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Financial Skeptic Bulletin, March 2009

Self-education materials about financial crisis

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That was definitely an interesting month :-).  The road to economic hell is paved with good intentions and bad banks.

Month that proved yet another time how few people feel "the pulse of events".  And I not talking about predicting stock market bounce that started in March 2009 and lasted more then a year.  I am talking predicting a bull market for bonds. Here is a rare example of proactive note that attract attention tot he issue:

[Mar 7, 2009] Bonds Beat Stocks in ‘Earth-Shattering’ Reversal: Chart of Day By Jeff Kearns and Dakin Campbell

Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president.
March 6 | Bloomberg

Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president.

For three decades, owning equities in developed countries earned more than “on-the-run” 30-year government bonds. The advantage reversed after $36 trillion was erased from equity markets since October 2007 amid the first simultaneous recessions in the U.S., Europe and Japan since World War II.

Top Posts

[Mar 30, 2009] The Quiet Coup by Simon Johnson

May 2009 | Atlantic
Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis

The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out

Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths

To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

[Mar 18, 2009] Regulate, Baby, Regulate by Thomas K. McCraw

"As a result of the administration's determination to save the big banks, we will emerge from this slump with an unreformed financial sector in the hands of the same people who produced the disaster in the first place."
March 18, 2009 | The New Republic

We're going to need a bigger Federal Register.

As the United States faces its biggest economic crisis since the Great Depression, Barack Obama and his team have been looking to Franklin Delano Roosevelt for help. The influence so far is obvious: The stimulus measure passed by Congress in February includes money for building infrastructure, strengthening unemployment insurance, and helping state governments--all reminiscent of FDR's New Deal.

It is now necessary for Obama to take the model one step further. In addition to spending, there was a less visible but equally important element of FDR's program: stringent financial regulation to drive what the president called "unscrupulous money-changers" from the temple. While Obama recently spelled out some admirable principles on that score, there are still obstacles to success. His pick to head the Securities and Exchange Commission (SEC), Mary Schapiro, is far better qualified than her Bush-appointed predecessor. But she seems less formidable than any of FDR's first three SEC chairmen: Joe Kennedy, whose stellar performance laid the foundation for the Kennedy political dynasty; Jim Landis, the chief draftsman of the major securities laws (and later dean of Harvard Law School); and William O. Douglas, who went from the SEC to become the longest-serving Supreme Court Justice in the nation's history. What's more, Obama will face stiff opposition from a political party that has depended very heavily on contributions from the industries he needs to regulate.

Putting money into people's pockets and into institutions is politically easy and economically sensible. But, if we don't reinvigorate regulation as well, the credit system will remain sick, banks won't fully recover, and investors and borrowers will keep on believing--correctly--that they've been hoodwinked and fleeced. Only a thorough repair of the agencies that handle securities and banking regulation--a repair FDR's model can help us achieve--can prevent new crises down the road. Without this reform, other shady financial practices will emerge, just as they've done throughout history, and the money poured into stimulus will have been wasted.

Like Obama, FDR inherited his economic problems. The 1920s were prosperous but were also wild and free-wheeling, a time when dubious mergers and rickety holding companies multiplied. The stock market, almost wholly unregulated, soared to record levels, and a self-satisfied Herbert Hoover predicted that "poverty will be banished from this Nation." Then came the Great Crash, and, by 1933, the task confronting the New Deal could hardly have been more daunting: The Dow Jones hovered in the fifties, down from a high of 381 in 1929. Issues of new corporate stocks and bonds totaled only $161 million for the entire year 1933, a decline of 98 percent from 1929. Unemployment stood at 25 percent.

In this state of emergency, the New Dealers quickly set out not only to stimulate the economy but also to create an effective regulatory system. Their goal, above all, was transparency, which FDR understood as the key to restoring consumer and investor confidence. Without that confidence, consumers would keep their money out of banks and, as FDR put it, "under the mattress." Investors, too, would refuse to buy stocks and bonds to finance business expansion. So FDR called for a Banking Act to assure depositors that their money would be safe, and securities legislation that, in his words, "adds to the ancient rule caveat emptor the further doctrine, 'let the seller also beware.'" Sellers who did not beware could end up in jail.

Both the Banking Act and the Securities Act were passed during the New Deal's first hundred days in 1933. The Banking Act, known as "Glass-Steagall," created the Federal Deposit Insurance Corporation (FDIC), which protected bank deposits and, almost by itself, stopped the epidemic of bank runs. Glass-Steagall also forced the separation of commercial banking from investment banking, thereby reducing bankers' ability to speculate with "other people's money," as FDR called it, quoting Louis Brandeis.

The Securities Act compelled all companies issuing new stocks or bonds to disclose hitherto secret information: their balance sheets and income statements, the pay and perquisites of their top managers, and reams of other data. This was a radical move toward transparency, the more so because the act required that all reports be certified for accuracy by independent public accountants. Next came the crucial Securities Exchange Act of 1934, which extended these same requirements to every company whose shares were already being traded on exchanges--essentially the several thousand most important firms in the country. The 1934 act also created the SEC to enforce the new laws and to regulate the New York Stock Exchange and all other exchanges. Drafted with meticulous care, the Securities Act and Securities Exchange Act thrust the affairs of corporate America into the sunshine for the first time in the nation's history. The strategy of transparency was now firmly in place.

Four years later, Congress also brought under SEC control the "over-the-counter market"--that is, trading not done through an exchange. This informal operation had been run by thousands of brokers and dealers, many of them swindlers. Under SEC sponsorship, the industry created the National Association of Securities Dealers (NASD, which set up its own effective regulatory branch and, later, the nasdaq exchange). With all this legislation, administered by the elite civil servants who enforced it, the New Deal created the finest system of financial regulation in the world's history.

The obstacles to change, however, had been substantial. The new laws were very technical, and Wall Street and most other players fought regulation every step of the way. The easiest opponents to bring into cooperation were the accountants, whom the SEC courted aggressively. At first, accountants were terrified by the new legislation, which imposed criminal penalties for misrepresentation of "material fact" not only by corporations submitting reports but also by accountants who certified their accuracy. Historically, accountants had been cowed by corporate executives into shading their numbers according to the executives' wishes. The SEC pointed out that the new laws gave the profession its first chance to achieve real independence, and accountants embraced the opportunity with great enthusiasm.

The New Deal's conquest of the accounting profession and the over-the-counter market was far easier than its victory over Wall Street, investment banks, and exchange-traded corporations. For both the Stock Exchange and the big investment banks, opacity was the tradition: Their money and power came from their virtual monopoly on information about companies' operations. If the monopoly on information were broken, then individual investors--and, later, mutual funds, pension funds, charitable trusts, and university endowments--could make their own informed judgments about securities, and the expensive advice of investment bankers would be less necessary.

After three years of struggle, the SEC finally won this fight in 1937, with the help of a major scandal. Richard Whitney, an aristocratic pillar of Wall Street and the former president of the New York Stock Exchange, was found to have embezzled millions of dollars from his clients to cover losses from his own speculations. In a matter of weeks, he was sent to Sing Sing prison. With Whitney's disgrace, as SEC Chairman Douglas put it, "the Stock Exchange was delivered into my hands." The revolution in financial regulation was now complete.

Over the next four decades, the SEC built a reputation as the most effective of all federal regulatory agencies. It was respected and feared by nearly everyone involved in the trading of stocks and bonds, the issuance of new securities, and the governance of corporations. Even the Reagan transition team reported in December 1980 that "the SEC, with its 1981 requested budget of $77. 2 million, its 2,105 employees and its deserved reputation for integrity and efficiency, appears to be a model government agency."

But no revolution lasts forever. Starting in the 1970s, the New Deal's regulatory triumphs were systematically undermined. As a result, we have witnessed one scandal after another: Michael Milken's junk-bond operations; the savings-and-loan fiasco of the 1980s; the collapse of Long Term Capital Management in 1998; the failure in 2001 of Enron, whose house of cards not even its own lawyers and accountants could understand; the uncontrolled growth of the real-estate bubble; the invention of ever more complex derivatives--sliced and diced mortgage securities, collateralized debt obligations, credit-default swaps; the Bernard Madoff affair; and, finally, the meltdown of the whole financial system in 2008.

Many elements were responsible for the backsliding that led to these scandals, not least the Republican Party. The decline of regulation began in earnest with Ronald Reagan's inaugural address, in which he famously noted that "government is not the solution to our problem; government is the problem." Guided by excessive faith in "the free market," regulators in the SEC, the Fed, the nasd (which merged in 2007 with the regulatory arm of the New York Stock Exchange to form the Financial Institution Regulatory Authority), and other agencies had simply stopped doing their jobs. Even during the Clinton administration, the craze for deregulation had so worked itself into the national culture that Congress blocked major accounting reforms pertaining to stock options, and, in 1999, Clinton's financial advisers supported the very ill-advised repeal of Glass-Steagall. Worse, in 2000 they accepted the catastrophic exemption of credit-default swaps from any regulatory oversight at all. By the time George W. Bush became president in 2001, the SEC's strategy of transparency had been thoroughly undermined. The return of opacity was in full swing. The elements of a perfect storm were in place, and, by 2007, Bush's policies had brought them all together for the explosion of 2008.

While all this deregulation was going on, the financial services industry had found even more new ways to circumvent transparency. An unregulated shadow banking system arose, through hedge funds, private-equity funds, off-balance-sheet operations, offshore tax havens, and the widespread trading by money managers in completely opaque instruments, especially credit default swaps. Because of the enormous profit potential in these securities, the movement of vast sums from the regulated sunshine to the unregulated shadows became inevitable.

Today, banks and other institutions have a very uncertain idea of what their holdings of the new instruments are actually worth. Therefore, they cannot accurately calculate their own assets and liabilities, let alone those of others. This is why they are so reluctant to lend, and why the nation's credit system remains in gridlock despite the $700 billion bailout. Opacity has thus turned inward upon the very institutions that created it, which would be an ironic farce if its consequences weren't so tragic.

Obviously, there is much work to be done. The SEC still has an acceptable structure, but it needs robust infusions of talent, expertise, and money. The staffs of both the Fed and its twelve regional banks are far more sophisticated now than they were during the 1930s, and the fdic is working well under Sheila Bair, one of the few people who began warning years ago of potential catastrophe. But banking regulation remains extremely fragmented, with far too many players: the Fed, the fdic, the Comptroller of the Currency (a part of the Treasury Department), dozens of state banking commissions, and still other agencies. They are in desperate need of better coordination and, possibly, consolidation. What's more, the regulatory talent emblematic of the New Deal is not gone altogether, but it is thinner to the point of anorexia. After years of ideological hiring, large clusters of ineptitude bedevil the SEC, the Commodity Futures Trading Commission, the Department of Justice, and many other federal bodies. Nearly every important agency has long been starved of resources--and even of the elementary belief that regulation is necessary.

The political opposition to reform will be stiff. The Republican Party will likely fight every step of the way. So will the financial services industry, some of whose stalwarts are Democrats. Even now, Wall Street remains in deep denial: The lavishing of billions in executive bonuses by firms that received federal bailout money is all we need to know about this industry's feral determination to protect its outrageous pay scales.

Fiscal stimulus is the first priority now, but only with reinvigorated regulation can the economy operate effectively over the long term. Capitalism depends on credit, credit depends on transparency, and transparency depends on illumination. It's that simple. If the new administration can accomplish what the New Deal did in bringing finance into the bright light, it will be one of Barack Obama's greatest legacies, just as it is one of FDR's.

Thomas K. McCraw is a Pulitzer Prize-winning historian and the author of Prophet of Innovation: Joseph Schumpeter and Creative Destruction.

Selected Comments

Posted by toritto
5 of 12 | warn tnr | respond

Once upon a time (maybe 25-30) years ago there were lots of strong, well capitalized commercial banks. They were highly regulated and rarely failed. They had low leverage (by today's standards) of maybe 9 or 10X. A well performing bank earned 1%+ on total assets and 10%+ on equity. They loaned out perhaps 80% of their deposit base to local or regional customers. They rarely funded themselves with "hot" money. They paid solid if uninspiring dividends to the little old ladies and local businessmen who owned their stock. There were thousands of these banks from the largest cities to the most rural area. They operated in virtually protected franchises as hostile take-over, or virtually any take-over for that matter that didn't involve a failing bank was not an option. Banking regulators simply wouldn't allow it. Branching was severely restricted by state statues, protecting smaller banks from intense competition from major metropolitan area banks. There was plenty of credit available and plenty of banks from which to choose. Banks developed their own specialities in order to effectively compete. Bank of Boston had vast trading contacts in Latin America. Irving Trust was the largest commercial factor in America. Morgan Guaranty was the premier corporate bank. Citi was NYC's largest retail bank. Regional banks dominated their geographic areas as branching restrictions kept others away. North Carolina allowed state-wide banking which nurtured NCNB, First Union and Wachovia. The largest commercial bank failure during that period was Continental Illinois of Chicago. Illinois was a "unit" bank state - no branches were allowed. Continental Illinois was housed in one building in downtown Chicago. As a result of the Illinois branch restrictions, Continental had a relatively small retail deposit base. It funded itself each day in the overnight markets. It was a risky strategy. When it ran into credit difficulties its sources of funding dried up. It was seized by the FDIC and liquidated. The last real estate crisis brought down a few banks - Republic of Dallas, Texas Commerce - but nothing that would threaten the stability of the banking system as a whole. The system worked fine even if it could be criticized as dowdy. Banking was not the most exciting profession to be in. Then came deregulation. Branching and nation-wide banking came into existence. With it came the hostile take-over. Glass-Steagle was revoked. Suddenly there was money to be made in bank stocks.. It all began when Bank of New York put a take-over offer in front of the Board of Irving Trust. Irving rejected th offer. BONY sweetened it. It was rejected again. Irving was counting of the Fed and regulators to do what they had always done - reject hostile takeovers. But the wind of change was in the air. Wall Street smelled defeat for Irving. After battling BONY for a year Irving lost in court and the Regulators gave approval. The rout was on. Chairman Rice of Irving Trust caved the day after losing in Court and Irving was acquired. Rice immediately retired. Thus was set in motion the creation of the banking system we have today. Plenty of money was made by Wall Street, bank stockholders and insiders holding shares and options, including me. The major regional banks were acquired and disappeared along with thousands of jobs. "Growth, growth, growth!" was the mantra. "Marketing" rather than credit worthiness became the norm as loans were marketed as if selling soap. Credit insurance from AIG made it possible to shovel billions of dollars into mortgage assets without worrying about the loans themselves - after all, they were insured by AIG and carried a Moody's/S & P investment grade ratings. Trading rooms expanded from foreign exchange and interest rate swaps to betting on credit derivatives - mark to market transactions which today can't be valued and are off balance sheet. Within all of the major banks in trouble today there were those who had serious doubts about how business was being conducted. "Nay-sayers". "Old fashioned". "Not up to date". They were ignored. There was no money in their Cassandra prognostications; not for "business development officers", executive management or shareholders. What was the matter with the old system? Not much. Deregulation, the revocation of Glass-Steagle and the cowboy mentality of growth brought us to where we are. Unfortunately, the banking system somehow needs to be rescued. It is more than the system deserves.

[Mar 30, 2009] Ron Paul on Glenn Beck 1-21-09 (HQ)


Selected comments

Unfortunately he's absolutely right. And the collective whole is ignoring him because they trust what the government tells them. During his inaugural speech, Obama spoke of rebuilding the trust in the American government by allowing the government to have a "watchful eye" on the market. That couldn't be any farther from what Dr. Paul advocates. The fact is, things are about to get much worse. We should have listened to him while we had the chance. Be ready for the real revolution.

[Mar 30, 2009] Guest Post- The Banks Were Profitable In January And February Thanks To... AIG

A small example of Obama's general betrayal of the mandate he received in the election. Is Obama determined to carry on the fundamental Bush policy changing only details ? It looks like "The Democrats are only just now waking up to the shock that the Reagan revolution is bankrupt."  Is "Obama every bit as much owned by the Wall Street Power Brokers as Bush? "
naked capitalism

So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice.ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name or index easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough

Selected Comments

CTMM said...
Um... this is surprising to whom, exactly?

It's been clear that AIG was a backdoor bailout to counter parties ever since their government funding exceeded their market cap.

I'm still waiting to find out if anyone is going to do anything about it, or is the entire financial industry willing to bend over and think of the queen?

Joe Sixpack is never going to understand or have a cohesive political impact on this process as long as the price of cable t.v. and McDonalds remains within purchasing reach.

Anonymous said...
Prima facie evidence of how American financial oligarchs control the government and manipulate the market. If anybody doubted Simon Johnson's story in The Atlantic.

Poor Rick Wagoner must be seething with rage because of how uneven the government response has been with respect to automakers compared to that toward mega-banks.
Then again, how often does he have lunch with Geithner?

jam said...
Hey, just want to let you know you are doing a huge service exposing this type of abuse. I am a blue collar working stiff that keeps up on this kind of stuff so it is no surprise to me. Some of the folks that I am working with at these local trade-union jobs are absolutley getting creamed. Losing 50% of all of their retirement that they have contributed for up to 25 years plus.
just another cog said...
Until the American public realizes the common link between politicians, the banks, and media, it will be status quo. We are their servants.
Waldo said...
Watched Geithner talk this morning on "Meet The Press".
He was explaining the reason for bailing out the banks and how system risk was a killer to our financial system and during this confessional he used the word "complicated" to explain the workings in finance. I realized at that very moment that he was obfuscating and we the taxpayer are being scammed. Admittadly I was for the Paulson plan of rescuing Wall Street but I was naive to the scale of the unserviced mortgage debt.
This $ put into the financial sector is gone. It has bought valuable time for depositers (my firm was at Citi - moved to Union Bank). These depositors would be very wise to transfer to a sound bank if you are deposited with Citi, BofA, Wells, and such
Anonymous said...
Sorry, I'm highly intelligent and educated and pretty much feet-on-the-ground. Perhpas that's why this doesn't make any sense to me; it's gibberish.

Can I have the Janet and John version, please?


It's not too complicated; Tyler's just using fancy terminology. AIG was closing out bundles of trades at bargain prices, so it was paying big money to counterparties on bundles of trades where AIG was in the hole. Sort of like an airline sitting on a bunch of leases and offering to pay its lessor huge money to terminate the leases early. Or a car dealer, pricing lots of cars significantly below market to clear out inventory.

AIG was basically intentionally losing money, since the losses were on the taxpayer's nickel. And Treasury was happy to have AIG do it because that funneled money to banks that are insolvent and need money to service their massive debt loads.

