag, on Thursday, Sept. 25. Write-downs and write-offs of bad credit spawned by "a blind drive for double-digit profits" have so far totaled $550 billion and no end to the crisis is in sight, he added.
The world financial system will consequently become more "multi-polar," he predicted.
Steinbrueck told the Bundestag that the Group of Seven (G7) finance ministers would be meeting in Washington next month to discuss how to tighten regulation of capital markets.
The German federal government, meanwhile, would continue efforts to trim spending, but would also make some moves to stimulate the economy.
He reiterated Germany's refusal to set up its own bank bail-out scheme, saying the crisis was principally a US problem.
Irresponsible moves
Reiterating Berlin's push for tighter regulation, Steinbrueck accused the US of blunders.
"The cause of the crisis was the irresponsible exaggeration of the principle of a free, unrestrained market," he told the Bundestag.
Washington has been reluctant to increase minimum equity rules and has too many competing regulators over US investment banks.
"This system, which in many ways is inadequately regulated, is now collapsing," he said, adding that Germany's banking system remained "relatively robust," with German regulators confident they can absorb losses.
"New rules of the road" for the financial markets were needed, he said.
Plans to be debated when the finance ministers of the G7 meet will include tightening cooperation between the International Monetary Fund (IMF) and the Financial Stability Forum (FSF).
The agencies were created by western nations as an early warning system.
Steinbrueck also renewed his call for fusion across Germany's state bank sector. The country's big commercial lenders, the so-called "Landesbanken," have been hard hit by the financial crisis.
The next move needs to be made by the individual states, as co-owners of the leading state banks, said the Social Democrat minister: "They need to overcome regional political pride and embrace pan-regional co-operation."
This, he said, would strengthen the German banking system and boost its sustainability.
"Financial support from the government in mopping up problems in this sector should not be expected," he added.
Given that past attempts to fuse the "Landesbanken" have failed, Steinbrueck proposed a redefinition of their business models in order to avoid excessive risk and to increase returns.
The financial crisis has, however, shown that both savings banks and cooperative banking institutions are stable and reliable, said Steinbrueck.
The unravelling that started with the Freddie and Fannie conservatorship has exacted a toll not just on dollar-denominated paper but on financial assets around the world. As they have fallen, so too has the standing of the US, which zealously promoted liberalized capital markets and saw US firms establish dominant positions when those rules were adopted.
America already had few friends thanks to our prosecution of the war in Iraq, and our reputation is testing new lows. From the Telegraph:
In a remarkable outburst at the German parliament, Mr Steinbrück said the world would never be the same after “Black September”. He demanded a sweeping code of regulations to “civilise the financial markets” and clamp down on speculators.Update 3:45 AM: More on the same speech from the Financial Times:Mr Steinbrück announced a swingeing eight-point plan to reorder the global markets - which will heighten fears in the City of London of interference by the European Commission.
“The US will lose its superpower status in the global financial system,” he said, predicting a new multi-polar order where power is spread across the globe.
“The financial crisis is above all an American problem. The other G7 financial ministers in continental Europe share this opinion,” he said, a pointed turn of phrase that excludes Britain’s Alistair Darling.
“This inadequately regulated system is now collapsing, with far-reaching consequences for the US financial market and contagion effects for the rest of the world,” he said....
Senior politicians in France and Germany have in recent weeks called for a radical shake-up of the market system. A powerful EU faction that has always been hostile to the City of London – which is known in Brussels as “the casino” – see this crisis as a rare chance to ram through irreversible changes.
“They want to regulate the capital levels of every firm and partnership, limit takeovers and regulate asset stripping. In short, they want to regulate the Anglo-Saxon version of capitalism out of existence,” said John Whittacker, MEP and UKIP’s economic spokesman.
Mr Steinbrück said the deft response of the world leaders in recent days had averted catastrophe. “Crisis management worked. We did not have a collapse of the international financial system,” he said.
Mr Steinbrück said the drive for short-term profit and huge bonuses in the Anglo-Saxon world was the root cause of the gravest crisis in decades. “Investment bankers and politicians in New York, Washington and London were not willing to give these up,” he said.
He later told journalists: “When we look back 10 years from now, we will see 2008 as a fundamental rupture. I am not saying the dollar will lose its reserve currency status, but it will become relative.”The minister, who has spearheaded German efforts to rein in financial markets in the past two years, attacked the US government for opposing stricter regulations even after the subprime crisis had broken out last summer.
The US notion that markets should remain as free as possible from regulatory shackles “was as simplistic as it was dangerous”, he said.....
The US, Mr Steinbrück said, had failed in its oversight of investment banks, adding that the crisis was an indictment of the US two-tier banking system and its “weak, divided financial oversight”.
He blamed Washington for refusing to consider proposals Berlin had made as it chaired the Group of Eight industrial nations last year. These proposals, he said, “elicited mockery at best or were seen as a typical example of Germans’ penchant for over-regulation”....
Mr Steinbrück’s proposals include a ban on “purely speculative short selling”; a crackdown on variable pay for bank managers, which had encouraged reckless risk-taking; a ban on banks securitising more than 80 per cent of the debt they hold; international standards making bank managers personally responsible for the consequences of their trades; and increased co-operation between European supervisors.