Juan said...
Robert Wood,

'[T]he Janet and John version' might also be the bigger picture version which, in shortest form, is simply to say state capture, i.e. that over a period government was effectively remade to serve the interests of a particular class segment [though some might prefer the word 'group'].

Differently, as Jamie Galbraith put it in a 2006 article:

Today, the signature of modern American capitalism is neither benign competition, nor class struggle, nor an inclusive middle-class utopia. Instead, predation has become the dominant feature—a system wherein the rich have come to feast on decaying systems built for the middle class. The predatory class is not the whole of the wealthy; it may be opposed by many others of similar wealth. But it is the defining feature, the leading force. And its agents are in full control of the government under which we live.

'in full control of' means making use of that control, which is exactly what we've seen taking place w/the whole alphabet soup of Plans -- the details differ but the intent is the, at any cost to 'Janet and John', reward failure and subsidize the financial.

Anonymous said...
I'm not even sure what to say.. I voted for this jerk Obama, and now I see he is nothing but a shill for all these bankers.. rarely have I felt this disgusted over all this bailout stuff. But this thievery is disgusting beyond words..

I know people,just like everyone here and elsewhere, who are just average hardworking americans.. trying to earn a living.. didn't get mixed up with any of this crap.. and now THEY HAVE TO PAY THE BILLS FOR MISTAKES THAT WERE NOT THEIRS????

I have lost complete faith in the fairness of this system...I beleive in free markets, but for a market to be "free", it has to be fair, and I guess I was naive enough to believe it was fair..

I have lost all faith in Obama.. he is nothing but an extension of the Bush administration. At least Bush didn't lie or pretend to be for the people.. and didn't hide behind a telepromter. Obama is worse, much much worse than Bush.

I trust neither political I look back and see that at least Sarah Palin broke up the oil monopoly in Alaska.. at least she tried and sucessed in breaking up the corruption in Alaska.

I just have no words for this theft, this is theft.. pure and simple.. from taxpayers to these people who made bad bets.. and this disgusting crime is being done with Obama's blessing.. what a absolutely disgusting thing ... they are all the same, doesnt matter who is in power...
no one stands up for the little guy, and for Obama to lie boldface and stand by while there is this huge transfer of wealth from taxpayer to these companies.. there are no words.. just disgust!

thank you ZH for bringing it to our attention!

[Mar 30, 2009] The Weimar Solution by  Patrick J. Buchanan

March 24, 2009 |  American Conservative

"The best way to destroy the capitalist system is to debauch the currency," said Lord Keynes.

Ben Bernanke disagrees. A student of the Depression, the Fed chair appears far more fearful of deflation -- a vicious cycle of falling prices, debt defaults, home foreclosures and rising unemployment.

Deflation is what America underwent in the 1930s. A Fed-created bubble burst, causing margin calls to go out to stockholders, who ran to their banks that, besieged, collapsed, wiping out a third of our money. As Milton Friedman, who won a Nobel for his thesis that the Federal Reserve caused the Great Depression, told PBS in 2000:

"For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing ... with millions of people having their savings essentially washed out, that decline was utterly unnecessary.

"(T)he Federal Reserve had the power and the knowledge to have stopped that. And there were people at the time who were ... urging them to do that. So it was ... clearly a mistake of policy that led to the Great Depression."

Is Bernanke fighting the war of 1929 in 2009? Surely, today, with the explosion in M1, the basic money supply, there is no shortage of dollars out there, even if they are not circulating fast enough.

To end our recession, Bernanke may be running an even greater risk: hyper-inflation. This has destroyed more nations than deflation or even depression.

Recall: It was French military intervention in the Ruhr in 1923, to force payment of war reparations, and Weimar's decision to let the currency fall and pay the French in cheap marks that led to the wipeout of the German middle class, the discrediting of that democratic republic and the Munich beer-hall putsch of Adolf Hitler.

"The first panacea for a mismanaged nation," said Ernest Hemingway, "is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."

Which brings us to last week's shocker.

The Fed will buy up $300 billion in long-term Treasury bonds and spend $750 billion more buying sub-prime mortgages to remove them from the balance sheets of ailing big banks, to get the banks lending again.

Bernanke is printing money to buy U.S. bonds.

Selected comments

Free Republic:

To: 2ndDivisionVet


And that COMPLETE Keynes quote is this:

“By a continuing process of inflation, governments can
confiscate, secretly and unobserved, an important part of the
wealth of their citizens. There is no subtler, no surer means of
overturning the existing basis of society than to debauch the
currency. The process engages all the hidden forces of economic
law on the side of destruction, and does it in a manner which not
one man in a million is able to diagnose.”
John Maynard Keynes, The Economic Consequences of The Peace, 1920

To: Dick Bachert

“I invite the reader’s attention to the much more serious consideration of the kind of lives our ancestors lived, of who were the men, and what the means both in politics and war by which Rome’s power was first acquired and subsequently expanded; I would then have the reader trace the process of our moral decline, to watch, first, the sinking of the foundations of morality as the old teachings was allowed to lapse, then the rapidly increasing disintegration, then the final collapse of the whole edifice, and the dark dawning of our modern day when WE CAN NEITHER ENDURE OUR VICES NOR FACE THE REMEDIES NEEDED TO CURE THEM”.

The Early History of Rome
Livy ( Titus Livius ) 64 17 A.D.

To: LowCountryJoe

So, if the capital accounts begin decreasing, the so-called trade deficit will improve

The trade deficit improves when we stop manufacturing debt and begin manufacturing things.

As it stands now all we are producing are increasingly sophisticated instruments of debt which we export round the world expecting to be paid because of our cleverness.

China, Europe and Russia are calling it quits

American conservative:

  1. Don, on March 24th, 2009 at 7:32 pm Said:

    Only a portion of PJB’s article is actually Rothbardian. Milton Freidman’s “explanation” of the cause of the 1929 Crash and Great Depression is, to be charitable, childishly simplistic. Benochio, who subscribes to Freidman’s view, belives that it was the failure of the Fed to inject cheap money into the system at some critical point in time which caused the Crash. That opinion completely ignores the prior cheap money policies undertaken by the Fed during the earlier 20s and their eventual tightening of money which caused the bubble to burst. To accept the Freidman explanation would be to accept that the cause of death, of a 500lb diabetic, was the failure to receive a dose of insulin at some critical point in time. While that may be superficially true, it totally ignores the prior lifestyle habits which resulted in the breakdown of the natural insulin-producing mechanism of the patient. For a genuine analysis of the causes of the 29 Crash and the Great Depression, you should consult Murray Rothbard’s: America’s Great Depression as well as his essay: “Milton Freidman Unraveled”. PJB does not specifically say that he personally accepts Freidman’s view of the causes, but does point out that Benochio Bernanke is taking Freidman’s “analysis” to heart and injecting massive amounts of baseless fiat currency into the economy as if he were administering even larger amounts of a drug to an addict.

  2. David Mueller, on March 24th, 2009 at 8:08 pm Said:

    Franklin Sanders of reports that in Georgia, “Georgia Rep. Bobby Franklin entered the act (Constititutional Tender Act) which requires the state to perform its duty under US Constitution Art. I, Section 10 to make nothing but gold and silver coin a tender in payment of debt.

    Today the House Committee on Banks & Banking held a hearing, & the bill’s supporters asked me to testify. Needless to say, the banks will fight it tooth & toenail, because they don’t understand it. If they did, they would support it as it offers the only chance for them to survive.

    Listening to the banking lobbyists specious objections, it dawned on me: Their time is past. A wave of revulsion against fiat money & uncontrolled fractional reserve banking will become a tidal wave as the economic crisis deepens. Within two decades at most, the fiat system will be dead, and with it, banking as we know it today.”

  3. Bruce Cannon, on March 24th, 2009 at 8:14 pm Said:

    The way I see it:

    I have an 18-year-old son whom I have been raising by myself for 16.5 years. At best, the U.S. government wants to destroy his future; at worst to use him as cannon fodder (kill him).

    It’s not difficult to be an Anarchist.

  4. TomB, on March 24th, 2009 at 8:49 pm Said:

    Seems to me Buchanan could have given a little more credit to what I suspect is Bernanke’s view. After all I don’t think Bernanke *wants* to be doing what he is, printing all this money and etc. After all he knows what inflation is.

    My suspicion is that Bernanke feels he’s somewhat in the situation of a paramedic at the scene of an emergency: You got a guy hit by a falling timber in a burning house about to collapse who says he can’t move his legs. If you move him quick you risk causing permanent paralysis but if you don’t he’s gonna get burned to death anyway. What you do is move him obviously to avert the immediate and just hope you can cope with the subsequent.

    Lots of similar situations appear all the time in medicine and indeed in life generally.

    Scares hell out of me thinking that Bernanke apparently does think the house is about to collapse given that he undoubtedly knows lots more than we do.


[Mar 30, 2009] The Cult of Finance

This counter-revolution -- restoration of the power of financial elite it enjoyed during Gilded Age -- probably should be properly called Reaganomics, not  "Cult of equities" of "Cult of finance". This article is much more radical than this blog usual staff. As Matt Taibbi in The Big Takeover (Rolling Stone) aptly noted "The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits..."
The rich have always controlled the government  -- the current situation is nothing new, only more obvious. But "suicidal capitalism" is new to the USA. Johnson poses two scenarios -- immediate collapse, with the possibility of revolutionary change, or long-term collapse, with continual looting. This is a powerful statement, that should focus the mind.
The Big Picture
I mentioned the “cult of equities” earlier this morning; An article in the Atlantic on the Cult of Finance is making the rounds:  The Quiet Coup.I found it very similar to Bailout Nation. If this sort of stuff floats your boat, then you will love the book — it gets much more granular than the Atlantic piece does.

Anyway, this is the section that I thought was pulled right out of chapter 20. Casting Blame. Regular readers of TBP will recognize most o these elements:

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

What he calls the Cult of Finance I would describe as the “Deification of Markets” . . .

Selected comments

  1.  Alex Says:
    March 28th, 2009 at 5:12 pm

    Ok, so if we have a cult of finance, and these are the symptoms of being programmed by same cult, who are we going to hire to deprogram T.Geith? Or is he the Jim Jones dejour?

    I would hope a more useful modification of “Insistence on free capital movements across borders” would be “Heading off any internationally coordinated financial supervisory response to capital flows that could pose systemic risk.” It is not even acceptable for supervisors to even KNOW what the hell is going on, much less do anything about it.

  2. Marcus Aurelius Says:
    March 28th, 2009 at 5:59 pm

    Ask not for who the KY flows . . .

    “The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.”

    Maybe if we just let the barbarians besieging the city come on in, they’ll turn out to be really good guys, who do right by us - keeping them on the other side of the wall seems to be pissing them off.

  3. snapshot Says:
    March 28th, 2009 at 7:33 pm

    On pg. 8 of 11

    This says it all for me….

    “The challenges the United States faces are familiar to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt who old IMF hands would say: nationalize troubled banks and break them up as necessary.”

  4. crabsofsteel Says:
    March 28th, 2009 at 7:56 pm

    here’s what FairEconomist said over on Krugman’s blog and I think it’s relevant:

    “Our equivalent is the worship of derivatives, especially the credit default swaps. Just as maintaining the gold standard forced the depression-era national banks into destructive deflationary policies, paying off derivatives that never should have been allowed to exist is forcing the current national banks into wasteful giveaway and encouraging zombiefication.”

  5. snapshot Says:
    March 28th, 2009 at 8:07 pm

    Speaking of Krugman, I found this article @ Newsweek - -
    “Obama’s Nobel Headache” more interesting than the Geithner piece.

    “Paul Krugman has emerged as Obama’s toughest liberal critic. He’s deeply skeptical of the bank bailout and pessimistic about the economy.”

  6.  Mike in Nola Says:
    March 28th, 2009 at 8:34 pm

    snapshot: To quote Nietzsche “The thinking man is not a party member because he soon thinks himself right through the party.”

  7. snapshot Says:
    March 28th, 2009 at 9:07 pm

    Mike in Nola - I think you are right about Geithner.

    In the Newsweek article, Krugman has a bit of hope for Summers, but says..”he thinks Geithner has been captured by Wall Street.”

    Here is a piece on Summers from The Economist.

    Anybody here hold out any hope for him?

  8.  km4 Says:
    March 28th, 2009 at 9:43 pm

    Have read The Quiet Coup because it’s that good.

    Simon Johnson is a hero to spell it out so clearly.

    The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

    Net Net: US Banking oligarchy f*cked up and still won big

    The USA in addition to having most advanced economy and military also has the most advanced oligarchy so if the Obama admin doesn’t swing the banking regulation pendulum back we’ll also be the world’s largest Banana Republic

  9. wkevinw Says:
    March 28th, 2009 at 10:02 pm

    Re: “deification of markets”….

    I know Adam Smith spent a fair amount of space discussing regulation of markets, so this idea of “deification” is mis-placed in my mind. I have called it “anarchy markets” instead of “free markets”. I saw a discussion of modern jazz as kind of like tennis without a net- same thing with the anarchy markets.

    I think free markets have “nets” as fundamental parts. They can’t function without the nets, e.g. regulated leverage maxima, and many of the other bullet points BR cites.

    It’s really not an argument. There was the perfect storm of stupidity on all sides, satisfying their own interests, who rationalized all of this.

    Doing the “right thing” didn’t work because it didn’t lead to getting rich quick, and in the end, it’s boring, (like much good investing).

[Mar 30, 2009] The revival of American populism Will there be blood The Economist

Regular blatant disinformation from the "Voice of the City " aka Economist (no less then FT), but comments are interesting
Stephen Morris:

The problem with "populism" is that the term is almost always used as a pejorative. No-one ever talks about those "populist" pro-democracy demonstrators in Myanmar! And the movement that led to direct election of US Senators is rarely dismissed as having been "populist".

But, as pointed out in the article, different people have different - and often contradictory - definitions of what constitutes "populism". The only element common to the contradictory definitions is that the policy is perceived to be popular.

By why should popularity have anything to do with the merit - or lack of merit - of any policy?

Thus, the term "populism" - when used as a pejorative - is actually a form of shorthand. It says: "I can't explain what is wrong with this policy. But just look how it appeals to those horrible Stinking Masses! That in itself should convince Superior People like you and me that it is bad."

A ready recourse to the term "populism" therefore manages to combine laziness with snobbery. It says far, far more about the people who use it than the policies it is directed at.

Now, for the most part, this carefully written article managed to avoid the pejorative use of "populism". But, even here, contempt for the Stinking Masses proved impossible to hide. Towards the end, we read:

"These figures are the stuff that nasty movements are made of"; and

"The president hopes that his budget will channel destructive anger into support for his policies."

But why should it be assumed that movements seeking to reform elitist institutions will be "nasty"? And why should it be assumed that the anger will be "destructive"?

Is it not conceivable that the institutions being criticised might in fact need an overhaul? Is it not conceivable that the antiquated system of (so-called) "representative" government might no longer reflect the wishes of the People?

If the institutions of government really did represent the People (as professional politicians never tire of telling us they do), there would be no need to talk about "populism". It would be called "Democracy" instead!


The Problem that The Economist wants to talk about? Public Outrage a.k.a. Populism.

The other less important problem that a magazine called The Economist might want to address, but which it doesn't want to talk about: the economy is bust, and why.

Typical scenario for the last 18 years:

This happens 100 times so the banks are bust too, but get bailed out by the taxpayer (that's those guys who lost their jobs and pensions at Widgets)

PEI lives happily in The Bahamas with the 550 million which he 'earned' in a fabulous year of 'value creation' made possible by the power of free and light touch regulated markets.

Sadly, due to the complexity of all this the bright chaps at The Economist can not quite see why this is a slightly problematic way to run an economy... Honi suit qui mal y pense.


Well, now, if you have been paying attention to Gerald Celente, the master of trend analysis, he predicts that we will see 20% unemployment in USA and a revolt of tax payers and the people. Gerald has seldom been wrong, if ever. So "he could also find his administration blown off-course or even swept aside by popular outrage" as stated in the article is very likely dead accurate. I think "swept aside" probably describes what is coming.


Two days ago, I traveled from the western United States to the middle east, and as I transited through Dulles airport, I saw a T shirt shop prominently displaying a shirt that said: "I'm Proud of my Country--It's my Government I don't Trust"

Thus far, the government tolerates public displays of that sentiment. Ron Paul has written a poorly received book detailing a manifesto of the coming revolution, but it is being read. As long as these sentiments can be ignored, populism will not be an issue.

But if and when these issues become more forceful, it will be government action/reaction that dictates public response. In the past, I have compared our current situation to the political conditions of pre-civil war America (the specific date I have chosen is 1848), and I continue to believe this is true.

It is too early to say; "There will be blood," but it is not to early to be worried.

Esteban R:
So it is becoming obvious that the current system is a failure for an increasing percentage of the population. What is needed is a new system with better incentives for personal responsibility and behavior on all levels. Can such a system could arise without blood and violence? It may depend upon our ability to accept some semblance of a collective human consciousness - possibly aided by instant global communication. Time will tell.
In my opinion (and judging from the Harris poll quoted in this article most of the rest of the people in the US), the populist sentiment in the United States is fueled by the nagging suspicion that global corporate interests are screwing this country in front of the populist bull. Some gutsy economists need to come up with a rational measurement which can be codified by governments to end ime. Of course, the code will have to be established without corporate influence on the government officials doing the codifying. The sooner we establish these laws, and apply them to all corporations, no matter where they are incorporated, the sooner the natural laws of supply and demand will start to work again.


I think a populist uprising every so often is helpful in order to reset the excesses that build up in an economy. Human nature being what it is drives certain people to create and take advantage of these excesses and unless some speed bump is placed in their way they will grow.

I personally believe the current excess is the growth in the financial sector. They, like politicians, sell the idea that you can grow your standard of living by letting them handle it. An appealing message for many. However, the flaw is that there needs to be something to invest in, and since we in America don’t make much of anything these days, they created “investments”. As people bought into the “let someone else handle your money” the financial execs became more and more invaluable and took more and more, and were able to find facilitators through larger political contributions. People’s belief in a passive approach to creating wealth as well as politicians removing the “speed bumps” brought us to where we are today.

Hopefully we can reset the economy to value real wealth creation through building things that we need

Empress Trudy:

Populism generally ends in fascist tyranny if history is any guide. Will it end in blood? Not bloody likely as the west, the Americans in particular are indifferent to doing anything besides screaming online or shaking their tiny fists at the TV. Therefore this is not really populism as merely the language of populism. And when you have that you have FARCE.

The Economist has flashed her good old fashion elitist class warrior skirts yet again here. The fear is almost French. Cronyism is on trial and retribution is in the air.


this is some kind of US National Socialism. free trade and globalization are essentially biggest geographical wealth distribution. winners are those that are REALLY poor. and loosers are those that aren't really that poor. greg mankiw recantly asked great question : "If one citizen of a nation can lay claim to the wealth of his more productive neighbor, shouldn't poor nations have the right to lay claim to the resources of richer nations such as the United States?"

All that the populist bomb lacks is a Huey Long or W J Bryan to light the fuse. Such men have arisen before and will do so again. Somewhere in a America there is a county sheriff, sickened by foreclosure proceedings,who is beginning to realize his time has come.
Being of a certain mature age and somewhat cynical, could it be that cable and internet news have to incite riots to fill their 24/7 schedules? It is definitely better for the ratings than another 4 hours of Geitner testifying before Congress. He is single handedly contributing to the recession in advertising.

[Mar 29, 2009] Anglo-American Capitalism on Trial

"Now, a wave of voices around the world would like a new Big Bang to sweep away the Bretton Woods template and the era of Anglo-American dominance it ushered in." Does this mean 10 years of troubles for S&P500 or 50 years ? As Tim Guy noted "I am more worried that the we will be left at a suboptimal equilibrium chiefly characterized by low growth and persistently high unemployment."

As chancellor, Mr. Brown celebrated the “light touch” regulation of the City of London under which American banks and investment houses flocked to build up their London operations. He appeared, to his critics on Labor’s left, to have accepted a Faustian deal under which the unbridled excesses of the City were tolerated because they generated windfall tax revenues that allowed Labor to splurge on public sector spending.

But in Strasbourg, France, the prime minister seemed to fall back on his roots as the son of a Scottish preacher, and as a student politician of the radical left, focusing on the demons that detractors believe are inherent in the capitalist system. Europe, he told the legislators, had learned the truth that “riches are of value only when they enrich not just some communities, but all.” He added: “As we have discovered to our cost, the problem of unbridled free markets in an unsupervised marketplace is that they can reduce all relationships to transactions, all motivations to self-interest, all sense of value to consumer choice and all sense of worth to a price tag.”

If the implication was that Gordon Gekko-style greed was an American contagion, Mr. Brown is far from alone in Europe. Among some of those who worked through the boom years in the City of London, the moment when matters began to get out of hand under the international financial architecture that began to take shape at Bretton Woods can be dated to the collapse of the Soviet Union. One result, these people now say, was an American triumphalism that translated, in the financial world, to the kind of free-for-all Mr. Brown spoke about in Strasbourg.

Not that London needed encouragement. The Big Bang that liberated financial institutions in the City had come in 1986, sweeping away the cobwebbed traditions of centuries and putting London, at last, in a position to compete with, and in some cases outmatch, Wall Street’s most aggressive practices. The genteel if not downright sleepy practices of post-imperial Britain gave way to what one British banker from that era described as the end of Anglo-American capitalism, and the beginning of a more virulent “American-Anglo” form.

“We were star struck — the American way had become more glamorous,” said George G. Blakey, a stockbroker who has written a book on the history of the London Stock Exchange. “This was the beginning of globalization, and this new American culture swept away everything I had been accustomed to.”

Now, a wave of voices around the world would like a new Big Bang to sweep away the Bretton Woods template and the era of Anglo-American dominance it ushered in. Prime Minister Vladimir Putin of Russia has suggested as much, to nobody’s great surprise, and even France’s otherwise pro-American president, Nicolas Sarkozy, has said the “Anglo-Saxon” presumption of dominance should be abandoned.

Against this background, what the British and American leaders will be attempting at the G-20 conference, along with their partners from around the world, will be to begin building a new global financial system that curbs the rampant and often conscienceless free-marketeering of the past 20 years with a new sense of accountability and restraint, but without extinguishing the spirit of enterprise that arrived in America with the Pilgrims who landed at Plymouth Rock.

It is a task some have likened to rebuilding an aircraft in midflight, and on its success may depend the future well-being of much of the world’s population of 6.5 billion, not to mention the fragile political prospects of Mr. Brown.

[Mar 29, 2009] naked capitalism On Cuomo's Forays Against Financial Chicanery at the Big End of Town

And that raises another issue. One or two day hearings are grossly inadequate venues to get to the bottom of anything. The US needs a full bore major investigation, ideally on the scale of the Pecora Commission. Those took nearly a full two years of hearings, including testimony of pretty much everyone who counted in the world of high finance. These half way measures instead create the illusion that Something Has Been Done at the expense of making real inroads.

Delicious said...
It reminds me of the Roman Senate, which still kept the form of government going for centuries after true power had gone elsewhere.
Jojo said...
Good Dilbert cartoon today that is very apropos. LINK
tom a taxpayer said...
It only takes one Attorney General or one prosecutor to make a world of difference. It only takes one Cuomo or prosecutor (State or Federal) to investigate just one crime, and follow the money, and the crimes, and bring down the entire criminal enterprise using a Racketeer Influenced and Corrupt Organizations Act (RICO) prosecution. This is a target rich environment, and the criminal activities (fraud, Ponzi schemes, blackmail, looting of treasury, cover-ups, etc.) are continuing today. So the investigation and prosecution can begin anywhere, with Countrywide and the mortgage industry or the appraisers or Freddie and Fannie or Citi and the big banksters or with Goldman Sachs and other Wall Street investment banks and brokerages or rating agencies or AIG or with federal co-conspirators at U.S. Treasury, SEC, OTS, and the Federal Reserve and with Hank "the mole" Paulson, Ben "the bag man" Bernanke, Tim "the patsy" Geithner, or the members of Congress who took money to facilitate the criminal enterprise.
Richard Kline said...
While I am, too, maddened by the pace of mega-theft perpetrated by the corporafacistic oligarchs on the public with the aid of The Powers That Be, Yves, I am not particularly put off by the slow official response to this as the tide of public opinion begins to weigh against it. Considering the Great Depression, it was on the order of four and a half years---Oct 29 to mid-33---before serious investigations and rectifications were pursued. To this point wer are only one and a half years in, give or take. Now contra that perspective, it was also three years in the GD before the major elections put a New Lot in the Congress and the White House. This time it was only a year plus . . . which _didn't_ put a new lot in either place, just a different one. Obama has promised continuity, and to our misfortune has so far delivered exactly that: the steal goes on.

My larger point, though, is that these things take time. Yes, we live in a 24-hour newscycle now, and everything is, supposedly, on fast forward. Yes, when Sweden had a crisis, it got down to real solutions in less time than we have already wasted on false ones---but they had no choice. They were a small country, and their currency was in implosion mode, which could only be partially salvaged by taking their busted bankers by the scruff and hiding their hides rather than hiding their asset-bare asses. It takes time for the weight of public opinion to tell.

Am I discouraged that it takes a _state attorney-general_ to put some real knife into the questions at hand? Well, I see this as a good thing in its way, a half-full glass of cloudy water (but I'm thirsty). The American tradition is one of checks and balances, of multiple jurisdictions and many avenues of complaint and rectification. Congress of a certainty doesn't yet want to fing out ANYTHING. I mean, they voted for the bankers to have an unlimited license to steal six months ago, and so are in a poor position to cavil at the method thereoff. So to me, it is good that someone, some any are using power of subpoena and criminal complaint to drag issues like the AIG pass-through in eleven-figure chunks into the mainstream media.

Would I prefer a fast nationalization and quick indictment of the point men of theft class, so that the country can be righted with speed? Natch. But those aren't the politicos we've got so we'll have to intervene with the ones we have. We will be watching the tortuous transformation of The Crisis of Our Times _for years_. That's bad, but it is what it is. Our leadership in this day is pathetic. How to make them move on this with more accuracy and alacrity? Cast more stones and shoes, and escalate the bang-for-buck ratio of said missles thereafter.
Latin America and the US
I am from the UK and I've divided my time between the UK, US, and Guatemala in the last six years.

What I have witnessed personally and the information I have digested (including GG's continued excellent work) leads me to believe that the US has headed towards a typical Latin American social structure, with a culture of impunity developing. There may not be the outrageous daytime hits carried out by bought-and-paid-for police, etc, (not yet) or the employment of the military in narcotics and antiquities smuggling, but the basic contours are the same, that the middle classes essentially vanish in terms of purchasing power compared to the elite, and that they are similarly pushed down into a life described by its stark limits - a home in a residencial (a fortified compound), walking on the street being rendered an insanity, public transport only for the impoverished, swift SUV runs to the shopping mall (the only relatively safe place outside the home), and access to decent healthcare and education met in full by the purchaser. The alternative to having the money to pay for these last two is third world standards, and I do not say that lightly, having toured cancer units in Guatemala City and witnessed dedicated doctors and nurses working in appalling conditions and without basic supplies.

Now comes my caveat, which contains a message of hope, not one like Obama's, but here goes : Just as another commenter mentioned the faulty logic of putting one's faith in saving a system that is hellbent on destroying the quality of life of its footsoldiers, I would move this on. The US has one enormous advantage over Latin America and that is the skills and knowledge of its people, particularly those educated before the rot set in in the public school system, etc. These people would be an enormous asset to Latin America, be it using their skills or as investors, entrepreneurs, business people. It takes almost no money, really, to begin investing in poorer countries in Latin America, and people should really consider moving south, where they can start again, rather than stay and fall prey to the continued inequities of the US system.

In my view, it's time for an exodus and the formation of an American diaspora - the Irish did it, the Croats did it, the Chinese and the Jews have done it - it's fun! It is time to deprive the political and financial elite of its consumer base, tax base, skills base and knowledge base. Just as Rousseau spoke about three centuries ago, those who control society are always in a far weaker position vis-a-vis the citizenry, and this is why they require so much force to achieve their aims. The American people can survive quite happily without their masters, and can always return in a generation or two. This is a time to be watching the action from a distance, not sat at the table.

-- kingfelix07
The US of A is still one of the best places to be in a global depression
As an immigrant, I want to shake Americans for their ignorance of how priviledged they are in their material wealth and personal freedom and opportunity. I volunteer at a food bank, and am amazed at the quantity and quality of food, the fat of the land, given away daily. In third world countries, people are already starving, and many more will as our unsustainable food production economy shrinks.

(Famine being the most likely of the Four, followed by War).

I think it is possible that the USA will have to adjust to 50 million homeowners handing the keys to their houses to the banks. What happens then? We're experiencing a preview.......

But starvation in America? No way.

-- divadab
DownSouth said...
"Junk yard dog" might be a more appropriate metaphor--he barks a few times, creating the false impression that something has been done to impede the intruders, and then goes back to sleep so the robbers can steal with impunity.

Also I wouldn't be so quick to lionize Cuomo. These comments throw up a red flag:

Mr Cuomo said that Carlyle alone paid Mr Morris more than $13 million in return for attracting $730 million in investments from the pension fund....

Caryle said that it had fully co-operated with Mr Cuomo’s investigation, of which it was not a target.

This begs the question: "Why wasn't Carlyle a target?"

Besides being a pretty good hand himself at playing junk yard dog, Cuomo's no slouch at political theater either:

His enthusiasm for the subpoena worries some in the legal community, not least a few prosecutors.

“Evincing outrage is not a legal strategy, so it remains to be seen what he’s going to do with his information,” said Daniel C. Richman, a Columbia law professor and former prosecutor.

Eliot Spitzer, his congenitally combative and competitive predecessor, not too subtly mocked Mr. Cuomo’s subpoena penchant this week.

“Everybody is jumping up and down, serving subpoenas and beating their chest trying to be tougher than the next person,” Mr. Spitzer said on WNYC radio.

The fact that Cuomo is the best we've got, and is being lauded as a crusader for the people, is a sad commentary on the moral shit hole into which this country has fallen.
Anonymous said...
it seems clear to me that Cuomo is keeping the heat on the AIG employees to distract from the real culprits.
Cuomo is a huge political player who is seeking higher office, as he has been throughout his whole career. he sees the populist outrage and is using it for his own advantage and, in all likelihood, the advantage of his future benefactors in the white house.
i am highly suspect of his motives, especially since he seems remarkably unconcerned about due process or other constitutional issues (abuse of prosecutorial power is a pretty big deal in my book - regardless of political affiliation - and a core constitutional and societal issue).

since he is such a political operator, i have to wonder why he is hung up on the AIG employees rather than the people who put this whole quasi private mess together? after the company announced that their liabilities massively exceeded their assets, didn't the real failures happen with the government? the fed and the treasury ignored existing bankruptcy laws and ventured into new territory by bailing out a non-bank to prevent a global meltdown. then they failed to provide any oversight or checks on their operations.
had the company gone bankrupt, a trustee would be overseeing them with the clear purpose of resolving their debts and finding an equitable outcome for the creditors and policy holders.
why did the fed, treasury and congress agree that this company had to remain private when they were insolvent? what did they expect would happen? and why are these investigations only happening after the bailout money has been disbursed to AIG counterparties?

it all stinks, but i don't think anyone should be surprised that AIG is looking like a mess. there was a well established legal process for what to do with companies like these and the government chose to ignore them and created a much bigger problem.
Bob Falfa said...
I have to agree with Anon(9:53), the motives of all actors have to be scrutinized. The hearings seem nothing more than a show to appease the masses and extract an ounce of flesh, but not too much - don't want the benefactors to put their checkbooks away.

As much as I despise oppressive government, deregulation has helped set the stage for this debacle. It's also clear that ratings on any investment are not as accurate as the diamonds Spitzer's whore was rated. As this blog has noted over the past couple of days: even now people are scamming the very systems meant to keep their corporations alive. I don't begrudge the bonus recipients at AIG, they had a contract that congress knew (or should have known) was protected by bills the lawmakers were crafting and voting into law. If they cannot realize there will be unintended consequences in bills (most of which they don't even read), they are too stupid to be in a position creating those laws (and possibly too stupid to breath).

Whew, now I feel better. At least until the next outrage is revealed...or my 1st quarter 401k statement arrives, whichever comes first.
Viv said...
Who cares if Cuomo has political ambitions and motives, if that means he does the right thing and put the fraudsters behind bars than so be it.

The FED can print all the money it wants, the treasury can spend all the money it wants (till bond market dislocation ofcourse) BUT you can't rebuild the broken trust in the system.

Why would I want to put any of my money in the stock market or invest it with a hedge fund or any of the major banks apart from a very liquid form of investment current account or short term t-bills.
The same guys who pulled this heist are in charge of trying to save the system. I'm keeping my money away from these scoundrels until guys like Cuomo clean the system out.

[Mar 29, 2009] Alan Greenspan's Disingenuous Financial Times Comment

naked capitalism

Alan Greenspan had a brief moment when he seemed capable of being redeemed, when he admitted before Congress that he was wrong about his assumptions that firms could regulate themselves. I have yet to see another central figure in the banking meltdown admit error. But he has now gone back to trying to salvage burnish his reputation.

Irving Fisher, arguably the most famous economist of the 1920s and a big backer of that era's new financial and economic paradigm, was virtually impoverished by the crash and spent the next few years trying to figure out what went wrong. Although his contemporaries (save Keynes) saw him as hopelessly tainted, posterity has been more kind. Fisher's debt deflation theory is now seen as a useful, perhaps even fundamental framework for viewing financial crises.

But Greenspan when he was chairman of the Fed, and to this day, still wants to be liked. And that means he is still far too willing to enable those in power, no matter how destructive their pet plans may be. Yet the most effective counsellors I have seen are able to tell people when they think their ideas stink (admittedly, it takes a great deal of interpersonal skill to pull that off without offending often insecure people in high places) and in fact, are sought out for their candor.

selise said...
from the nyt, 1987:

Top officials at the Treasury Department have concluded that the Government should encourage creation of very large banks that could better compete with financial institutions in Japan and Europe.

The Treasury plan, which would permit the acquisition of banks by large industrial companies, was also endorsed by Alan Greenspan, in an interview before President Reagan nominated him this week to be chairman of the Federal Reserve Board.

Mr. Greenspan said the plan would provide multibillion-dollar pools of investment capital for a banking industry that was ''severely undercapitalized.''

the whole article is pretty interesting. here is another bit:

In the interview, Mr. Greenspan said ''the separation of commerce and banking at this stage is simply not helpful'' because it cuts off one important source of new capital. He added that the declining profits of the leading American banks had hampered their ability to raise capital in stock offerings. That leaves them only one practical source for large injections of funds: the industrial sector of the economy.

Given the current banking environment, Mr. Greenspan said, ''I do not have a fear of undue concentration of banking powers.''

if i'm not misreading this:

1) reagan wanted big banks (american banks must be the biggest!)
2) volcker was not going along
3) reagan's treasury advocates for big banks
4) greenspan says what reagan wants to hear and one week later is nominated to replace volcker
Anonymous said...
Great post!

fresno dan said - “There was a great boom. Greenspan happened to be there. He should have taken away the punch bowl - but he didn't - he poured more. Everybody loved the pourer of punch, till the hangover. Now they hate him.”

Puppet Greenspan’s crime was not taking away the punch bowl. His crime was being a willing and knowing party to the cabal that set the punch bowl out.

Less attention should be paid to puppet Greenspan and more attention paid to his strings and the broader political context that pulls them. These are not bumbling idiots as they would have you believe, they are deceptive gangster state actors playing in a well planned and well orchestrated multifaceted finance based global/domestic coup. The FT rag is just another of their propagandistic promoters. They are working their asses off to deflect from the ruse and give ‘legitimacy’ to the scam.

Deception is the strongest political force on the planet.

i on the ball patriot
Anonymous said...
You can't compare Greenspan's predicament to Fisher's. We're in a golden age of looting, where the Fed is literally printing money and giving it to the malefactors of the past decade, thereby cheapening the hard earned assets of those who actually produce things for a living. Why wouldn't Greenspan try to endear himself to the looters? It makes sense for all of us to get as close to the looters as possible. They should be in control for a very long time.
Anonymous said...
Greenspan was a tool, first and foremost. He did his job well for the oligarchy.

One hopes that history will properly vilify him.

If not then it means that we lost the battle to maintain some semblance of moral & humanistic social order.

Write fast Yves......

[Mar 29, 2009] CNN in third place in prime time for first time David Bauder

If the country the most popular show is "The O'Reilly Factor"  chances of economic recovery are probably much less then otherwise...  From LA comments: Please, please people watch Outfoxed." "I'm sure there are people who watch fox just because it is so crazy and gives fodder to comics, but this is a dangerous propaganda."
Mar 27, 2009 | Ap

Fox remains on a mountain above its two closest competitors, with its prime-time audience in March more than that of MSNBC and CNN combined. "The O'Reilly Factor" has done particularly well, keeping more of its postelection audience than anything else on CNN and MSNBC.

Through Wednesday, Fox was averaging 2.73 million prime-time viewers in March. MSNBC had 1.16 million and CNN had 1.14 million. The March ratings period ends Friday, and it's doubtful CNN will be able to overcome MSNBC.