Tim Duy at Economist's View tells us that the economy is slowing down markedly, and that that will lead to a lot of false causality. Whether the bailout plan gets done in some reasonable form or not, the slowdown will be blamed on its failure, or the fact that the rush to get it done meant an ineffective program was put in place.Duy also addresses one of our pet issues: a slowdown is inevitable because US consumption has been at an unsustainable level. Lowering consumption will reduce growth, and with the economy at barely above a stall, any further reduction means recession. But in America, recessions are not supposed to be inevitable. Permanent growth is our God-given right. But it looks like we have fallen out of divine favor of late.
===
Vijay said...
It has been conventional wisdom that China, Japan, and other countries that run trade surpluses with the US, which means they fund our overconsumption by buying assets like US Treauries, would never restrict the flow of credit to us because it would lower their exports and hurt their growth. We've long been leery of the idea that unsustainable trends will have a life eternal, and Brad Setser has a simple reason why this process is self-limiting. Our foreign funding sources aren't just lending us money to buy their goods; they are also providing the funding for interest on the loans extended for past imports. At a certain point, the interest payments become so large relative to the value of the exports that the deal no longer makes sense.
The day of reckoning may be approaching well before Setser's tipping point. And the trigger is much simpler. We look like a lousy risk. The Freddie/Fannie conservatorship, the Lehman bankrutpcy, and the rescue of fallen Asian powerhouse AIG has, not surprisingly, lead to a reassessment of the US's creditworthiness.
Anyone nicknamed Dr. Doom is likely to be a man after my own heart, and Marc Faber is no exception. The Swiss investor has a good record of market calls (for instance, he was a staunch commodities bull till late in the spring, when he reversed his view) and perhaps as important, has a broader historical perspective than most of his peers and a propensity to be blunt.
... ... ...
Other sources of funding, such as foreign reserves of resources-rich countries, are also likely to dry up, Faber said. "I think sovereign wealth funds are going to be very busy supporting their own markets, they won't have much money to buy assets around the world."
Volatility comes from the fact that, as the private sector tightens lending conditions to adjust its risk management, central banks are injecting liquidity in the money markets to grease the system, he said, adding that banning short-selling will not contribute to reducing volatility and was a "stupid measure."
"Short sellers are not responsible for current problems. The current problems are caused by the US Fed (Federal Reserve), that was sitting there and letting credit growth go out of bounds," Faber said.
"We have to see very clearly that the cause of the problem was excess leverage. The biggest hedge funds were Fannie Mae, they had the leverage of one over 150 and under the eyes of Congress, under the eyes of the SEC and everybody… and nobody did anything about it. Then, people go and bitch about the short sellers," he added.
The fact that the rules on short-selling are changing nearly daily, with new names added to the list of securities in which short-selling is banned or with specific rules regarding hedging and confidentiality contributes to adding uncertainty, he said.
The problem is also exacerbated by the fact that nobody knows how long the emergency measure will last or what is next.
"The next emergency measure will be that Americans are not allowed to buy foreign currency and transfer money overseas, and the next measure will be not permitting Americans to buy gold and so on and so forth…. It creates even more uncertainty in the market place when you continually change the rules," Faber said.
Global money markets were racked by fresh convulsions yesterday as Henry Paulson, the US Treasury Secretary, and Ben Bernanke, Chairman of the Federal Reserve, struggled to persuade America’s sceptical lawmakers to pass their $700 billion (£378 billion) bailout plan for Wall Street.
However, Mr Buffett sounded a warning that markets remained in a “dangerous situation”. “I am, to some extent, betting on the fact that the Government will do the rational thing and act properly,” he said.
This is now a national disaster for the United States. The centrality and import of inexpensive and available credit to America's function is total.We have moved well beyond a subprime crisis. We have moved well beyond a financial industry crisis. The position of the US economy is in jeopardy and the employment security and wealth of the nation is now very much in play.
Like the nations of East Asia in the aftermath of the Asian financial crisis of 1997-8, or Eastern Europe after the collapse of the Soviet Union in 1991, our way of economic life - warts and all - is imperiled. No matter what happens as the week comes to a close our lives have changed. Shock waves are emanating out from the debt collapse ground zero. US$3.6 trillion in global stock market wealth has evaporated this week. The job losses and macro effects are not far off.
Over the past 14 months one assumption after another has been proven unsound. Why? We have been waiting and working toward a return of normality. The normalcy of the past six years is illusion. Credit conditions designed to keep the macro-economy and asset prices at peak levels filtered into balance sheet leverage, government debt and consumer debt levels well beyond prudence. This happened because credit easing does not and cannot substitute for earnings, wages or tax revenues.
Well beyond the US's oft-discussed addiction to oil is its never-mentioned addiction to foreign credit. In 2007, America imported 49% of total global reported imported capital, the lowest US percentage in several years. Thus, our 25% reported share of oil consumption is much lower than our share in imported capital. We became addicted to debt - especially foreign debt - and that addiction becomes an illness in a credit constriction. Leading US banks and financial firms grew large and reaped huge profits writing, packaging, trading and rewriting, repackaging and retrading all that borrowed money. Thus, the boom created the bust.