"The fact that one network may have eked out a slight edge in one small slice of the overall business really doesn't say much of anything," Jon Klein, CNN U.S. president, said on Friday. "It's more clear than ever, given the way that our competitors have positioned themselves, that CNN has positioned itself as the real news network."

Relying on news, rather than opinion, leaves CNN more susceptible to higher ratings peaks during big stories and lower valleys in routine times. Yet it's hard to consider the present — new president, economic turmoil and two wars — a slow news period.

CNN's ratings news "is very significant," said Frank Sesno, a former CNN Washington bureau chief and now a professor at George Washington University. "This is a big problem."

More significant is what CNN's ratings problems mean coupled with the daily drumbeat of layoffs in the newspaper industry, he said. With people more interested in hearing things through an ideological prism as a form of entertainment, it diminishes the value of independent voices giving straight news.

"It's getting harder to do real journalism on television," Sesno said. "This is `man the ideological barricades.'"

Fox is ready to start a new venture Monday, "The Fox Nation," which it bills as an online community that believes in "your right to express your views, your values, your voice." Fox representatives would not immediately return a call for comment.

... ... ...

MSNBC's Rachel Maddow is a close third to Larry King, and both are beaten handily by Sean Hannity's new Fox solo show. At the 10 p.m. hour, a rerun of the show Olbermann did two hours earlier has been doing surprisingly well against CNN's "Anderson Cooper 360," leading MSNBC to at least temporarily put on hold any development of a new live show then.

MSNBC chief executive Phil Griffin said the prime-time ratings are an affirmation of the network's decision to go liberal with Olbermann and Maddow. But he also said it pointed to problems at his rival.

"They've got the best brand in news," he said. "CNN, that's better than anybody. But you've got to deliver on that — and they're not. It's a hollow promise."

[Mar 28, 2009] Comparing the U.S. to Russia and Argentina  by Glenn Greenwald

"...Does anyone really doubt any more that the predominant characteristic of our political culture is "the incestuous relationship between governments and large [] corporate conglomerates"?...". A very important observation. Also "... the finance industry has effectively captured our government — a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises."  Related is Johnson's observation that "needing to squeeze someone, most emerging-market governments look first to ordinary working folk" But the best analogy is not some other country, it is the US 80 years ago. Reaganomics was essentially the idea of deliberately restoring the power (and, by extension, corruption) of financial elite that was achieved during Gilded Age. The key dynamic underlying all of this -- the linchpin that allows it all to happen and, historically, the primary hallmark of a deeply broken nation -- is the total elimination of the rule of law for the ruling class, with a simultaneous intensification of the law as a weapon against the masses. -- (GG). Of course a robust financial sector printing phantom profits out of thin air fit perfectly well with the GOP agenda of making it look like the tax cut regime was growing the economy when it was merely blowing an enormous bubble.
 March 26, 2009 |

...Does anyone really doubt any more that the predominant characteristic of our political culture is "the incestuous relationship between governments and large [] corporate conglomerates"?  Yet another former Goldman Sachs official and long-time derivatives advocate who played a major role in the repeal of key banking regulations, Gary Gesner, is now poised to become Obama's chief of the Commodities Futures Trading Commission, the body charged with regulating commodities and financial futures.  The sleazy, central role Goldman Sachs has played in the events of the last six months -- from their current CEO's still-unexplained presence with Paulson (its former Chairman) and Geithner (protegé of its other former Chairman, Robert Rubin) as the AIG bailout was designed to the massive government windfalls that firm has received (including from that very AIG bailout) -- is merely illustrative of how our Government has long functioned and continues to.

Yves Smith last night noted the rather extraordinary (though unsurprising) development that the very institutions that played such a critical role in the crisis -- Citibank and Bank of America -- are now using TARP funds they received not to extend more loans (the ostensible purpose of the bailout), but rather, to buy up more and more of the very distressed assets that Geithner insists they need to be relieved of, because they now know that, under Geithner's plan, they will be able to sell them at a substantial profit courtesy of public funds (i.e, the Government will buy those crippled assets at well above their current market price).  As Smith puts it:  "So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money. . . .Welcome to yet more looting."

Despite the limitless gorging on public funds by the very oligarchs (government owners) who caused the financial crisis in the first place, the predominant sentiment from our establishment media now is that Obama needs to force ordinary Americans to "sacrifice more."  Back in 2006, Jonathan Schwarz wrote this very prescient post predicting that the U.S. would soon adopt the type of so-called "structural adjustments" which, through the IMF, we repeatedly forced upon other heavily indebted, defaulting nations:  whereby we would demand that they pursue solutions that further enriched their economic elites while massively cutting the social spending that provided the barest of safety nets to their ordinary citizens.  As Schwarz put it yesterday in citing highly revealing comments by Tim Geithner at a CFR conference this week:

There's been a common phenomenon in the third world over the past three decades or so. A country's financial sector, in collaboration with the larger financial world, would create some type of gigantic economic fuck up. The IMF would then (in collaboration with the local financial elites) step in and provide loans in return for what was called "structural adjustment." Structural adjustment involved getting rid of any kind of social spending that made life bearable for everyone else.

In other words, the country's financial elites would use the catastrophes they'd created themselves in order to do what they'd always wanted to but couldn't get away with in normal times. They took the profit, and then imposed all the costs on everyone else.

Isn't that exactly what is now happening here?  When I first heard Chuck Todd questioning Obama at Tuesday's Press Conference about why Obama wasn't demanding "sacrifice" from ordinary Americans -- as though the massive loss of jobs, homes, retirement security and financial opportunities isn't sufficient "sacrifice" -- I mistakenly attributed Todd's question to the standard vapid ignorance and insularity of our media stars.  I assumed that Todd was just mimicking a question he heard about 9/11 and decided to repeat it seven years later without realizing what a complete nonsequitur it is when applied to the financial crisis.

But there was actually a more pernicious aspect to his question.  He was basically demanding of Obama:  shouldn't you be telling those dirty masses that they can't have health care and education improvements and that they're also going to have to give up their Medicare, Medicaid and Social Security benefits (while Citibank and BoA use taxpayer money to buy up distressed assets that they will then sell at a huge profit, also to the taxpayer under the Geithner plan)?  Among our coddled elites, anger at the oligarchs who pillaged and who continue to pillage is misplaced, irresponsible and dangerous populist rage that must be stigmatized and suppressed.  Instead, what is needed -- as Digby and DougJ noted weeks ago would be the prevailing message from our media class -- is a further reduction in the standard of living for average Americans in the name of "fiscal responsibility" to ensure that the subsidies to our oligarchical class -- the ones who enriched themselves for the last decade (and who own our media outlets) -- can continue (and that is, more or less, what Lachman advocates today as the necessary solution).

The key dynamic underlying all of this -- the linchpin that allows it all to happen and, historically, the primary hallmark of a deeply broken nation -- is the total elimination of the rule of law for the ruling class, with a simultaneous intensification of the law as a weapon against the citizenry.  Does anyone expect there to be any widespread prosecutions for those most responsible for the looting, systematic fraud and grand-scale theft of the last decade?  Identically, as more and more evidence emerges of the vast war crimes of the prior administration, the failure to enforce the law and our legal obligations against our nation's most powerful becomes even more transparent.  As law professor Jonathan Turley put it on Rachel Maddow's show Monday night:

The president refuses to allow the investigation of war crimes. And we just found out the international Red Cross, also the definitive body on torture, found that this was a real torture program. And yet, the president is having a debate with the guy [Cheney] over whether it was good policy. . . .

It is just as bad to prevent the investigation and prosecution of a war crime as its commission because you become part of it. There‘s no question about a war crime here. . . .

You know, some people say, what do you need, a film? We actually had films of us torturing people. So this would be the shortest investigation in history. You have Bush officials who have said that we tortured people. We have interrogators who have said we tortured people. The Red Cross has said it. A host of international organizations have said it. . . .

He should be appointing a special prosecutor. There is no question about that. This is the most well-defined and publicly known crime I have seen in my lifetime. There is no debate about it. There is no ambiguity. It is well known.

Contrast these desperate efforts to avoid any criminal accountability at all for the country's most powerful lawbreakers with the merciless application of criminal law to ordinary Americans.  As Brown University Glenn Loury recently:

Simply put, we have become a nation of jailers and, arguably, racist jailers at that. The past four decades have witnessed a truly historic expansion, and transformation, of penal institutions in the United States — at every level of government, and in all regions of the country. We have, by any measure, become a vastly more punitive society. Measured in constant dollars and taking account of all levels of government, spending on corrections and law enforcement in the United States has more than quadrupled over the last quarter century. As a result, the American prison system has grown into a leviathan unmatched in human history.

Here, as in other areas of social policy, the United States is a stark international outlier, sitting at the most rightward end of the political spectrum: We imprison at a far higher rate than the other industrial democracies — higher, indeed, than either Russia or China, and vastly higher than any of the countries of Western Europe. . . . With approximately one twentieth of the world’s population, America had nearly one fourth of the world’s inmates.

The treatment in our justice system of ordinary citizens ("a nation of jailers") and our elites (immunity from lawbreaking) could not be more disparate.  We have (and are continuing to solidify) exactly the state of affairs that political science literature and the American government itself have long self-righteously warned other countries is the prime enabler for tyrannical rot:  a two-tiered system of justice which exempts the country's elites from accountability.  I've previously cited this 1998 essay in Foreign Affairs entitled "The Rule of Law Revival," by Thomas Carothers of the Carnegie Endowment for International Peace, because it so perfectly expresses long-standing Western lectures to the "developing world" about the need for a robust rule of law for a nation's ruling elite class:


THE RULE of law can be defined as a system in which the laws are public knowledge, are clear in meaning, and apply equally to everyone. They enshrine and uphold the political and civil liberties that have gained status as universal human rights over the last half-century. . . . Perhaps most important, the government is embedded in a comprehensive legal framework, its officials accept that the law will be applied to their own conduct, and the government seeks to be law-abiding. . . .

The primary obstacles to such reform are not technical or financial, but political and human. Rule-of-law reform will succeed only if it gets at the fundamental problem of leaders who refuse to be ruled by the law. Respect for the law will not easily take root in systems rife with corruption and cynicism, since entrenched elites cede their traditional impunity and vested interests only under great pressure.

It should be fairly significant when someone like Lachman -- who spent his career at Salomon and the IMF -- warns that the U.S. has now adopted the worst and most decadent attributes that drove and defined the era of collapse in Russia, Argentina and similar places.  As he says, this is true not only "in what led us to the crisis" but also "in how we're trying to fix it."  There is fundamental corruption in our political system that has led to all of this, and that corruption, in so many ways, is now being exacerbated and fortified rather than uprooted.

UPDATESalon's Andrew Leonard has a very good analysis of the significance (or lack thereof) of Geithner's call for new regulatory oversight over the financial industry.

UPDATE II:  In a superb article just published in The Atlantic, former IMF Chief Economist and current MIT Professor Simon Johnson makes a very similar argument, using his IMF experience with failing economies to document numerous similarities between the U.S. and other collapsing nations.  He notes specifically "that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises."  The article should be read in full, but a couple of excepts are here:

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” . . . The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). . . .But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

It's rather difficult to dismiss as fringe hysteria the observations of those most familiar with what took place in other financial crises around the world.

Related to Johnson's observation that "needing to squeeze someone, most emerging-market governments look first to ordinary working folk," here is The Washington Post's Paul Kane today explaining what the U.S. must do to solve its deficit and debt problems:

Even if you were to curb a bunch of Obama's most ambitious programs, you're still looking at trillions and trillions of dollars in debt.

The real fiscal answer is entitlement reform -- that's code word, everyone, for slashing Medicare benefits and raising the retirement age/payout time for Social Security recipients.

So our political class cheers on treasury-draining wars, allows financial elites to rob and pillage, witnesses huge transfers of wealth to the richest, and then when the whole thing explodes, the "real fiscal answer" is for ordinary Americans to have their Medicare benefits "slashed" and Social Security benefits reduced.

Glenn Greenwald's Unclaimed Territory

I was previously a constitutional law and civil rights litigator in New York. I am the author of two New York Times Bestselling books: "How Would a Patriot Act?" (May, 2006), a critique of the Bush administration's use of executive power, and "A Tragic Legacy" (June, 2007), which examines the Bush legacy. My most recent book, "Great American Hypocrites", examines the manipulative electoral tactics used by the GOP and propagated by the establishment press, and was released in April, 2008, by Random House/Crown.

Selected comments

[Mar 21, 2009] Guest Post - Road to Reflation

naked capitalism

No wonder pressure is mounting on the U.S. dollar. On the one hand you have incompetent politicians in Washington pandering to Wall Street and on the other you got Ben "the helicopter gambler" Bernanke, betting that inflation will remain at bay:

Before he was named chairman of the Federal Reserve Board, Ben Bernanke was one of the foremost scholars of the central bank's response to the Great Depression. It tells us much about his state of high anxiety that the Fed is injecting another $1 trillion into the economy by buying Treasuries and other government securities. Bernanke clearly believes this is not just another recession. And he's mindful that the Fed's biggest mistake in the Depression was to tighten credit, which worsened deflation of the 1930s.

But it's a gamble. The Fed's purchasing power is not made in a tree by elves. It comes from, essentially, printing more money. If the world's biggest danger is deflation, as Bernanke and a number of economists believe, then this action is wise. The trick to price stability is "reflation" not tight-fisted central banks. If conditions are different, however, it bakes serious inflation in the cake. Thus today's market gyrations, which at the moment have the dollar down, gold and oil up and stocks falling. This is less a fear of raging inflation, than a fear of uncertainty itself, to paraphrase FDR.

But the Fed is out of the conventional tools it has used in post-World War II recessions. Interest rates are virtually zero. So now it's a step into a risky undiscovered country. Among the risks is how our overseas creditors react if they believe this will dilute the value of their dollar-based assets, including Treasuries. Then there's the danger that Bernanke is creating yet another Fed-made bubble, with an even worse crash to follow. If it works, however, it may finally get credit moving. Stay tuned.

The Back Story: Moody's says it may downgrade $241 billion in securities backed by so-called jumbo mortgages. This is a pretty big deal because these are considered prime loans, as opposed to the risky subprime mortgages that began the bubble burst. Jumbos, mortgages usually larger than $417,000, go to borrowers with good credit, and they've been widely used in the Seattle area. The credit rating service obviously expects more defaults -- not unreasonable given rising joblessness. And who knows what scary creatures are hiding in those tranches.
I can only imagine what will happen if Moody's does downgrade those jumbo mortgages. More financial pain for everyone, including pension funds that are overexposed to alternative investments.

Speaking of alternative investments, the situation is getting uglier by the day. As hedge fund liquidations hit a record high, some are saying it's time to revisit hedge funds.

The head of investment strategy at Union Bancaire Privee (UBP) was quoted as saying on Thursday that the hedge fund industry could shrink by two thirds from its peak as market losses and a slough of redemptions take their toll:

Christophe Bernard told French language financial daily L'Agefi that hedge fund assets, which data show peaked at more than $2 trillion in early to mid 2008, could fall as low as $700 billion as investors seek out less risky climes amid continuing market turmoil.

Bernard is responsible for investment strategy at UBP, which at end 2007 was the world's second-largest investor in hedge funds with more than $53 billion invested in single funds and funds of funds. Data is not yet available for 2008.

Bernard also said UBP might cut about 10 percent of its staff of about 1,390, in line with the banking industry, through a combination of layoffs and early retirement.

A spokesman from UBP said half of the layoffs would be in Switzerland and half in the rest of the world.

Bernard said UBP would reduce its own hedge fund exposure by two thirds, and would restructure its range of funds of funds by the third quarter of 2009.

Last week, UBP said it would partially reimburse investors with exposure to Bernard Madoff's $65 billion fraud. Many invested either directly through UBP or had exposure via its fund of hedge funds products.

UBP said in the future it would only invest in funds with independent custodians, who hold the fund assets, and administrators, who calculate the value of those assets.

On Wednesday, a leading hedge fund manager said that the shakeout of the hedge funds industry could be over by June 2009, with nearly half of firms likely to shut up shop:

"The hedge fund bubble has popped and, unfortunately when any bubble pops, it's a painful process," said Ken Kinsey-Quick, head of multi-manager of hedge fund firm Thames River Capital.

"If half were to close down, I wouldn't be surprised. But the nice thing about hedge fund land is that things move very very quickly, it will probably be done and dusted by June," he continued

Hedge funds returns were a negative 19 percent last year, when investors pulled out a record $158.9 billion (113.86 billion pounds), according to data from Lipper.

Kinsey-Quick believes that only strong hedge fund models are likely to survive the financial meltdown.

"You will have only very robust models -- only the fittest will survive. But there is going to be some collateral damage. There will be some good players taken out," he said.

And he noted that the hedge fund industry was already adapting to meet the calls for greater scrutiny.

"Transparency has gone through the roof. Liquidity terms are beginning to match the liquidity of underlying assets," he said.

In private equity, firms are trying harder to please powerful investors as dollars for new commitments become harder to come by...

Hedge fund and private equity woes are also impacting commercial real estate, especially in London and Manhattan where deflation rolls on as apartment sales see a huge drop.

U.S. commercial real estate prices tumbled in January, Moody's said on Thursday, suggesting problems that began in housing have spread well beyond that sector;

Commercial property values fell 5.5 percent, the biggest drop in since the ratings agency began compiling this index in 2000.

"Prices have nominally returned to the levels they were in the spring of 2005," Moody's said, adding that transaction volumes were at their lowest levels since October 2003.

GE's real estate arm said Thursday its debt-default rate on loans in its portfolio could rise to 10% under adverse economic conditions:

Speaking to investors in New York, executives said a stress test on its portfolio based on a Federal baseline assumption for the economy implied the default rate could be 8%, rising as high as 10% if U.S. GDP and unemployment turn more negative. That would result in a potential 2009 segment loss of $900 million, or $1 billion, respectively. For the fourth quarter, GE Real Estate said its debt-default rate was just 1.2%, compared with a 5.4% rate seen at commercial banks, due to unit's avoidance of construction and development loans, second mortgages, malls, and resorts, and having just 3% of its portfolio in subprime lending.

Now, let me ask you, if you are the Fed Chairman and you are seeing signs of deflation everywhere - soaring unemployment, a mortgage mess, pension funds imploding, etc. - wouldn't you try to reflate your way out of this mess?

The market seems to be betting that reflation will persist. Chris Puplava wrote an excellent analysis, Commodities - Signaling Reflation or Stabilization?

But the jury is still out on quantitative easing and its effects on pension funds. Today's stock market was clearly not a sign of confidence.

If successful, the road to reflation will be long and arduous. I remain skeptical, fearing the age of deflation, knowing that you can't reflate deflated balloons.

[Mar 20, 2009] Naked Short Sales Hint Fraud in Bringing Down Lehman (Update1) By Gary Matsumoto

March 19 | Bloomberg

The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.

“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”

[Mar 19, 2009] Why We Need Criminal Investigations

jh said...
The deed is already done. The populist anger will fade away. The players will always find a
way into the casino. The markets have perennial short term memory loss.

Fraud is so rampant at all levels that the kettles and the pots are indistinguishable. Could be wrong.
Doubt it.
Anonymous said...
Economist Michael Hudson thinks that the attention to the bonuses merely serves to conceal the more damaging fact of the identity of the counterparties. He believes that this concealment is purposeful. Thoughts?
Anonymous said...
Thanks Yves.

I worry about this situation being rectified by hanging a few of the most egregious financial perps...not that it wouldn’t help to make a statement. It is like the illegal drug market in that the benefits out way the chance of getting caught.
What is needed AGAIN is systemic repudiation of investment banking in all manners that breed excess and integrate constant vigilance so that we can keep it at bay for longer than this past stretch.


Guest Post- Charlotte Observer pitches softball, Ken Lewis hits homer

Anonymous said...
Newspapers are totally bankrupt of journalistic integrity. This is why the world's smallest violin plays as they crumble into dust.

It reminds me though of what people at Bear Stears/Lehman were saying about their company 1 yr/6 months ago. "Everything is fine." We know how to parse that one!

On the other hand, the bailout money has been used to pick up some good bargains and to drive out the smaller competition, so with sufficient interest rate hikes, banking fees and so forth, it's not inconceivable that B of A could turn a profit.
Anonymous said...

Thanks for the posting. It was direct, short and with the proper sense of disdain for our current reality.

The first anon commenter chided you for attacking the small newspaper in the city of BIG BofA. Ooooogagaaa Booogaaa!!! We are indeed sick to think that we need to bow down or be fearful of a corporation of any size.

Lets see what they taught me in school. The government is suppose to be by and for the people. Corporations are licensed to operate in the our country and states and those licenses can be revoked. As citizens, we should only have to entreat our elected officials to right wrong. A free press is suppose to be the neutral purveyor of facts to the populace so they can know how to best live and direct their government.

Unfortunately, what they taught in school is not our current reality. We live in a fascist theocratic empire instead of a republic and the press is the propoganda arm of the corporations.

The least they can give us is to allow our textual white noise to be accurate, right?

PascalB said...
I am getting "incompetence fatigue"... the USA is seriously turning into a banana republic. Journalists are batting below 200 on the real questions side. US households are cash-strapped. Period. They have been living WAY beyond their normal means for at least a decade now. Everyone knows this - economists and non-economists. Anyone with common sense and more than 90 IQ. The IQ part is high in upper Administration, but the common sense is extremely hard to come by in Washington or Wall Street.

This excessive consumption has been made possible by the miracles of loose credit standards and free Fed money always bailing out the economy beyond normal macro stabilization. The whole racket stemming from loose monetary policy and the ability to borrow from Asia, whose househods actually save and whose Central Banks add to the party by pegging their currencies with the fortunate byproduct (due to past pressures to appreciation) of financing US Govt deficits at low rates and US trade deficits. Again, everyone knows this.

So this brings us to the typical talk like BoA and City-AIG people, as in this "interview". What is to be expected in the coming years?

1) real growth forecasts will NOT materialize because there is simply no way insolvent households, firms, and governments will rebuild their budget health within such a short time frame and have the ability to buy goods and services at the rate they were before. That would be magic, and I keep telling my students that if there seems to be magic in economics, then something is wrong or missing in the picture.

2) "Too Big To Fail" institutions will thus continue sucking the life out of everything they can while making it LOOK like "it's not their fault, they would really love to give all that taxpayer cash back, but "the situation" is beyond their control and requires exceptional measures" (looting).

3) Obama, Geithner, Bernanke, Summers and co will continue being extremely intelligent people giving great speeches and saying they are "acting boldly", while actually avoiding what would be bold in these extreme times - full public control/takeover of financial firms, MAJOR overhaul of financial regulation, and a return to sane capitalism based on value added production and innovation in tradeable (market-desired) goods and services. Remember, the BASIC law of free markets is shared risk = shared potential profits. Right now we have "dump all risk on taxpayers without anything in return" type of policies. It can't work. When common sense is out the window, something has to give. I don't care how sophisticated the DSGE models behind the arguments are.

4) All top ranked officials will be "shocked shocked" that the stagnation is continuing unabated and will call for MORE credit and messy taxpayer-to-Big-Finance transfers. Give the alcoholic more alcohol to get through his "cold turkey" and don't mind the fundamentals of purchasing power.

5) Renewed calls that the end is near will come and new ("updated") forecasts will come out.

6) All this time, while the Crazy House (White House, WS, etc.) continues with its nonsense, normal people with down-to-earth common sense will deleverage, firms will deleverage against their will, and MUCH later, normal times will come back.

7) Officials will say "see we told you the end of the slump was coming soon" and will all inter-congratulate themselves on a fine job.

Hopefully, what will have been lost in the process will be Disconnected-From-Reality capitalism. The capitalism that pads excessive mega risk takers and irresponsible policies. Free credit capitalism. Free Lunch capitalism. Looting and in-your-face nonsense public policies.

Hopefully what will emerge down the road is a return to sane capitalism. The one based on private initiative, innovation and sane, calculated risk taking. A system that will penalize poor business judgement without mercy and will NOT transfer all risk to taxpayers when the going gets tough. A system that will provide profits to value adders and good business positioning. A system in which bondholders will understand that default is possible and will not be "bailed out", where shareholders will understand that returns are not guaranteed and risk is real. A system which will internalize externalities and market imperfections such as information assymetries, near rationality and bubble psychology. A system that will get back to at least trying to bring equality of chance for as many as possible, while letting life takes its course, efforts bring rewards, and differences bring different outcomes. A system that will heavily regulate and oversee "too big to fail" firms, since they are all implicitly insured by the taxpayer. A world where consumers will buy stuff mostly with... money they HAVE in their bank account, mostly from their labour income! A return to sanity with sane leverage ratios, risk assessment and clear frontiers between the various players in the economy. Yes We Can!


[Mar 18, 2009] "The Tipping Point?"

"Just a reminder that the "Best and Brightest" was originally used as a derogatory remark to describe the failure of policy makers in the Vietnam war."

James Kwak hopes that the AIG scandal will compel the administration to take action:

The Tipping Point?, by James Kwak: $165 million, of course, is less than one-tenth of one percent of the total amount of bailout money given to AIG in one form or another. Yet it may turn out to be the $165 million that broke the camel’s back.

The AIG bonus saga neatly encapsulates many of the problems that we have identified with the financial system and with the bailout to date.

However, this scandal may yet serve a purpose. ... The key issues throughout this crisis have been political as much as economic. In this case, the Obama administration has been taking a difficult political position - propping up financial institutions in their current form and insisting everything will be OK - when it would have been easier to play the populist card. This was by no means an inescapable choice; according to news reports in February, David Axelrod and Rahm Emmanuel were in favor of being tougher on the banks. Perhaps the AIG bonus scandal will force the administration’s hand toward the decisive action that we need.

Selected comments

kharris says...

Staw that broke the camel's back? What camel?

AIG has already been nationalized. We can't get all Swedish on their butts now, cause we already went Swedish. Everything else Kwak has written makes some sense, but part of the problem is that these guys got here way ahead of us. They rigged the system while nobody was watching and so far there has been little that government has been able to do, or at least willing to do, that has made much difference in the grasp of the greedy. They got into this racket to make obscene amounts of money, and have done obscene things to make that money. Ripping the whole thing away from them and making it clear regulators would make life hell for any firm that would hire them again seems the only way to deal with the ethics of the situation, and we are far from doing that.

Why do you think jails are mostly full of poor people?

hari says...

kharris -

NO! You've not gone Swedish at all, me thinks.
Our tax system, as you know, is progressive and there is no way such shenedigans/cabal like AIG could survive in my adopted land.

Posted by: hari | Link to comment | March 18, 2009 at 05:15 AM

hari says...

*The Tipping Point* is American (public) morality - not Congressional Chairman or their stooges.

The latter have been complicit in this transgression and apparent wound inflicted on public morality.

May be, our host (MT) is driving us to question what type of *morality* allows such financial transgressions?

James Kroeger says...

AIG has already been nationalized.
That's really not true, is it, kharris? The majority share of AIG's assets were purchased by the Fed with money that was created out of thin air. No taxpayer dollars were involved, were they?

The Fed, of course, is not a part of the government, but is privately-owned by America's commercial banks. How can AIG be considered 'nationalized' if the federal government does not own any part of the company? The fact that the President gets to appoint the governors of the administrative policy board (from a list of candidates that private bankers will supposedly accept) does not magically transform the Fed into a government agency. It receives no funding from Congress.

This truth ought to inspire even more outrage re: the mismanagement of the financial services sector of the economy. AIG is now owned by the commercial banks, who paid for their purchase with money that it simply keystroked into existence. Imagine the outrage that Main Street Americans would feel if they understood that the commercial banks have the ability to bail themselves out at any time through their fully-owned Central Bank. Moral Hazard? What moral hazard?

Bankers and insurance companies do the same thing: they 'borrow low and lend high.' They persuade lots of people to give them their money for a period of time, promising to return it when certain conditions are fulfilled, and then use that money to seek higher yields. If they guess wrong, everyone who gave them money ends up losing.

They become obscenely rich taking risks with other people's money, but then, if they guess wrong, they are able to persuade the politicians to save their butts. Madoff's ponzi scheme is not really all that different from what the banks and insurance companies do. Accept money from people, promise to make their money + a nice profit available to them as they require it, and then give yourself great rewards for being so clever.

We can only hope that President Obama will eventually figure this out; but we can know with certainty that he will not be getting the whole truth from Geithner and Summers.

[Mar 17, 2009] Wiliam Black Savages Treasury's Conduct on AIG

Don said...
"And to Black's point, the real issue is fraud. Why is no one at Treasury willing to use the F word? Who would it embarrass? There is not reason for NOT pursuing that angle, save that AIG must have the 5x7 glossies on some pretty influential people, or that pursuing fraud at AIG would, via a daisy chain of connections, reveal that fraud was pervasive, and the Treasury is desperate to preserve the false image that the system has integrity. "

I agree. A terrific post. People should read Pizzo's "Inside Job" about the S and L Crisis. It will at least teach them what to look for.

Don the libertarian Democrat

March 16, 2009 11:35 AM

 Moopheus said...
5x7's? Are things so bad now that blackmailers won't spring for 8x10's? I've still got a wet darkroom--I'll make some prints for them, very low rates.

But really, fraud does seem to be the elephant in the room that no one seems to want to talk about, whether it's in mortgages or management. In fact, it has always seemed like whitewashing the fraud has been an implicit goal of many of the programs put forth by this administration and the last. Really, one has to ask, who are they really protecting? It has to be more specific than just the appearance of the "integrity of the system."
Anonymous said...
Tyler Durden carried a good discussion about the black hole that CDS are and the lack of foreseeable solutions, on the previous AIG disclosures post... something worth fleshing out and tying into your suspicions.

It sounds like AIG is a real lemon, but a good front for funneling out taxpayer cash to banks (sans the stigma of govt assistance), and maybe a necessary front for keeping up appearances that the US's behemoths aren't paint-on-rust.

Well, anyway.. back to trying to make that imaginary wealth real
Mannwich said...
This has been my assertion since Sept of last year. The fraud and criminality is so pervasive, the feds fear that if they go down that road, they'll find that much of our system itself is completely fraudulent. Now what would that revelation do to the markets and our economy? It's also likely why we won't get the real truth behind the likes of Madoff and Stanford.
Anonymous said...
AIG is not the issue, and nothing more than a Red herring. Since the August 2007 credit blow up, the Treasury and the Fed initiated a policy to allow the principal financial actors to attempt to trade their way out of the mess. The policy is not working, but they are too invested to back out now. Keeping AIG alive allows another conduit to the investment banks. AIG seems to be acting as if they feel they have some power now - maybe they do. Given the recently released info on AIG counterparties receiving massive sums from the government - maybe they do.

The "Fraud" is at the very highest levels of the Treasury. If the AIG conduit goes away, can the Treasury and the Fed rely solely on TARP II and TARP III? The derivative overhang will continue to unwind. Massive amounts of corporate term debt need to be rolled over in the next 48 months. Debt destruction will occur, and the White House / Treasuy will work to decide which firms live and which firms "restructure." The market forces are in motion and the trends continue to point to debt destruction.

Yet, Goldman Sachs will survive - maybe even prosper.

MyLessThanPrimeBeef said...
It's still not too late for change.

BTW, I wasn't last November, but I am ready for leadership change now. I think we need replace everyone in Washington DC, from the janitors all the way to the very tops.

March 16, 2009 12:57 PM

Anonymous said...
p.s. - As much as I like Seeing Obama & Co talking about exercising all legal options to nip the bonus... at this point, and with AIG having so much egg on its face, so little to loose, and such minimal faces-in-the-media presence... is tough talk at this hour going to force AIG mgmt to get entreched in this legal battle to save face and shield populous wrath?

These guys can play legal games... dragging them into the light is where they;re out of their element -- remember what a reptile Paulson looked like?

March 16, 2009 12:59 PM

Anonymous said...
""AIG must have the 5x7 glossies on some pretty influential people": or a single photocopy of one man's Long Form Birth Certificate?"

Offensive rightwing claptrap.

March 16, 2009 1:03 PM

Eric L. Prentis said...
LARRY SUMMERS BULLSH*T! "The government cannot just abrogate [AIG bonus] contracts." Ha! When AIG first came begging for a government bailout the Feds needed only to insert a clause that all bonus contacts were abrogated or taxpayer funds wouldn’t be forthcoming. Now that AIG has come begging three times, AIG can either stop the bonuses or return the $170 billion taxpayer dollars, or better yet, let the bonus babies sue, no US jury would award these bogus bonuses. Larry Summers acts like a big pig protecting all his little piglets. President Obama, where are you.

March 16, 2009 1:08 PM

Anonymous said...
Our dear savior, Abraham Delano Obama, is out this morning assuring everyone that has the stomach to listen to his phoney posturing anymore that he will do everything in his power to pursue AIG legally on these bonuses. If BS were green this guy would be an 18 hole golf course.

Why now is it "everything in his power"?

He hadn't exerted his full powers earlier? Precisely why?

This commitment has all the force of his support for Charles Freeman.

March 16, 2009 1:18 PM

Anonymous said...
Perhaps Treasury is failing because that is the Fed's plan. Interesting video here...

Love Box 9 said...
DOJ should have been on this years ago, but the blackmail runs very deep and wide in all this mess, so who is covering for who? We know SEC is corrupt and useless, as is Treasury, as is FBI, as is DOL and then all the AG's are out of the way and the only people left in control are the guys at places like AIG that are getting bonuses ... hmmmm?

[Mar 16, 2008] Roubini- "Reflections on the latest sucker’s rally"

From Nouriel Roubini: Reflections on the latest dead cat bounce or bear market sucker’s rally
It is déjà vu all over again. We have already seen this Groundhog Day movie at least six times over and over again in the last year or so: the market starts to rally – this time around about 8% in a week - and the chorus of optimists starts to say that this is the bottom of the economic and financial crisis and that we are at the beginning of a sustained stock market rally that signals the true end of this bear market.
Next Roubini outlines what he sees as the arguments of the optimists:
[H]ere are the arguments of the optimists:

1. While the first derivative of economic activity is still negative the second derivative is becoming positive around the world: i.e. output, employment, demand etc. are still contracting but they are – or will soon be - contracting at a slower rate than in Q4 of 2008. As long as the second derivative is positive rather than negative economic activity will bottom out some time in H2 of 2009 and the recession will be over sooner rather than later.

2. The policy stimulus, both monetary but especially fiscal, in the US, China and the rest of the world is starting to have traction and will contribution to the slowdown in the rate of economic decline and eventually –sooner rather than later – contribute to the economic recovery

3. Stock markets have already fallen in the US and globally by over 50% and are now way oversold. Earnings have fallen a lot but will recover soon as economic activity will soon stabilize. And since stock markets are forward looking and bottom out 6 to 9 months before the end of the recession we must be now at the bottom if the economy will recover by H2 or, at the latest, by year end.

4. Banks and financial stocks are way oversold; Citi, JP Morgan, Bank of America and other banks are now saying that they will be profitable this year and that they will not need any further injection of capital by the government. The financial system is solvent and the undershooting of banks’ equity prices was way too excessive.

Let us explain again – as we discussed most of these points here before – and flesh out in more detail why each of these optimistic arguments is incorrect or, at least, too early and exaggerated.
Selected Comments
  1. Broward Horne says: Yesterday, 10:36:37 PM

    “I agree with Roubini, I think the percentage bet is a sucker's rally tacitly supported by the U.S. gov't for its own purposes (scamming another month of funding from hapless Chinese dupes). 
    Roubini versus Krugman meme - 
    People everywhere in America agree... Krugman pwns Roubini (but Roubini is probably right).

  2. Anonymous says:Yesterday, 10:44:45

    PM“I have been thinking about the Titantic all afterenoon. It feels like we have hit the iceberg, the upperclass knows the ship is sinking but the trick for the PTB is to keep the steerage class in the dark until the lifeboats are away.

  3. Broward Horne says:Yesterday, 11:02:59 PM

    “"Roubini is becoming bearish again.. wonder why?"

    "For example, if clear evidence of inflation arises soon, that will cause Treasury prices to fall, and in fact may be causing them to do so already. The most likely trigger is a Tax Receipt Epiphany that leads to a Fiscal Deficit Shock and sudden loss of confidence in US sovereign credit quality"

  4. RE says:Today, 12:07:38 AM

    “I look at it differently. I believe that this contraction is a secular contraction with built-in feedback loops as the standard engines for a recovery will not be revived easily.

    The U.S. has an economy that is primarily services driven. A services dominated economy has much more of a built-in recognition lag as the transmission mechanism is indirect.

    What we have observed is that manufacturing economies have been hit much harder and earlier. They are first in line as a product’s useful life can be extended in most cases quite easily without a significant loss in productivity or convenience. This acts as the discretionary portion of the cycle and the retail trade in the U.S. has therefore been hit first and hardest to date.