To move forward we need coherent national policy from leading firms, regulatory agencies and pundits. We need to move forward toward lower debt, higher earnings and sustainable government spending. We need drastic and proactive reform of regulatory bodies. We have a patchwork of overlapping regulation in some areas with giant gaps of under-regulation and absent regulation. This has created a situation where actions are piecemeal and graceless in the midst of a crisis.
President Franklin D Roosevelt's New Deal did, as a start, engage in some bail-out operations. The Reconstruction Finance Corporation, actually created by president Herbert Hoover, continued to rescue major railroads and other key businesses, while some of the New Deal's efforts to help homeowners also rewarded real estate interests.
The main emphasis, however, now switched to regulation. The Glass-Steagall Banking Act, the two laws of 1933 and 1934 regulating the stock exchange, the creation of the Securities and Exchange Commission, and other similar measures subjected the financial sector to fairly rigorous public supervision.
This lasted for at least two political generations. Wall Street, after all, had been convicted in the court of public opinion of reckless, incompetent, self-interested, even felonious behavior with consequences so devastating for the rest of the country that government was licensed to make sure it didn't happen again.
The times call for a new departure. The next administration, which will surely enter office under the greatest economic pressure in memory, must confront reality. The financial system is out of control and has led the economy into a wildly turbulent sea of heavily leveraged speculation.
It's time for a reversal of course. Stringent re-regulation of FIRE is not enough any more. Washington's mission may, at this late date, be an even greater one than Roosevelt's New Deal faced. The government must figure out how to deploy its power to shift the flow of investment capital out of the minefields of speculative paper transactions and back into productive channels that will help meet the material needs of American society.
Real value must be created in place of chimeras. In the meantime, we all have ringside seats - in fact, far too close to the action for comfort - as another gilded age is ending. What comes after is, in part, up to us.
Mish's Global Economic Trend AnalysisMarketWatch is reporting "Echoes of Iraq in Bush handling of mortgage crisis"
News analysis: Another 'trust me' remedy is getting rushed before lawmakers."You can draw some valid parallels between the prosecution of the war under the Bush regime and the way the financial sector has operated in recent years," said Tom Schlesinger, head of the nonprofit research group Financial Markets Center in Howardsville, Va."It fails the most basic test of democratic accountability," Schlesinger said.
It boils down to "give me the money and trust me," Schlesinger said. James Angel, a professor of finance at Georgetown University, said the White House appears to be "flying by the seat of their pants."
Ben Stein, a man whose character and politics I find to be despicable, has a column today that I noticed on Yahoo Finance. A good buddy of mine, who stays closely abreast of these kinds of financial shenanigans, told me the other day that Ben Stein, in spite of his character flaws, had some really astute observations on this whole mess. So out of curiosity today, I clicked on the link.And I have to admit, I am astounded by what he said. And even more by what he didn't say. The Big Question he leaves unanswered. It's seriously mind-blowing.
Here is the article:
Everything You Wanted to Know About the Credit Crisis But Were Afraid to Ask
And here is the meat of his article, which leads to the huge gaping hole which he leaves unfilled:
The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.
The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)
These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.
Did you see that bolded section?
In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...
Many of us have already said that, including a LOT of prominent economists like Michael Hudson. These people knew the loans they were making were bad loans. They knew the money wouldn't be paid back. Which has always bothered me -- why did they make bad loans on purpose? For short term gain? Well, yes, at least as far as some of the people involved go, like mortage agents in banks who worked on commission. But the people in charge were letting them make these loans. Why?
Now that is what leads to the real meat of what he's saying, the "Elephant in the Room", That Which Shall Remain Unspoken:
They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.
Somebody, somewhere, is blackmailing the economy. Because somebody, somewhere, is owed these TRILLIONS of dollars. And it is THEY who are holding a gun to the economy and demanding payment, and all of Wall Street, and even the Fed, cannot pay this debt.
So WHO is this Tony Soprano-like world figure? Who are these people? Why are we not identifying them, and talking to them, and negotiating with THEM, whoever they are, to keep from bankrupting the American economy in their favor?
Somebody, somewhere, is blackmailing the entire United States economy. Somebody, somewhere, has a gun to our head. And to the head of the American government.
I want to know who they are. I want them identified.
Who are they? And why are we willing to bankrupt the entire country in order to pay them off?
Somebody, somewhere, has way more power than they should have. Who?
The oldest technique for the usurpation of power by the executive from the legislative is the manufacture of a state of emergency.
Sep 23, 2008 | The Big Picture
Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to testify today before Congress on their massive bailout program.
Here are some questions I would like to hear asked:
5. You have said that "The Housing correction is the root cause of market stability." What about leverage -- how significant was that as a root cause?
6. Your initial estimates for the cost of this were $700 billion dollars. Yet you also asked for a blank check, an unlimited ability to spend more "as needed." What is your worst case scenario for the total costs of this bailout?
7. The original version of this bailout package requested no judicial, administrative, or budgetary review of the spending of this bailout, What was the thought process behind that extraordinary, extra-constitutional request?