    The second leg happens as a result of lack of investment and increased layoffs. As we have seen with CRE, because larger scale projects involve have so much committed capital the tendency is to complete them even in the face of a dramatic slowdown in business. An important point in this regard is that, aside of housing, many businesses were not seriously impacted until the 3rd to 4th quarter of 2008.

    In addition, government expenditures which make up about 30% of GDP are impacting the economy with a tremendous lag. It is only now that states and municipalities are starting to seriously cut back. Up till now increased Federal spending has cushioned the fall but increased Federal spending even at the present high levels has not been able to stop the downward trend. With Federal spending at a plateau, the cuts at the state and municipal level will now have an increasingly negative impact.

    IMO the negative feedback loop will be in effect until the economy can shed a significant part of its debt load (personal and government) which is extremely difficult in a deflationary environment. I presently don’t see any policy on the table to address this key issue and therefore cannot see a sustained recovery in the foreseeable future.

  5. ShortCourage says:Today, 12:23:01 AM“Comrade De Chaos said, A while from now majority will realize that 85+% of us still have jobs & our lifestyle while became simpler did not deteriorated that much. The greed will kick in and markets will recover to a certain degree that will resemble rational evaluations and not those driven by "animal spirits".

    IMHO, you are way off on this. Markets will eventually decline to rational valuations. Today's stock prices only seem irrationally cheap to some who think that earnings will go back up to the levels that they attained during a credit bubble. They will not. Not for a long time. Deleveraging and deflation will drive them lower and keep them low for years.

    Unless of course the government succeeds in reflation. It might, but I doubt it.

[ Ma 13, 2009] Employee Free Choice Act as Stimulus for US Economy by Seth Sandronsky,

13 March 2009 | t r u t h o u t

A supporter of the Employee Free Choice Act holds a money bag as a prop during a rally on March 9 in Washington, DC. (Photo: Getty Images)

Across the US, indebted businesses and consumers are struggling to make ends meet. The same holds for local and state governments. Fortunately, help is on the horizon. No, the helping hand is not Uncle Sam doling out more tax dollars to giant banks and insurers. Rather, it is about Rep. George Miller (D-California) and Sen. Ted Kennedy (D-Massachusetts) introducing the Employee Free Choice Act in the House on March 9. The bill, an amendment to the National Labor Relations Act of 1935, would ease the current path to union membership, levy stiff fines on employers who resist employees' choices and impose binding arbitration for first-contract talks between companies and workers. Further, the EFCA would strengthen the weakened purchasing power of millions of American workers who have kept themselves and the economy afloat with debt-led consumption.

    Consider this. Workers in unions earn higher wages than those who labor in union-free workplaces. According to the US Bureau of Labor Statistics, "among full-time wage and salary workers, union members had median usual weekly earnings of $886 while those who were not represented by unions had median weekly earnings of $691" last year.

    All things constant, the more a worker earns, the less she needs to borrow to get by.

    The backdrop to the EFCA as a stimulus for the US economy is the crash of a multitrillion-dollar housing bubble. Absent a worker's ability to tap into her rising housing price as the economic slowdown worsens, she is pulling back on consumption of all manner of purchases: from autos to food and travel. This pullback effect is underway across the US economy, 70 percent of which is on consumer spending. Therefore, a national policy of recovery requires government intervention for the working majority. The EFCA could do that.

    If Congress passes the EFCA and President Obama, who co-sponsored the bill as a senator in 2007, signs it, the ranks of union members could grow by millions. That would speed up the recovery of the economy, according to a recent report by David Madland and Karla Walter of the Center for American Progress. "One of the primary reasons why our current recession endures is that workers do not have the purchasing power they need to drive our economy," they write.

    Ninety-two percent of Americans in the private sector work for non-union employers. Unionization rates for private-sector workers are about a fifth of their counterparts in the government sector, where the major union growth has occurred. However, the private sector is where the bulk of workers toil. Their productivity, or output per hour, expands the US economy. The EFCA would help this large share of the labor force whose energy creates the growing pie to gain bigger slices of it.

    The opposite has been the case for some time. In fact, American workers have experienced ever-worsening income inequality over the past 30 years. In "Crunch: Why Do I Feel So Squeezed?" (and "Other Unsolved Economic Mysteries," 2008), economist Jared Bernstein explains what happened to the trend of shared prosperity in the three decades following WW II, the so-called "Golden Age." The author, now a top economic adviser to Vice President Joe Biden, reveals that labor unions enabled workers' living standards to keep pace with the rate of productivity growth.

    As labor unions weakened, US workers' share of the pie got smaller. The process sped up with the election of President Ronald Reagan in 1980. "Looking from 1980 to 2008, nationwide worker productivity grew by 75 percent, while workers' inflation-adjusted average wages increased by only 22.6 percent, which means that workers were compensated for only 30.2 percent of their productivity gains," write Madland and Walter.

    For an extreme current example of US private employers' hostility toward unions, we turn to the giant of the retail industry, Wal-Mart Stores Inc. The company is the largest non-union, private-sector employer nationwide. Crucially, organized labor has been unable to change that equation between the company and its at-will work force to date. EFCA could change that stalemate. Therefore, the implications for organizing employees at Wal-Mart Stores Inc. into a union would be huge for the company and its smaller competitors. What horror!

    That is why the US Chamber of Commerce is the lead business lobby rallying to defeat the EFCA, which passed the House in 2007 but died in the Senate later that year. Despite and because of the bill's capacity to stimulate the US economy from higher wages and improved buying power for working people, the USCOC wants to keep federal labor law as it is, slanted towards the power of employers in secret-ballot elections directed by the National Labor Relations Board. For business interests, it is better in the short term to thwart the EFCA's passage than to allow more workers to unionize, boost their earning power and lessen the role of spending based on lending in the US economy.

[Mar 12, 2009] U.S. Household Net Worth Falls 18% By Barry Ritholtz

March 12, 2009

Not very good: The Federal Reserve reported that “Americans’ net worth fell in 2008, erasing four years of gains, as the value of their houses and stock market portfolios decline, according to new data from the Federal Reserve.”

The specifics ain’t pretty:

• Household assets as a whole fell 15% to $65.7 trillion, unadjusted for inflation.

• Household liabilities a declined less than 1% to $14.2 trillion.

• Net worth of American households (difference between assets and liability) was $51.5 trillion, down $11.2 trillion or nearly 18% from 2007.

• Americans’ total wealth is now back to levels prior to 2004.

• Mortgage credit fell to $10.5 trillion, the first decline since the Fed started keeping track in the 1950s.

• Non Mortgage consumer credit rose nearly 2% to $2.6 trillion.

• Household debt increased by 0.5% , 6.25 percentage points less than the 2007 increase.

• Americans’ homeowners’ equity as percentage of the value of their homes fell to 43% in 2008. (Includes both homeowners with mortgages and those who have paid their mortgages off.)

• Americans’ stock market holdings — both direct holdings, mutual funds and retirement plans — fell to $12.1 trillion a year-end 2008 from $20.6 trillion the year before, the lowest level since 1997.

• Total bank deposits rose nearly 5% to $7.7 trillion in 2008.

Makes me think of those Capital One ads: What do you have in your wallet ?

Answer: A lot less than last year  . . .

Selected comments

  1. james hogan Says:
    March 12th, 2009 at 10:22 pm

    There’s something about these charts that is very troubling. There are dozens of them, and almost all of them show a pronounced upward deviation from normal starting in about 1982-83. (That coincides roughly with the end of the Volcker era at the FED and the high-interest rate regime he implemented.) Suddenly, the charts start moving upwards at a degree that doesn’t seem to be substantiated by the underlying strength. From a structural standpoint, not a way to build something permanent.

    Of late there’s been quite the comparison between the US over the past 14 months, and Japan from about 1989 to the present. Some have even hoped, it seems to me, that we can make do as well as Japan.

    This seems to me to be not much of a hope. Japan has been in a decline for the past 19 years, and they could export their goods to the US and the rest of the world. The US, on the other hand, has been the ‘host’ here, buying goods from Japan (and China and everywhere else), and putting it all on a credit card, so to speak.

    Japan started this decline in ‘89 with a surplus of savings, has a very homogeneous population, and a tradition of helping others in need. The US started out in debt, and is about as opposite a country as can be imagined from Japan in other ways. Let us all hope that the “humanity” gene is dominant.

    For if we have already lost $11.2 trillion, and if the long-term trend is restored, then there could be _at least_ another $30 to 35 trillion lost before the trend is reached, and maybe more if it overshoots the trend line.

    There is no doubt in my mind that the trend will restore itself if left to its own devices. It may be that this is the right thing to do. But there will be so much agony in the meantime that I doubt that the population will permit it to happen.

    So we should begin to examine how we want to build this new old world we are entering, and be prepared to spend as much as necessary to construct it, so that when it is built, we will have something that will work for us for a long time in the future.

  2. nayyer ali Says:
    March 12th, 2009 at 11:19 pm

    Are the charts log or arithmetic charts for the upturn since 1982? Non log charts can be deceptive, minimizing early returns.
    There has been much made of how household debt exceeds household income. But isn’t the first item a balance sheet item and the second an income statement item? Should the two be compared? Or should it be debt to equity and debt service to income? How are those numbers doing long term?

[Mar 12, 2009] Cuomo Asserts That Traders Looted Merrill

naked capitalism

The latest wrinkle, which generated a flurry of press reports, was that Cuomo had taken a new tack, charging that Merrill had misled Congress as to when the payments would be made. But for my money, the juiciest bit came at the end in the New York Times story:

Mr. Cuomo claimed that Merrill traders had mismarked their books as of early December in an effort to get higher bonuses.

“It appears that some of these losses may have been booked by Merrill employees who marked down their portfolios only after their 2008 bonuses were set,” the attorney general wrote in the filing. “Despite the gargantuan unexpected losses, Merrill did not reconsider its bonus awards” and Bank of America did not request or demand that Merrill reduce its bonus pool, he wrote.
This is a particularly strong and damaging claim. I've read repeatedly of people who worked with traders saying that they would engage in strategies (not clearly described) that would lead them to show high profits though year end that they would wind up giving back (and often more) early in the next year. The idea was that they'd make so much on their trumped up performance that it didn't matter if they were fired next year. But a lot of types of behavior could produce this result, so it's hard to know what sort of trader chicanery was afoot. And without names, or descriptions of the nefarious deeds, its too vague to treat as substantiated.

But here, if Cuomo is correct, we have what amounts to fraud, and brazen to boot. And the exaggerated profits would also seem to be a bong. The investigations are finally getting to where the rubber hits the road.

Recommended Links

Anonymous said...
We used to catch traders booking 'hedge' deals with variable spreads to take advantage of subtle distortions they had entered in market data.

When the market data was corrected (often something obscure like a 3D vol surface skew or SABR parameter) the P/L on their books would disappear like tax money in the hands of Hank Paulson.

Ken Lewis should be fired for getting snookered by one of the oldest tricks in the books.
sk said...
This provides dramatic evidence for that research piece on the looting type of behavior that occurs in these circumstances - by Akerlof and Romer that you've highlighted in your blog a few times.
Anonymous said...
"I've read repeatedly of people who worked with traders saying that they would engage in strategies (not clearly described) that would lead them to show high profits though year end that they would wind up giving back (and often more) early in the next year. The idea was that they'd make so much on their trumped up performance that it didn't matter if they were fired next year."

Frank Partnoy ex trader and now a law professor at the University of San Diego had these very tactics in his book FIASCO (1999). As a trader, he helped to put together "securities" that would book quick profits for Japanese fund managers but would blow up later on. All the managers cared about was the year end bonuses, knowing they would be moving on probably to other jobs in the next year.

FIASCO illustrated many of the Wall Street abuses that led to this Crash and Burn. But we kill the Canaries rather than listen to them.
Boat52 said...
We can only hope that Cuomo is cleaner than clean and that the dark force doesn't try to unseat him before victory.

Never before in history have so few taken so much from so many in such a short period of time.
Anonymous said...
This is Cuomo as Claude Raines in Casablanca - shocked to find traders mismarking their positions. Such reliable features of human nature are the reason internal control procedures were established.
The clear target here should be Ken Lewis - he struck a bad deal that failed to protect his shareholders at the time, as well as his future shareholders the American taxpayer.
By all means fire the traders for being dirtbags, and strip them of their illegitimate bonuses. But however wrong individual positions may have been, the failure to focus on the relevant details of an M&A deal that was done on the fly over a weekend is the true criminal act here.

[Mar 12, 2009]  Wall Street Bailout Exceeds Cost of All US Wars Combined. And you can throw in the New Deal, Marshall Plan and Moon Shots as well

Casey Research, of Vermont, has analyzed the costs of the government bailouts of the housing crisis, the credit crisis and others and has concluded that the total is $8.5 trillion, which is more than the cost of all US wars, the Louisiana Purchase, the New Deal, the Marshall Plan and the NASA Space Program combined.

According to CRS, the Congressional Research Service, all major US wars (including such events as the American Revolution, the War of 1812, the Civil War, the Spanish American War, World War I, World War II, Korea, Vietnam, Iraq and Afghanistan, the invasion of Panama, the Kosovo War and numerous other small conflicts), cost a total of $7.5 trillion in inflation-adjusted 2008 dollars.

[Mar 12, 2009] Guest post- A few thoughts about the banking crisis response in the United States

"we don't believe that citizenship in the United States should now hurriedly be converted into forced participation in an unaccountable secretive national hedge fund which buys lousy assets at inflated prices from banks mismanaged for personal profit by multi-millionaires, and makes non-consensual capital calls on uninformed, captive, financially unsophisticated families."
Anonymous said...
Edward's article in fact begs for a deeper question: aren't there any alternatives to fractional reserve banking? Since we seem predisposed to consider even radical reforms at the moment, one might as well consider that possibility.

It would be technically possible to have only one single central monetary authority accept deposits with absolute guarantee that they will stay whole. This would be the equivalent of having digital money that is as safe as banknotes, an obvious pre-requisite for any modern monetary system. Relying on defaultable entities to be the depositary institution for modern digital money is madness.

Freezing up deposits and forbidding their use for the purpose of issuing loans is not a new idea. It is actual cast in ston in the ancient Roman Codex which is at the base of modern legal systems, except that the portion on deposits for some misterious reason has been replaced with the failed Basel Accord in modern times.

By turning deposits into pure custody contracts, one would obviously dry up money used for credit lines. However, new money can always be explicitly created for that purpose. Private banks could remain private and run a business out of issuing loans while obtainining a possibly substantial portion of their financing directly from the central monetary authority. This would entail that they keep only a fraction of the credit risk for each loan that is issued. Instead of being fractional reserve banking, this would be fraction credit banking.

What I am outlining here is not really so different from what we already have. From a certain viewpoint, there is just a formal difference in the way accounting for banking institutions is carried out.

The advantage of an accounting paradigm of this sort is that it would point at a much simpler solution to credit crisis. Instead of overloading governments with unpayable debt, with the risk of tax revolts while at the same time jeopardizing deposits and savings, one could simply have the monetary autorithy restructure its loans in aggregate by reducing the notional amount to reflect asset deflation. Banks would still be on the hook for the portion of credit risk they carry, which is only a fraction of the total, while restructuring would be subsidized by monetary fiat.

Opening the way to aggregate loan restructuring from a central authority would also provide the means for controlling asset bubbles. By the same token that notionals can be reduced if asset deflation occurs, whenever one witnesses asset price inflation the central bank could instead increase notionals of loans to reflect the changed mark to market of the collateral, thus effectively sterilizing a fraction of the monetary base and reducing asset price inflation.

One more nice thing about this sort of accounting reform, is that it would enhance and not reduce the role of mark-to-market. It would also increase transaparency in the loan issuance process as a portion of the process would be centralized and in public hands.

Am I talking heresy here?

March 11, 2009 7:01 AM

Ken Stremsky said...
Our elected leaders should have learned how important COMPETENT government regulation is from the Savings and Loans Crisis.

If you want to help poor people and middle class people, support policies that are likely to grow the economy.

If you want banks and other financial institutions to do better, support policies that are likely to grow the economy.

Many poor people and middle class people have 401(k) plans. Many businesses match employee contributions some.

People should be allowed to remove their contributions from 401(k) plans tax free and penalty free whenever they want.

People should be allowed to remove interest from 401(k) plans tax free and penalty free whenever they want. Many people may only want to have money in accounts that pay interest.

People should be allowed to remove capital gains and dividends from their 401(k) plans tax free and penalty free whenever they want.

These changes to 401(k) plans may make it easier for people to make mortgage payments, reduce their debts, buy things, and improve consumer confidence. If consumer confidence improve, many businesses may fire fewer people and many businesses may hire more people.

I discuss sales taxes I would like the federal government to have, other topics dealing with the financial crisis, and other things on

If you like my ideas dealing with 401(k) plans, I hope you will consider telling others the ideas.

If you like some of my ideas on newgeography, I hope you will consider telling people those ideas you like.
S said...
Alan Greenspan made the argument today that he lost control of rates and correlations prove it (irony emphasis added). His sin of omission is that he was on the receiving end of the gift that kept on giving. Hence correlations didn’t matter. Now they do.

Now for the Greenspan encore. The Fed can’t possibly suppress interest rates by Greenspan’s logic. Buffet, PIMCO, Faber, Julian Robertson and a host of others are not buying the deflation meme. Mish has a piece up debunking the myth that Bernanke can somehow control this daisy chain. Stigilitz adds further fuel to the fire that the dollar as a reserve currency doesn't work and is not sustainable. The UK false flag treasury op is a dry run for the US auction fails. China's trade numbers (and Japan), not to mention German exports (and exports and industrial production tankage globally – see fist full euros blog for charts), argue that day grows nearer and nearer.

While it is axiomatic that fractional reserve requires confidence, it is not lost confidence in banking so much as confidence in the US (global) business model. The unbridled enthusiasm of the narrowing and delusional herd that pimp the boundless opportunities embedded in the "we are different" meme is waning. Until we start to talk about the failed US paradigm, there can be no rebirth.

Consider a few foreign policy headlines from yesterday: Intel head Blair says yesterday halting Iran's march to nukes is not likely. China harasses a ship in the South China Sea. The former head of the SAS in Afghanistan says the war is useless and in summary “the idea that we control anything more than the 500 meters outside our bases is ridiculous." India tells Holbrooke he has no role in the Pakistan and India (Kashmir linkage/dispute).

Between the benevolent as opposed to malevolent (Swiss) swap lines, the bankrupt race to zero (which has to be a short term anomaly if Greenspan is to be believed) and the propaganda memes like we may be bad they are worse hence dollar strength, the Fed engages in a death struggle to keep the US as the fulcrum of the global payments system. Economics is politics. This is the forest.

What are the key players doing? The UK is lined up behind bankrupt US policies. It may be a nativist response to their Bloomsbury beginnings perhaps but more likely a last gasp to sustain its above weight punching power. France rejoins NATO out of vanity but its Gaullist traditions run deep. Under its bullying the EU rejects the Summers blather about more stimulus and pushes its commitment to multilateral action –and the IMF as centerpiece for banking resolution. Read those maneuverings as dissolution of US power via a more multilateral regime as in the spider and its web (ICC issues Sudan warrant, etc.). German looks askance at the Keynesian depravity showing its Austrian bias. China harasses a US navy ship in the SCS after last week's parade of congratulatory administration rhetoric on the reopening of military to military talks (US/China). Japan joins the chorus of lunacy and says it will print more money and buy equities. The Asian tigers have seen exports shrinking on average 30-40%. Industrial production around the world is declining 10-40% Y|Y, and yet inventory to sales ratios are rising. And then there is Russia.

The entire globalization paradigm of vendor financing collapsed (not is collapsing, not will collapse, rather past tense). Little Tim and his oligopolists are desperate to keep the system afloat, seeing the current regime as the only mechanism for the US to maintain its stranglehold on fiat dominance. Perhaps the ends justify the means? But somehow history says that line of reasoning doesn’t end well; Marie Antoinette case and point. There is a reason Paulson was in China what 40 times or whatever the number. Geithner and the rest are fighting a rearguard action at best ignoring the maxim that you win the battle before it's fought.

While the US enshrines a public hedge fun in keeping with the private to public “partnership,” the German calls for harnessing the locusts look prescient. This from mathematician and economist Eric Weinstein (h/t

“Many of us who work in finance are even more horrified by what we see than the lay public appears to be. Some of us spoke publicly for years about the dangers posed. Others published papers or books to spread the word. Curiously, however, our country's laws would not even permit average families to voluntarily invest in those hedge funds that profited from this crisis by, for example, shorting subprime mortgages.

Accordingly, we don't believe that citizenship in the United States should now hurriedly be converted into forced participation in an unaccountable secretive national hedge fund which buys lousy assets at inflated prices from banks mismanaged for personal profit by multi-millionaires, and makes non-consensual capital calls on uninformed, captive, financially unsophisticated families.

Oddly, that's not hyperbole. That's a description of what has taken place. It's the reality that's objectively outrageous.”

This crisis is far graver than dissolution of Bank of America (see: Tainter, Diamond). The proper analogy is pre civil war America, not Sweden.

I have no idea what to make of Chuck Norris and his mass following in the war zones of Iraq and Afghanistan. But his instincts tap into something pulsating below the surface outside the greenzones housing the administration, the politicians and the intellgenzia, across the Northeast and the left coast. Theses constitnuencies remian dangerously captive to their OODA loop.

From Chuck:

"From the East Coast to the "Left Coast," America seems to be moving further and further from its founders' vision and government.

George Washington advised, "The great rule of conduct in regard to foreign nations is in extending our commercial relations [and] having with them as little political connection as possible." Yet the Obama administration just pledged $900 million in U.S. taxpayer-funded aid to Hamas-controlled Gaza and Mahmoud Abbas' Palestinian Authority.

Thomas Jefferson counseled us, "We must not let our rulers load us with perpetual debt." Yet the Feds have just skyrocketed our national deficit and debt by trillions of dollars, and it plans much more fiscal expansion with few expectations of resistance. Despite that George Washington admonished, "To contract new debts is not the way to pay for old ones," we keep borrowing and bailing, while we watch the stock market plunge further every time we do.

Patrick Henry taught that, "Our Constitution is … an instrument for its people to restrain the government." Yet our Congress and president stampede that founding document, overlook its explicitness and manipulate its words to abandon a balance of power and accommodate their own desires, partisan politics and runaway spending.

John Adams declared that, "Our Constitution was made only for a moral and religious people." Yet we've bastardized the First Amendment, reinterpreted America's religious history and secularized our society until we ooze skepticism and circumvent religion on every level of public and private life.

How much more will Americans take? When will enough be enough? And, when that time comes, will our leaders finally listen or will history need to record a second American Revolution? We the people have the authority according to America's Declaration of Independence, which states:

That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience has shown that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

When I appeared on Glenn Beck's radio show, he told me that someone had asked him, "Do you really believe that there is going to be trouble in the future?" And he answered, "If this country starts to spiral out of control and Mexico melts down or whatever, if it really starts to spiral out of control, before America allows a country to become a totalitarian country (which it would have under I think the Republicans as well in this situation; they were taking us to the same place, just slower), Americans won't stand for it. There will be parts of the country that will rise up." Then Glenn asked me and his listening audience, "And where's that going to come from?" He answered his own question, "Texas, it's going to come from Texas. Do you agree with that Chuck?" I replied, "Oh yeah!" Definitely.

It was these types of thoughts that led me to utter the tongue-n-cheek frustration on Glenn Beck's radio show, "I may run for president of Texas!"

I'm not saying that other states won't muster the gumption to stand and secede, but Texas has the history to prove it. As most know, Texas was its own country before it joined the Union as its 28th state. From 1836 to 1846, Texas was its own Republic. Washington-on-the-Brazos (river) served as our Philadelphia, Pa. It was there, on March 2, 1836, where a band of patriots forged the Texas Declaration of Independence. (We just celebrated these dates last week.) "
a said...
"Is it fair...?" Life's not fair. Get over it.

Spoken like a true neoclassical ideologue.

But I would argue that questions of fairness and morality are very much on the minds of a majority of rank and file Americans. The United States is not Mexico, despite all the wishful thinking of the neoliberals.

The Golden Boys of Finance not only operate from a very small political base, but that base is shrinking rapidly as we speak. They may find a couple of big ugly brutes -- politics and society --barging in upon their pleasant little afternoon garden party.
Independent Accountant said...
$40 billion? The only reason a bank like say Citigroup can make any money is interest rate suppression. If we had no Fed and market interest rates, I estimate short rates would be 6-7%. How much would Wells make in that environment? Banking as it currently exists is a parasitical industry. Kill it.
Of course there are alternatives to fractional reserve banking. Mencius Moldbug, who is generally more cynical than I, yes he proves its possible, has written about them at his Unqualified Reservations. So have I at my Skeptical CPA. They are based on that four-letter word, GOLD!

[Mar 12, 2009] Come on, Buffett! by Donald Ruffkin

March 9th, 2009 | By Guest Author Donald Ruffkin works at an equity-oriented investment fund.


Buffett has come out once again, offering his view of the market and where we stand. I thought his comments provided a useful platform with which to engage what are ultimately the 2 most important questions:

  1. What is our problem?
  2. What should we do about it?

In the first couple sections of this, I offer rebuttals to some of Buffett’s statements. I use this as a lead-in to answer those 2 most important questions.

To put it simply, I believe we need the following:

  1. More manufacturing
  2. More savings
  3. Less debt
  4. Less speculation and leverage in our banking system
  5. More transparency and honest dealings in our financial system

Will this be painful? Yes, it will be really, really painful. But the path we are going down will make this all the more painful. If, as I am claiming, the problem is too much for the government to prop, all the resources committed to that endeavor will have been wasted.

Let’s get ready for the future, instead of bankrupting ourselves trying in vain to bring back an unsustainable past.

Buffett’s comments

This is Part 1 (source). He says we are in an economic Pearl Harbor, mirroring comments he made 6 months ago. The economy has “fallen off a cliff” and the consumer is “changing their behavior like nothing he has ever seen.” There has been a reset in people’s minds. He says the level of spending we are seeing is due to their being “fearful”. He says that fear is contagious. He says that we have a great leader and we should follow his prescription. In wartime, you need to follow the leader. Now is not the time to ask questions or have internal dissent. Now is the time to follow what he says.

My comments

I had a few:

Buffett’s comments 2

This is another part of his interview (source). Many, many times he refers to his war analogy. This is war! He mentions that the banks should be able to “earn their way out” of this downturn. He noted that Wells Fargo’s cost of funding is now extremely cheap, and earnings spreads have never been wider. When Betsy Quick retorts, asking why the banks should be able to do this and get huge bailout checks from the government, he responds that in wartime, no one ever questioned shipbuilders and the excess of profit they made during those times.

My comments 2

My belief - not a war, but a drug addiction that began in earnest in 1980

I wrote a few pieces earlier which convincingly argue that our real problem is simple - too much debt.

Debt is in many ways like a drug. It provides an up front “high” (cash) at the expense of the future (interest payments). At the beginning its impact is a lot stronger than it is later after repeated use. It can create addiction, where later on, doses are required simple to remain “even” (if you borrow interest over time, debt continues to rise, requiring debt simply to pay off the interest payments). If the dosage gets high enough in the blood stream it can be fatal.

A person making $1000 per year can support $300 of debt a lot easier than $1000. But we are way worse than that. There are 116M households in the US, generating average income of $68k per year. We have $52T of total debt in our country. This is $450k per household. $68k supporting $450k of debt is extremely high, and is larger than we have ever had before (source).

The picture is clear - we are spending too much, and working too little. And that this really began starting in about 1980.

  1. Secular shift out of manufacturing started then (source)
  2. Real Industrial production peaked in 1975 (source)
  3. Domestic non-financial debt / GDP began spiking in 1980 (source)
  4. Imports began consistently outstripping exports in 1975 (source)
  5. Savings rate secularly shifted from 10% to 0% in 1980 (source)
  6. Financial sector profits rose from 5% of total US corporate profits to about 40% (Let’s let financial services shrink back to a suitable size.
  7. Let’s re-impose rules to create transparency and stability in our marketplace. Ban naked short selling. Clean up the CDS market. Break up the banking and ratings monopolies. Enact position limits in the commodities market. Bring back the uptick rule. Replace Goldman Sachs alumni with capable individuals with fewer conflicts of interest. Enforce policies promoting disclosure - let us know who AIG’s counterparties are, instead of dragging your feet and then having that information leaked “through the grapevine”.
  8. Will this be painful? Yes, it will be really, really painful. But the path we are going down will make this all the more painful. If, as I am claiming, the problem is too much for the government to prop, all the resources committed to that endeavor will have been WASTED.

    All those resources can be used on the reconstruction efforts mentioned above. Change is coming, whether we want it or not. Let’s get ready for the future, instead of bankrupting ourselves trying in vain to bring back an unsustainable past.

    Addendum - Want a risk free 4-6% return? I have a solution for you

    Pay off your mortgage.

    These are conventional mortgage rates from 1972 to 2008 (source). Your money is probably sitting in a money market account right now, earning less than 1%. As Buffett himself had said, Wells Fargo had a cost of funds of around 1.4% last year. That is because Wells is paying YOU 1.4% on average.

    Instead of putting what little you have remaining in the stock market, you might want to consider paying down your mortgage.

    Just something to consider.

    Selected comments:
    1. ancientone Says:

      March 9th, 2009 at 4:51 pm

      At last! Someone with a modicum of authoritativeness saying the same things I’ve been saying to anyone who would listen to me for the last thirty years! (Of course that was a very small number of people.) Between the assault on government regulations and the almost complete cluelessness of the American public, the Super Rich managed to drag us back to the 1920s, and now, again into the 1930s…..

      “The Empire Strikes Back” is not just the name of a Star Wars movie…..they really did it!

      The idea that Obama, or any other Washington politician, can fix what ails us is an exercise in wishful thinking. To paraphrase the late, great Paul Harvey, “Good luck, America!”

    2. arel Says: March 9th, 2009 at 7:49 pm

      great comments.

      1- The Treasury and the Fed have been focusing on INSTITUTIONS rather than the INSTRUMENTS (CDS) that have caused the problem.

      A- we still don’t have a central comprehensive data base of all the derivative instruments, i.e. what’s in each tranch and where are they located?

      2- What is wrong with a slowdown in purchasing on credit?

      3- a focus on developing automation in manufacturing, especially in assembly, would permit our design and manufacturing base to prosper. Look at Japan’s growing high tech manufacturing base. They keep the R&D high tech core and export the low tech manufacturing.

      Here GE walks away from appliances just when appliances begin to incorporate intelligence and a whole new industrial cycle.

      Boeing becomes an integrator and gives away the keys to the kingdom, i.e. knowledge on wing construction to China.

      Is GE going to do the same with jet engines?

      Most of the composites in the new planes are manufactured and assembled abroad.

      If the US doesn’t have a vibrant manufacturing base then we will ultimately go the way of the UK, which is exactly what the Financial Service industry has wanted and continues to want.

      They (Paulson, Rubin…) have always fought for open access for financial services but never for manufactured products.

      4- Buffetts last two major purchases (not investments) were manufacturing companies: Iscar and Marmon.
      What am I missing??

[Mar 12, 2009] Ask Warren - Complete Transcript

Self-inflicted economic Perl Harbor for banksers, five years recovery...

BUFFETT Well, we went wrong originally because we had a belief that--and everybody had the belief. I had it, the government had it, mortgage lenders had it, borrowers had it, media had it, everybody thought house prices could go nothing but up and--or at least they couldn't go down a lot. And once you had that belief--and it was nationwide--it didn't make any difference what you lent on the house because if the guy couldn't pay, you'd sell it at a profit anyway or you wouldn't lose much money. So you had 11 trillion of residential mortgage debt built on this theory that who was borrowing it, what their income was really wasn't that important because the house itself had to go up in price.

And when that tumbled and houses which might've been worth 22 trillion at the peak are worth maybe four or five trillion less, it's a huge amount out of people's net worth. It's the biggest asset most people have. And then secondarily, all of these instruments that were built on it, which people didn't understand too well, started toppling to various degrees in value and then that exposed other things. I mean, it was like, you know, some kid saying, `The emperor has no clothes.' And then after he says that, he said, `On top of that, the emperor doesn't have any underwear either.' You know. I mean, various layers have been--and they interact. When people get scared, they change their buying habits. When they quit buying as much, people lay off. We are in a very, very vicious negative feedback cycle. It will end, but, believe me, I mean, I don't want this to be the last line of the movie, the last line of my annual report that America's best days lie ahead. And we can talk about why that is, but--and that is the final answer.

But how fast we get there depends enormously on not only the wisdom of government policy, but the degree in which it's communicated properly. People--when you have a Pearl Harbor, you have to know the nation is going to be united on December 8th to take care of whatever comes up. And we have little squabbles, otherwise we put them aside and everybody goes to work on defense plans, we start building planes, we start building ships, even though they're not going to be ready tomorrow, people join. The Army doesn't blame the Navy because there were too many ships in Pearl Harbor, and it shouldn't have happened. The Army doesn't say, `Well, it was your fault, so we're not going to send our troops.' None of that sort of thing. We got united, and we really need that now.

[Mar 12, 2009] Gross Raises U.S. Debt Holdings to Highest Since 2007 (Update3) By Dakin Campbell

March 10 (Bloomberg) -- Bill Gross, manager of Pacific Investment Management Co.’s $138 billion Total Return Fund, increased his holdings of U.S. government debt to 15 percent in February, the highest percentage since July 2007.

Pimco’s founder and co-chief investment officer bought government debt after holding a negative position through purchases of derivatives, futures or shorting Treasuries in January. Gross also boosted the world’s biggest bond fund’s holdings in mortgage-backed securities to 86 percent of total assets, up from 83 percent last month, according to the Newport Beach, California-based company’s Web site.

While the government debt category includes Treasuries, Gross has said in the past that Pimco is not interested in buying the securities. In February, Gross said it was “incumbent” upon the Federal Reserve to buy Treasuries but that he wouldn’t follow the central bank’s lead. Gross missed out on the biggest Treasury market rally in 14 years in 2008, saying that yields were too low because inflation will accelerate as the deficit surges.

“We wouldn’t buy Treasuries but we would buy bonds that are correlated and related to Treasuries with a higher yield,” Gross said in a Feb. 5 interview on Bloomberg Television.

Central bank policy makers have decided for the present time not to buy longer-term Treasuries, Federal Reserve President William Dudley said on March 6 after a speech in New York to the Council on Foreign Relations. Fed Chairman Ben S. Bernanke first discussed the possibility of purchases on Dec. 1.

11 Straight Months

Gross added government debt last month for the second time in three months after holding negative positions in Treasuries, debt issued by government-backed agencies such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank system or interest- rate derivatives for 11 straight months ending in November 2008.

At the end of January, Gross held minus 2 percent of assets in U.S. government securities. The fund held a negative 25 percent position in cash equivalents.

The difference in yield between two-year debt issued by mortgage-finance company Fannie Mae and similar maturity Treasuries rose to 76 basis points from a low of 26 basis points Feb. 26, according to Bloomberg data.

The Total Return Fund rose 4.8 percent in 2008, beating 93 percent of its peers, data compiled by Bloomberg show. The fund has lost 0.23 percent this year through February, according to Pimco data.

Mark Porterfield, a Pimco spokesman, has said the firm doesn’t comment on fund holdings.

To contact the reporter on this story: Dakin Campbell in New York at

[Mar 12, 2009] More Credit Tightening

3/10/2009 | CalculatedRisk 

From Bloomberg: Libor Creep Says Credit Markets Risk Freeze on Policy Distrust

The cost of borrowing in dollars is rising as the global recession deepens and central bank efforts to prop up the financial system fail to prevent a growing number of banks from requiring government bailouts.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans climbed to 1.33 percent yesterday, the highest level since Jan. 8 ...

Short-term borrowing costs are increasing as banks hoard cash and governments struggle to thaw credit markets ... “The market is beginning to think that the solution is either not politically possible, or we can’t afford it, or maybe there isn’t a solution,” said Bob Baur, chief global economist at Des Moines, Iowa-based Principal Global Investors ...
And from Bloomberg: Bank Debt Stressed at Bear Stearns, Lehman Peaks
Bank debt is as stressed as when Bear Stearns Cos. had to be bailed out and Lehman Brothers Holdings Inc. collapsed, according to analysts at BNP Paribas SA.
“We’re seeing the start of the next leg of the crisis and that’s going to be financial bondholders taking a haircut as lenders default,” said Mehernosh Engineer, a London-based strategist at BNP Paribas.

[Mar 11, 2009] Lessons from the Great Depression for Economic Recovery in 2009"

By Spencer

Required reading:

Christina D. Romer of the Council of Economic Advisers

Lessons from the Great Depression for Economic Recovery in 2009

I really like her comments on gold, treasury operations and money supply.

(hat tip Greg Mankiw)

[Mar 11, 2009] Math & Physics versus Wall Street By Barry Ritholtz

March 10th, 2009

Interesting article in the Science section of today’s NYTimes: They Tried to Outsmart Wall Street.