8. In 2004, your former firm, Goldman Sachs, along with 4 other brokers, received a waiver of the net capitalization rules, allowing these firms to dramatically exceed the 12-to-1 leverage rules. How much was this waiver responsible for the current situation?
... ... ...
10. The Securities and Exchange Commission has been AWOL during much of the problems we now face. What do you think is the proper role for the SEC in terms of supervising or regulating securities markets? Doesn't your plan usurp SEC authority and move it to the Treasury?
11. How significant are derivatives and credit default swaps to the current crisis? Why weren't they regulated the way other insurance products are?
12. The current proposal has the US bailing out foreign banks. Has the USA become the insurer of the worlds financial assets?
09/18/08 | Network WorldWall Street fat cats: How much they made last year
With the failures of Lehman Brothers, Fannie Mae and Freddie Mac this month, reams of Wall Street IT executives are out of work or soon will be. While financial services CIOs and their staff polish their resumes and ponder what's left of their retirement savings, we thought it might be interesting to look at how much money their bosses made last year. Read on to find out what 9 Wall Street chiefs cost their companies in 2007, once their salaries, bonuses, stock awards and more are added together.
Beat The Press The American Prospect
Treasury Secretary Henry Paulson is telling Congress that if it doesn't give him a $700 billion blank check the financial system is going to collapse. It would be reasonable for reporters discussing this request to present some background on the track record of the person asking for this enormous blank check.In March of 2007, after the first shock waves of the housing meltdown had already hit, the Associated Press reported Mr. Paulson's view that the credit difficulties linked to the housing slump would be limited.
In August of last year, after the second round of financial shock waves disrupted markets worldwide, Paulson commented, "We have the strongest global economy I’ve seen in my business lifetime."
Just last March he warmly endorsed a reduction in the capital requirements for Fannie Mae and Freddie Mac, saying "additional capital [invested in mortgages by Fannie and Freddie] will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market."
At every point along the way, Secretary Paulson has failed to see the extent of the crisis resulting from the collapse of the housing bubble. This raises serious questions about his judgment. Reporters should be discussing Paulson't track record in the context of this bailout proposal.
--Dean Baker
Comments
One way to pay off the assumed debt would be a tax on wealth, which has been the most direct beneficiary of the bailout. Aggregate family net worth is about $56 trillion per Federal Reserve. A 1% tax on that would retire the debt in 1-2 years.Since aggregate family net worth is about 7 times aggregate personal income, servicing and paying off the assumed debt through the income tax would a much bigger burden--as well as being a misplaced burden.
From David Herszenhorn at the NY Times: $700 Billion Is Sought for Wall Street in Massive BailoutThe ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise.I hope you laughed. I did. A little gallows humor
emphasis addedComments
Bush/Cheney Doctrine for Idiots- Preemptive Bailouts/Preemptive Wars/Deficits Don't Matter. We can't take a chance, debate, or think this thru, things have gotten worse so quick!!! Anyone remember Katrina or Saddam Hussein.If we buy into this, I think these are the results: Greatest Ever Destruction of American Freedoms and Way of Life, Lower Standard of Living (except for the rich), Higher Inflation and Interest Rates , and Two to Three More Generations of American Debt Slaves(your kids and your kids' kids). We get what we vote for. The Fed can't control deflation; therefore they have to inflate to regain control. They were the cause of the problem, and we stupidly trust them for the solution....their proposed solution is a blank check from the govt after they just blew $800 billion of their own reserves. Of course it only took their predecessors a hundred years to build it up. Let's slow down and debate this!!!!!
I'm an American Tax Prayer, and I approved this message
cesqy | 09.20.08 - 5:38 pm | #Aleister Perdurabo writes:
There is no sincere plan by this administration to help America or Americans. There is only a plan to slow the financial collapse until after the November elections by throwing a politically palatable amount of money at it and a plan to continue to blame it on a housing bust.
If we, the American people, allow this to happen, we’re enablers to the unintelligent design model. Before one more penny of our taxes are spent on this ruse, we must demand a seat at the table (I think Ralph Nader should occupy that seat) to discuss breaking up Wall Street, crushing this model, innovating a sensible model that serves the individual investor and deserving businesses, and promises our children a future of more than a banana republic.
http://www.counterpunch.org/ mart...ns09202008.html
Aleister Perdurabo | 09.20.08 - 5:38 pm | #Moderator writes:
I am from the government. I am here to help you moderate your opinions.
There is no problem. The economy is strong. Very strong. Shopping is good for you.
Moderator | 09.20.08 - 5:39 pm | #
John Stark writes:
Many months ago, Dr. Hamilton at Econbrowser wrote of his frustration that so many in government and the press were talking as though the Fed could find some safe course to guide the economy through the storm, by charting the safe course between inflation and recession. He suggested that, in the wake of so many billions in real losses, there may not be any safe course that avoids significant economic distress.
I suspect that Paulson and Bernanke know this to be true. Maybe the first, necessary step that has NOT been taken is the political step: Tell us the friggin' truth. Stop trying to reassure us as if we were children. Stop pretending that Daddy will make sure everything is okay.
John Stark | 09.20.08 - 6:03 pm | #
Anonymous writes:It's a Bull Market in Government Intervention
It's worth repeating the reality that prices want to fall and interest rates want to rise. It's not clear that the government can change that reality. And while the government theoretically has access to unlimited amounts money to throw at problems, in practice there's a limit if only because the dollar is regularly valued vis a vis other currencies and gold.
At some point, cranking up the printing presses to bail out Acme Finance is self-defeating because the marginal gains of injecting liquidity are more than offset by a slump in the purchasing power of the buck.
http://seekingalpha.com/article/...nt- intervention
Anonymous | 09.20.08 - 6:20 pm | #
On Tuesday, in the middle of the worst financial panic since the Great Depression, the kings of Wall Street held their last jamboree. ... During these few days, the global financial market has been fundamentally reordered. If the new system fails, some fear we could face another Great Depression.
... ... ...
“The best thing would be for people to stay home next week. Avoid making investment decisions. Wait a while and review the situation with a cold eye. An end to financial shocks, if it is the end, doesn’t mean the downturn is over. There are deep-seated problems in the Western economies. It’s impossible to say how long it will take to sort them out.”
Yesterday in his town hall meeting with Gov. Sarah Palin (R-AK), Sen. John McCain (R-AZ) advocated offshore oil drilling by pushing three myths: 1) Hurricanes won’t damage oil rigs, 2) Fish love oil rigs, and 3) Cuba is allowing China to drill near the U.S. coast:McCAIN: An oil rig off of the Louisiana coast. It survived hurricanes. It is safe, it is sound, and to somehow —
And by the way, on that oil rig — and I’m sure you’ve probably heard this story — you look down, and there’s fish everywhere! There’s fish everywhere! Yeah, the fish love to be around those rigs. So not only can it be helpful for energy, it can be helpful for some pretty good meals as well. […]
As far as China and Cuba are concerned, we continue to hear that there is negotiations or conversations or — I’m not exactly sure what the state of play is, but it’s not a healthy thing, obviously.
MYTH #1: Hurricanes won’t damage oil rigs. The U.S. Minerals Management Service estimates that Hurricanes Katrina and Rita destroyed 113 offshore oil platforms and caused 124 offshore spills for a total of 743,700 gallons. In fact, damage to offshore producers accounted for 77 percent of the oil industry’s storm costs. In the wake of Hurricane Ike, there are at least three offshore oil rigs missing and “presumed to be total losses.”
MYTH #2: Fish love oil rigs. McCain is pushing an oil industry talking point. While marine biologists have seen fish congregating around oil rigs, it doesn’t mean they are good for wildlife. “That’s like taking a picture of birds on a telephone wire and saying it’s essential habitat,” said the Environmental Defense Center’s Linda Krop. Without the platforms, fish would likely return to natural reefs.
MYTH #3: Cuba is allowing China to drill near the U.S. coast. The Congressional Research Service has unequivocally concluded that Cuba has not permitted China to drill near the U.S. coastline in the Gulf of Mexico. Even Vice President Cheney has admitted this talking point is false.
McCain’s second claim is especially silly. Not too long ago, conservatives were also trying to argue that the United States should start drilling in Alaska’s Arctic National Wildlife Reserve because oil pipelines would “become a meeting ground and ‘coffee klatch‘ for caribou.” (HT: AMERICAblog)
Across the political spectrum in Europe, the former fed chief's name keeps popping up when the discussion turns to "root cause", and Italy's finance minister sets the bar quite high, putting the world's most famous terrorist in the same company as the world's most famous central banker, as reported in the LA Times.
It's a rare day when finance officials, leftist intellectuals and ordinary salespeople can agree on something. But the economic meltdown that wrought its wrath from Rome to Madrid to Berlin this week brought Europeans together in a harsh chorus of condemnation of the excess and disarray on Wall Street.The finance minister of Italy's conservative and pro-U.S. government warned of nothing less than a systemic breakdown. Giulio Tremonti excoriated the "voracious selfishness" of speculators and "stupid sluggishness" of regulators. And he singled out Alan Greenspan, the former chairman of the U.S. Federal Reserve, with startling scorn.
"Greenspan was considered a master," Tremonti declared. "Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most. . . . It is clear that what is happening is a disease. It is not the failure of a bank, but the failure of a system. Until a few days ago, very few were willing to realize the intensity and the dramatic nature of the crisis."
The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.
The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.
''We're going to work with Congress to get a bill done quickly,'' President Bush said at the White House. Without discussing details of the plan, he said, ''This is a big package because it was a big problem.''
... ... ...
In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets -- such as loans that are delinquent but not in default -- and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.
''You give them good cash; they give you the worst of the worst,'' Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.
September 19, 2008 | The Big Picture
I am having a hard time keeping up with all of the bailouts and special facilities created for dealing with this crisis. Am I missing any?
- Bear Stearns
- Economic Stimulus progam
- Housing Bailout Program
- Fannie & Freddie
- AIG
- No Short selling rules
- Fed liquidity programs (Term Lending facility, Term Auction facility)
- Money Market fund insurance program
- Special Loans for GM & Ford
- New RTC type program
MBIA and the Ambac Financial Group may have their debt rankings cut several grades by the credit ratings company Moody’s Investors Service after Moody’s raised its forecast for losses on securities backed by subprime mortgages.Syncora Guarantee, the Financial Guaranty Insurance Company and CIFG Assurance North America will also be evaluated for the effect of the higher loss projections, Moody’s said.
... ... ...
MBIA, based in Armonk, N.Y., and Ambac are the two largest bond insurers. Five of seven formerly AAA-rated bond insurers have been stripped of their top rankings this year after straying into securities backed by subprime mortgages from backing the debts of cities and states.
CHRIS Cox for VP?
Former conservative colleagues in the House of Representatives are Christopher Cox, chairman of the Securities and Exchange Commission since 2005, boosting to be Sen. John McCain's vice presidential running mate.
ROBERT D. NOVAK - Syndicated Columnist, March 18, 2008--- Republican presidential candidate John McCain, in remarks prepared for delivery Thursday, said he thought Christopher Cox, chairman of the Securities and Exchange Commission, should be dismissed.
...
In a speech in Cedar Rapids, Iowa, Sen. McCain said the SEC allowed abusive short-selling, or bearish bets on a company's stock, to turn "our markets into a casino."
McCain Says Cox Should Be Fired As SEC Chief Amid 'Casino' MarketsMcCain is right that Cox should be fired. (Still unlike McCain assumes, Cox can not be simply fired on a Presidents say so.) But Cox should certainly not be fired for allowing short selling.
If you allow people to act on expected increases of a products price, like filling up the car before a Gulf hurricane hits because gas will likely be more expensive the next day, why not allow people to act on an expected decrease of a product's price? Why should there be an asymmetry between up- and downside risk?
This is the real reason why Cox should be fired:
The events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.
Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.
Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.
Blaming short sellers is in vogue these days. But financial markets did not go down because of short sellers. They did and do go down because rampant fraud allowed after zealous deregulation. Something McCain and Cox both have favored and are still favoring.
Lost in the shuffle this week were three stories laying more blame for the current mess at the feet of former Fed chairman Alan Greenspan. They are worthy of a brief note here, late in the day on Friday, as we await more bank failure news or government rescue news over the weekend.First up is Greenspan's Folly by Michael Hirsch in the current issue of Newsweek, from whence the title of this post was culled.
Greenspan has tried to defend himself repeatedly, though as bank after bank has failed he's retreated to the shadows. But in a 2007 interview with CBS he admitted: "While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late." This, from a man who once told me, in an interview, that he most enjoyed scanning economic reports for hours in his bathtub. Now, with Tuesday's $85 billion bailout of AIG adding to the hundreds of billions the government has already put up to rescue Bear Stearns, Fannie Mae and Freddie Mac, this apostle of free-market absolutism has realized his worst nightmare. He has given us the largest government intervention into the markets since FDR. Heckuva job, Greenie.
To be sure, there were other regulators who failed. The federal Office of the Comptroller of the Currency and Office of Thrift Supervision in 2002 pre-empted all states from regulating banks and thrifts. The regulator of Fannie Mae and Freddie Mac had almost no power at all. In addition, Fannie and Freddie are both funded by Wall Street, just as the OCC and OTS get their funding from industry fees. That created conflicts of interest: the "government-sponsored entities," as Fannie and Freddie were known, and the regulators of banks and thrifts were vested in boosting the profits that kept them going. "At the national level, the view prevailed that diversifying risk is a good thing, and markets can solve most problems," says Kathleen Engel, a finance expert at Cleveland State. "Advocates in the states were saying the markets weren't, but the federal agencies just sat on it." These regulators also encouraged the industry they so loosely oversaw to send battalions of lobbyists into state capitals to gut regulation at that level, as well. Tom Miller, the Iowa attorney general who successfully sued Ameriquest over irresponsible lending practices nationwide, told me over the summer that the OCC's director spent so much of his energy on turf battles—fighting state efforts to regulate—that he barely paid attention to what the banks were doing in subprime securitization. "He kept saying the states are too strong in regulation, and telling the banks, 'We're not going to be as tough on you'." OCC spokesman Robert Garsson defends his boss, saying that "almost everybody agrees that predatory lending is not a problem in the national banking industry." Now, that may be true. Still, any banks bought plenty of the securities that predatory lenders were helping to create.
... ... ...
The one who should have known most of all was Greenspan. Rokakis, the Cuyahoga treasurer, recalls when he first sensed the beginnings of the storm: way back in 2000. The foreclosure rate in the Cuyahoga County had doubled in one year, the treasurer noticed. That suggested, very early on, that lending practices were becoming irresponsible and very often fraudulent. In October of that year, Rokakis led a local delegation to the Federal Reserve Bank of Cleveland asking for help. After much pleading the Fed scheduled a daylong conference in March 2001, titled, "Predatory Lending in Housing." "We asked them to step up and take action," Rokakis recalled recently in his office in downtown Cleveland. Nothing was done. At the national level, Greenspan even stymied marginal efforts to put innocuous restrictions in place, like protections for Habitat for Humanity borrowers. "He was just philosophically opposed," says Mike Calhoun of the Center for Responsible Lending in Washington. "Here's what I learned about the Fed: They do wonderful lunches. Their cafeteria is really good," says Rokakis. "But the Federal Reserve Bank is not there to protect us. It's there to protect the banks." And now the banks are helping themselves to vast amounts of taxpayer money. Enjoy your retirement, Alan.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”
When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”
“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”
Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.
“You have the credit lines in America, which are the lifeblood of the economy, frozen.” Mr. Schumer said. “That hasn’t happened before. It’s a brave new world. You are in uncharted territory, but the one thing you do know is you can’t leave them frozen or the economy will just head south at a rapid rate.”
Most cycle theorists agree, however, with the "Schumpeter-Freeman-Perez" paradigm of five waves so far since the industrial revolution, and the sixth one to come. These five cycles are
- The Industrial Revolution--1771
- The Age of Steam and Railways--1829
- The Age of Steel, Electricity and Heavy Engineering--1875
- The Age of Oil, the Automobile and Mass Production--1908
- The Age of Information and Telecommunications--1971
According to this theory, we are currently at the turning-point of the 5th Kondratiev. Some scholars, particularly Immanuel Wallerstein, argue that cycles of global war are tied to Capitalist Long Waves. Major, highly-destructive wars tend to begin just prior to an output upswing
“For the global financial institutions sector, we expect weak mortgage credit trends to continue into mid- to late-2009 with lenders suffering elevated mortgage-related losses that gradually subside in late 2009 and 2010. This scenario assumes very slow growth, if not recessionary economic conditions,” said Standard & Poor’s credit analyst Victoria Wagner.
The U.S. clearly is facing the most severe mortgage credit stress, as losses posted in subprime, prime, and second-lien mortgages have reached new industry-high loss rates.
“We do not expect credit losses to be of the same magnitude in other key global mortgage markets, given that subprime and second-lien mortgages were much less established outside the U.S. However, credit losses will gradually rise from minimal levels reached in recent years, following the sharp correction in a number of housing markets and simultaneous economic slowdown after several years of spectacular boom in mortgage lending,” added Ms. Wagner.
It remains to be seen whether the degree of stress both in these countries and elsewhere will be the same as in the U.S. markets.
The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.
--Lee Pickard, former director, SEC trading and markets division.
Is Financial Innovation just another word for excessive and reckless leverage?
Apparently so.
As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind
Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.
You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.
Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.
Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman,
Merrill,Lehman,Bear Stearns,and Morgan Stanley.As Mr. Pickard points out that "The proof is in the pudding — three of the five broker-dealers have blown up."
So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis.
You couldn't make this stuff up if you tried.
Here's an excerpt from The Sun:
"The Securities and Exchange Commission can blame itself for the current crisis. That is the allegation being made by a former SEC official, Lee Pickard, who says a rule change in 2004 led to the failure of Lehman Brothers, Bear Stearns, and Merrill Lynch.
The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.
Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.
"They constructed a mechanism that simply didn't work," Mr. Pickard said. "The proof is in the pudding — three of the five broker-dealers have blown up."
The so-called net capital rule was created in 1975 to allow the SEC to oversee broker-dealers, or companies that trade securities for customers as well as their own accounts. It requires that firms value all of their tradable assets at market prices, and then it applies a haircut, or a discount, to account for the assets' market risk. So equities, for example, have a haircut of 15%, while a 30-year Treasury bill, because it is less risky, has a 6% haircut.
The net capital rule also requires that broker dealers limit their debt-to-net capital ratio to 12-to-1, although they must issue an early warning if they begin approaching this limit, and are forced to stop trading if they exceed it, so broker dealers often keep their debt-to-net capital ratios much lower.
Chalk up another win for excess deregulation . . .
And the Blackberry is made by that fine American company Research in Motion, based in Waterloo, Ontario.
I can't wait to hear how John McCain invented WATFOR and WATFIV as well.
Times Online
Mr. McCain called for an inquiry modeled on the 9/11 Commission “to find out what happened” as he alleged that the “old-boy network and corruption in Washington is involved”. He added: “I know how to fix it.”
... ... ...
Mr McCain, a former chairman of the Senate Commerce Committee, has consistently opposed government interference with market forces, telling The Wall Street Journal earlier this year: “I’m always for less regulation”. In Tampa, Florida, he pinned much of the blame on “regulatory agencies in Washington” which “haven’t been doing their job right”.
Here in the US, we may be well meaning interventionists Socialists -- but at least our markets are open !
Comments
Posted by: b_thunder | Sep 17, 2008 12:57:23 PM
This too shall pass.
We're witnessing a radical revolution and reorganization of the global financial structure. EVERYTHING YOU BELIEVED about the U.S. (perhaps an outmoded notional nation?) and what it stands for is undergoing a transformation. EVERYTHING YOU BELIEVED about the nature of "money," "labor" and "economies" is undergoing a shift. Change is never easy, and a lot of you are whining about it, but it's happening due to forces beyond anyone's control.
The harder you cling to old ways of thinking, the more painful and disorienting will be the shift. As far as I can tell, no one really understands the situation fully. But I also trust that, like some brokers, banks, governments and insurance companies, humanity itself is "too big to fail."
Now THAT's a Big Picture!
===
Barry, you sound like a complete idiot when you say this. I think the real criminals are on Wall Street, not just in Russia. It just comes to prove that the brainwashing you underwent has done a great damage to your international understanding. Otherwise, I love your work.
Rapacious Wall Street is a largely Republican animal and McCain's efforts to disassociate himself from it and his party's legacy is forcing him into all manner of contortions.
... ... ...
Now there are to be congressional hearings within weeks, with Bush administration officials being grilled along with disgraced Wall Street former masters of the universe such as Dick Fuld. I cannot wait for the public hearing involving Fuld, the Lehman Brothers chief executive and financial ex-genius. One of the best features of muscular American capitalism is the ritual humiliation served up to the powerful when they lose lots of other people's money in a questionable fashion. Get ready for another round of punishment in public and Congress laying the ground for an overhaul of financial regulation.
Comments
... ... ...Meanwhile the Bush administration are coping with disaster and have become nationalisers of Banks in the best State Capitalist tradition-who would have thought it?
Where is there for Obama to go on the economy? His obvious territory is already occupied. What would he do differently?
... ... ...
Davidjay September 17, 2008
===
Penscot- At some moments I could almost agree with your assumptions on McCain and Palin but those less than desirable qualities are almost attractive to the American voter as they can be construed as bravery and conviction rather than weakness.I would also suggest that many Americans think that the current Sheriff of Tombstone, George Bush, is not to blame for the problems of Wall Street, Iraq/Afganistan, education/healthcare/pensions, etc., but that there are others who are more hated than the White House such as: Congress, New Yorkers, the "effete snobs of the Northeast US", Jews/Catholics/non-Evangelicals, anyone who went to a top-rate university especially if they followed it with law school and of course anyone who is African-American, Asian or Hispanic, as they represent evil, crime and wasted public support dollars.
So while "change" is given lip-service, it really does not matter at all to the majority of Americans as they might actually like to see Bush stay in power and in the White House, a few nukes dropped on the sand-rats in "Eye-ran" or anyone else who is not like them and/or who they are told to actively fear and hate, particularly the dark-skinned ones who blew up the World Trade Center or the Oklahoma City building or killed Bobby Kennedy or whatever they did.
America views this division as being like a Yankees vs Red Sox game: it doesn't matter how the game is played as long as the "home team of the majority present" wins.
By the way any next round of Congressional hearings and financial services regulation will be as totally meaningless as the last one was. None of this works to Obama's benefit at all and maybe not to the benefit of the voter... as if the voter really ever mattered.
Henry Cave Devine September 17, 2008
The GuardianWho are they? Where are they now? They said it could not happen again. They said they were masters of the universe. They had conquered history itself and had that wily monster quivering at their feet. There would be no more crashes, no more recessions, no more booms and busts, just moonbeams and rainbows and jam for tea.
...But those responsible for our finances can apparently vanish into the forest like Cheshire cats, leaving only gold-plated grins. Not for them a Hague tribunal or a Hutton inquiry. They are not just good at shedding risk - they shed blame.
We are seeing what historians of ideas call a paradigm shift. In the last century, the necessities of war and the rise of socialism thrust government intervention to the fore. When that failed in the 60s and 70s, the "Reagan-Thatcher revolution" turned the emphasis back to private enterprise and deregulation. That era has ended with astonishing abruptness. Governments in Britain and the US have been nationalizing and spending public money with a will that would have made Attlee or Roosevelt blush.
Those of us who learned economics in the old days were taught that banks had t
September 26, 2008 4:32 AM
I have not heard much discussion about this, but I imagine I will as this crisis becomes more acute, is that we have witnessed a COLOSSAL mis-allocation of capital and resources into the building of houses. Houses are an unproductive asset, especially at over-inflated prices. If this country is to pay off its debt, don't we have to find a more productive means of generating capital?
Thanks for all your hard work!
Mike
"I have not heard much discussion about this, but I imagine I will as this crisis becomes more acute, is that we have witnessed a COLOSSAL mis-allocation of capital and resources into the building of houses. Houses are an unproductive asset, especially at over-inflated prices. If this country is to pay off its debt, don't we have to find a more productive means of generating capital?"
----------
Tell you one more thing that is massively overbuilt - the financial services industry. And $700 billion just isn't going to fix that. It will only invite an even larger catastrophe down the road a bit. It will also open the door to demands for much larger bailouts, and soon.
The jig is up.
Now the situation is quite different and any discussion of a US economic recovery must include the fact that the US imports 2/3 of the crude that it uses.
One aspect of the huge demand for foreign crude in the US: if Bernanke decides to attempt to monetize the debt (and I doubt he can pull it off) then oil in dollars will rise accordingly.
If oil prices rise dramatically in dollars I expect that oil will be denominated in some other currency or basket of curriencies...Then the US will be in for a very difficult if not impossible economic recovery effort.
River