“Quants occupy a revealing niche in modern capitalism. They make a lot of money but not as much as the traders who tease them and treat them like geeks. Until recently they rarely made partner at places like Goldman Sachs. In some quarters they get blamed for the current breakdown — “All I can say is, beware of geeks bearing formulas,” Warren Buffett said on “The Charlie Rose Show” last fall. Even the quants tend to agree that what they do is not quite science…

Asked to compare her work to physics, one quant, who requested anonymity because her company had not given her permission to talk to reporters, termed the market “a wild beast” that cannot be controlled, and then added: “It’s not like building a bridge. If you’re right more than half the time you’re winning the game.” There are a thousand physicists on Wall Street, she estimated, and many, she said, talk nostalgically about science. “They sold their souls to the devil,” she said, adding, “I haven’t met many quants who said they were in finance because they were in love with finance.”

Fascinating stuff.

I can recommend the first 3 books, and have the next 2 on my list to read:

  1. The Black Swan: The Impact of the Highly Improbable
    by Nassim Nicholas Taleb (Random House, 2007)
  2. When Genius Failed: The Rise and Fall of Long-Term Capital Management
    by Roger Lowenstein (Random House, 2000)
  3. Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
    by Satyajit Das (FT Press, 2006)
  4. My Life as a Quant: Reflections on Physics and Finance
    by Emanuel Derman (John Wiley & Sons, 2004)
  5. Physicists on Wall Street and Other Essays on Science and Society (Title Essay)
    by Jeremy Bernstein (Springer, 2008)

[Mar 10, 2009]  Big Bear Market Rally Coming," Says Noted Bear Barry Ritholtz

Posted Mar 10, 2009

Stocks jumped early Tuesday with the Dow recently up about 3.5% while the S&P and Nasdaq were each up more than 3.8%. The gains are being widely attributed to a leaked memo revealing Citigroup had operated at a profit during the first two months of the year. But the reality is the market was due for at least a short-term technical bounce after its recent rout, as discussed in the accompanying video, taped Monday afternoon.

Earlier: Despite a confirmed deal in pharma and rumors of a second, the stock market slumped to yet another round of multi-year lows Monday.

Still, the cadre of formerly steadfast bears who are turning bullish, like Doug Kass and Steve Leuthold, continues to add members. On Monday, newsletter writer Mark Faber, of the Gloom, Boom & Doom Report, made a bull call on Bloomberg TV, while veteran technician Richard Suttmeier of declared "the next 50% for [the S&P 500] is up, not down."

"There's a big bear market rally coming," agrees Barry Ritholtz, CEO of Fusion IQ, who's certainly earned his place in the pantheon of bears during this recent cycle. Ritholtz sees "more upside vs. downside" potential for major averages from current levels, and definitely believes it's "too late to sell."

Fusion IQ has covered its shorts but Ritholtz, author of The Big Picture blog and the forthcoming "Bailout Nation", isn't a rip-roaring bull. He's advising investors to "prepare a wish list" of stocks they'd like to own for long-term investments, but stresses the importance of scaling into positions vs. making a big one-time bet that a major "bottom" has indeed occurred.

Full disclosure: I am collaborating on Ritholtz's book and being paid for my efforts.

[Mar 09, 2009] Paul Krugman: Behind the Curve

[Behind the Curve, by Paul Krugman, Commentary, NY Times]

I've heard people say the debate over the size of the stimulus package was misrepresented in the media, that the media rarely presented the view that the plan was too small.

President Obama’s plan to stimulate the economy was “massive,” “giant,” “enormous.” So the American people were told... Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious.

Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.

Why do you say that? Won't his plan create millions of jobs?

Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least. It’s a credible promise... But 3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.

Ah, I see. Even though it's likely to create 3.5 million jobs as promised, it's still millions short of what is needed. So how do we improve the plan?

There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?

What are the answers?

On the first two questions, I found Mr. Obama’s latest interview with The Times anything but reassuring.

“Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of. ... And there was no hint in the interview of readiness to do more.

Do you mean he doesn't seem ready to do more in terms of fiscal policy, or that he's not ready to do more of anything, in particular, more to help the banking system recover?

A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan... But he went on to dismiss calls for decisive action... As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery ... well, you get the picture.

Yep. It's like one of those bad dreams where your feet won't move fast enough to get away from the impending doom closing in on you. Will the administration wake up and get moving?

Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along?

One side won't, that's pretty clear, and I'm not so sure about the Democratic side of the aisle either.

Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do... If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed.

And if there are any small successes to point to Republicans will, of course, insist it was because of the tax cuts in the first round of stimulus. Where does the public stand at this point?

The broader public ... favors strong action. ... But will that support still be there, say, six months from now?

I wouldn't count on it.

Also, an overwhelming majority believes that the government is spending too much to help large financial institutions. This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital.

I don't suppose we can borrow political capital from China?

So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.

And at that point, he begins pushing a new plan?

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.

Would you bet some of your Nobel money on that prediction?

O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up.

Posted by Mark Thoma on Monday, March 9, 2009 at 12:33 AM in Economics, Fiscal Policy, Politics 

Permalink  TrackBack (0)  Comments (15)

[Mar 9, 2009] "Seeds of its Own Destruction"

Economist's View

Martin Wolf looks at some of the ways the world may change in response to the crisis:

Seeds of its own destruction, by Martin Wolf , Commentary, Financial Times: ...In the west, the pro-market ideology of the past three decades was a reaction to the perceived failure of the mixed-economy, Keynesian model of the 1950s, 1960s and 1970s. The move to the market was associated with the election of Reagan ... in 1980 and the ascent to the British prime ministership of Margaret Thatcher the year before. ...

Today, with a huge global financial crisis and a synchronised slump in economic activity, the world is changing again. ... If the financial system has failed, what remains of confidence in markets? It is impossible at such a turning point to know where we are going. ... We are witnessing the deepest, broadest and most dangerous financial crisis since the 1930s. ...

Among the possible outcomes of this shock are:

The transformation will surely go deepest in the financial sector itself. ... After the crisis, we will surely “see finance less proud”, as Winston Churchill desired back in 1925. Markets will impose a brutal, if temporary, discipline. Regulation will also tighten. ...

No less likely are big changes in monetary policy. ... Yet a huge financial crisis, together with a deep global recession, if not something far worse, is going to have much wider effects than just these. ...

One transformation that can already be seen ... is a ... shift in attitudes towards inequality: vast rewards were acceptable in return for exceptional competence; as compensation for costly incompetence, they are intolerable. Marginal tax rates on the wealthier are on the way back up.

Yet another impact will be on the sense of insecurity. ... The search for security will strengthen political control over markets. A shift towards politics entails a shift towards the national, away from the global. ... protectionist intervention is likely...

The impact of the crisis will be particularly hard on emerging countries: the number of people in extreme poverty will rise, the size of the new middle class will fall and governments of some indebted emerging countries will surely default. ... Helping emerging economies through a crisis for which most have no responsibility whatsoever is a necessity.

The ability of the west in general and the US in particular to influence the course of events will also be damaged. The collapse of the western financial system, while China’s flourishes, marks a humiliating end to the “uni-polar moment”. As western policymakers struggle, their credibility lies broken. Who still trusts the teachers?

These changes will endanger the ability of the world not just to manage the global economy but also to cope with strategic challenges: fragile states, terrorism, climate change and the rise of new great powers. ...

On June 19 2007, I concluded an article on the “new capitalism” [ aka Reaganomics -- NNB] with the observation that it remained “untested”. The test has come: it failed. The era of financial liberalisation has ended. Yet, unlike in the 1930s, no credible alternative to the market economy exists and the habits of international co-operation are deep. ... The world of the past three decades has gone. Where we end up, after this financial tornado, is for us to seek to determine.

[Mar 9, 2009] Wolfgang Munchau Abandon All Hope.....

"We are nowhere near a solution to the crisis. After committing errors of omission, global leaders are now producing errors of commission. The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares."

naked capitalism

The best way to fight such a disaster is to restructure the banking system and provide short-term economic stimulus through monetary and fiscal policy. ...the current stimulus package is woefully inadequate. In other words: we are looking at an L.

An L-shaped recession will make the adjustment of balance sheets even more painful. Unemployment will continue to rise. House prices will keep on falling. US consumers and banks will spend the next five or more years deleveraging, getting their respective balance sheets back in order. In that period, the US current-account deficit will fall sharply, as will that of the UK, Spain and several central and eastern European countries. This process can take a long time, and in an L-shaped recession it takes longer.

But the effect is also brutal on the rest of the world. The fall in current-account deficits will be partially compensated for by lower surpluses from oil and gas exporters, such as Middle Eastern countries and Russia. But the bulk of the adjustment would be borne by the world’s largest exporters: Germany, China and Japan....

If we had a simple U-shaped recession, we would still have a painful recession in Germany and Japan, for example. But under a U-shaped scenario, both countries would be among the first to benefit from the recovery.

In an L-shaped recession, however, recession gives way to depression, despite the fact that both countries thought they had done their “homework”. If nobody can afford to run a large deficit for a long time – which is what an L recession effectively implies – the economic models of Germany and Japan will no longer work. Germany had a current-account surplus of more than 7 per cent last year. It is the world’s largest exporter. Exports constitute about 41 per cent of national gross domestic product – an extraordinary number, given the size of the country.

So what should these countries do? The right policy response would be to reduce the dependency on exports and undertake structural reforms that facilitate the shift towards non-tradable goods...

Unfortunately, the opposite is happening. Germany is clinging to its export model like a drug addict. An example is the debate about the future of Opel, the European car manufacturing subsidiary of General Motors. Opel is unlikely to survive without help from the government. The proponents of a state bail-out of Opel argue that the company is systemically relevant. This argument is obviously wrong. There can be systemically relevant banks, but there can be no systemically relevant carmakers. But the answer is also revealing. What it means is that Opel is systemically relevant for the country’s export-oriented model. The bail-out adherents are clinging to an industrial structure that has no hope of survival in an L-shaped world...

We are nowhere near a solution to the crisis. After committing errors of omission, global leaders are now producing errors of commission. The Americans dream about a return to a world of credit finance consumption while the Germans dream about assembly lines. In an L-shaped world, these are nightmares.

Selected Comments:

David said...
One peculiar feature of this world recession is that governments feel compelled to keep their important (but failing) companies alive. The effect of that is likely to be deflation. Too much supply for the level of demand. How can all these car companies, for example, expect to make profits when every weak lamb is being protected.

Another feature this time around seems to be excessive saving. That is why interest rates stayed so low for so long, not Fed manipulation. The saving however is not individuals but rather these large institutions, pension funds, non-profit endowments, trusts, central bank reserves. There institutions were not nearly as large (as percent of GDP) 50 years ago. You can goad a person to spend more but you can't convince a pension fund. They have no choice but to save.

I think perhaps one of the root causes of this epic crisis was too many institutions seeking fixed income investments which lowered interest rates and eventually lead to over-indebtedness.

[Mar 8, 2009] An Amazingly Disingenuous Piece by Alan Blinder on Bank Nationalization

Look like Alan Blinder plays "Joe the Plumber" ;-) What a service to the economic profession ;-) As anonymous reader aptly remarked: "A good friend of mine always said that the biggest whores do not stand on street corners...When we talk about zombie banks, we also need to discuss zombie economist."
naked capitalism

Independent Accountant said...

Amen. I have nothing to add to your comments. Personal note: I have encountered Blinder in my "wanderings" and consider him an intellectual charlatan. But he went to Princeton and has a PhD from MIT. So? I am not and never have been impressed with Blinder's intellect.
Richard Smith said...
The "nationalize everything" straw man is in use right at the top - see the last para of this NYT interview with the fantastically smug Obama (via CR):
Dave said...
Spot on Yves, in so many ways. I have nothing to add. You have demolished the argument and shown the author for the economic and political charlatan that one can only conclude he must be. Even "Joe the Plumber" types can dissect this argument for the steaming pile of non-sequtur intellectual excrement that it patently is.
Anonymous said...
Alan Blinder is against nationalizing banks because he owns a consulting firm that works for banks. Blinder is the vice chairman of Promontory Interfinancial Network, which provides consulting services to banks. Blinder is also on the board of directors at On Deck Capital which takes wall street money to make small loans to individual.

Everything Alan Blinder says is bought and paid for by the wall street banks.

Promontory Financial:

On Deck Capital:

[Mar 8, 2009] Furthering my understanding of the money from money theory By divorced one like Bush

Angry Bear

I'm reading Kevin Phillips “Bad Money”. I want to understand where this idea that money is made from money comes from. On page 61 he writes:

In 1996 a much discussed article in Foreign Policy titled “Securities: The New World Wealth Machine” had set out the ultimate paper entrepreneurial opportunity: high-quality stocks and bonds could be issued against clusters and pools of existing loans and assets, an innovation that “requires that a state find ways to increase the market value of its stock of productive assets.” By such a strategy, “an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.”

Professor Edmunds, the author of the article put's it more bluntly on the first page than the quotes Mr. Phillips used. Referring to “Securitization- the issuance of high-quality bonds and stocks...”
Wealth was created when a portion of income was diverted from consumption into investment of buildings, machinery and technological change. Societies accumulated wealth slowly over generations. Now many societies and indeed the entire world have learned how to create wealth directly.
Now I don't know but, is that not the grand slam of free lunch economics you have ever read? How could a learned person make such a statement?

In fact, googling for this posting I came across a thesis by a young man, 23 years of age written for his college work in 2001 in which he states:

What Edmunds refers to as “Securitization,” is nothing more than the shuffling of money from one market to another. However, this approach does create something known as a financial bubble; an instance in which an increase in speculation within a financial market, inflates the market value of stocks and bonds beyond their underlying value. It also results in a number of unpleasant systemic consequences.

First, an inflated financial market tends to exacerbate the trend for money to concentrate in the hands of the rich.

A second consequence of an inflated financial market is that it tends to draw money away from the productive sector that actually engages in the creation of wealth. This can put an economy in a very tenuous position, as was evidenced by Thailand in 1997.

Not bad for a student from a liberal arts college in 2001. All I can ask is: What the hell happened to the economist and money minds advising the last 2 and now the current president?

Back to Mr. Phillips, page 63:
Back in 1986, Minsky had written in Stabilizing an Unstable Economy that where as a banker's orientation to cash flow was sober, “an emphasis by bankers on the collateral value and expected value of assets is conducive to the emergence of a fragile financial structure.”
I searched “Minsky” at AB. He comes up as early as 2004. Unfortunately, I could not find the actual post. I googled Professor Minsky and to my surprise found an original document
The Financial Instability Hypothesis
Hyman P. Minsky*
Working Paper No. 74
May 1992

The readily observed empirical aspect is that, from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control.
I guess it wasn't to observed for the mantra I believe prior to the current fiasco was that everything was smooth sailing, the oceans have been tamed by man.

In this paper, I believe the following is the relevant aspect of his theory that we need to learn:

The theoretical argument of the financial instability hypothesis starts from the characterization of the economy as a capitalist economy with expensive capital assets and a complex, sophisticated financial system.

This Keynes "veil of money" is different from the Quantity
Theory of money "veil of money." The Quantity Theory "veil of money" has the trading exchanges in commodity markets be of goods for money and money for goods: therefore, the exchanges are really of goods for goods. The Keynes veil implies that money is connected with financing through time.
It is the following in Professor Minsky's paper that I believe would lead someone to make the statements Professor Edmunds made:
Thus, in a capitalist economy the past, the present, and the future are linked not only by capital assets and labor force characteristics but also by financial relations. The key financial relationships link the creation and the ownership of capital assets to the structure of financial relations and changes in this structure...In contrast to the orthodox Quantity Theory of money, the financial instability hypothesis takes banking seriously as a profit-seeking activity.
Banks seek profits by financing activity and bankers. Like all entrepreneurs in a capitalist economy, bankers are aware that innovation assures profits. Thus, bankers (using the term generically for all intermediaries in finance), whether they be brokers or dealers, are merchants of debt who strive to innovate in the assets they acquire and the liabilities they market. This innovative characteristic of banking and finance invalidates the fundamental presupposition of the orthodox Quantity Theory of money to the effect that there is an unchanging "money" item whose velocity of circulation is sufficiently close to being constant: hence, changes in this money's supply have a linear proportional relation to a well defined price level.
And thus is born the idea that you can make money from money. That is if you ignor that Professor Minsky does not state that finance stands alone, or that "an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective". On the contrary, he says nothing about primacy. He just notes that what is missing in the Quantity Theory is finance.
Thus, in a capitalist economy the past, the present, and the future are linked not only by capital assets and labor force characteristics but also by financial relations.

[Mar 8, 2009] A look at the week ahead for Wall Street By Alexandra Twin

The economy depends about as much on economists as the weather does on weather forecasters. ~Jean-Paul Kauffmann
Mar. 7, 2009 |

With little in the way of earnings or market-moving economic news on tap this week, stocks will continue to take a cue from the financial sector as investors try to see if the latest levels can hold.

There's been such a tremendous selloff in the financial sector and in some of the retailers, that at some point even traders who are betting on a weak market are going to want to get in, said Fred Dickson, chief market strategist at D.A. Davidson & Co.

... ... ...

Ripe for a bear market rally. In both October and November of 2008, the stock market stabilized at levels that many market pros were betting could be the bottom, before ultimately declining further. That could be the case now as well, Dickson said. But he also said that some of what he has been seeing lately is reminiscent of the way Wall Street ultimately stabilized during the last bear market, bottoming between October 2002 and March 2003. ...Also, from a contrarian perspective, stocks are ripe for a bounce. The American Association of Individual Investors (AAII) said 70.3% of investors surveyed were bearish, as of Wednesday. That's the highest level since the index was created in 1987.According to the latest report from Trim Tabs, investors pulled $29.9 billion out of stocks in the week ended March 4, versus an outflow of $18 billion in the previous week.

[Mar 7, 2009] Dahlem_Report_EconCrisis021809

The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.


The global financial crisis has revealed the need to rethink fundamentally how financial systems are regulated. It has also made clear a systemic failure of the economics profession. Over the past three decades, economists have largely developed and come to rely on models that disregard key factors—including heterogeneity of decision rules, revisions of forecasting strategies, and changes in the social context—that drive outcomes in asset and other markets. It is obvious, even to the casual observer that these models fail to account for the actual evolution of the real-world economy. Moreover, the current academic agenda has largely crowded out research on the inherent causes of financial crises. There has also been little exploration of early indicators of system crisis and potential ways to prevent this malady from developing. In fact, if one browses through the academic macroeconomics and finance literature, "systemic crisis" appears like an otherworldly event that is absent from economic models. Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon.2 In our hour of greatest need, societies around the world are left to grope in the dark without a theory. That, to us, is a systemic failure of the economics profession.

The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track. The majority of economists thus failed to warn policy makers about the threatening system crisis and ignored the work of those who did. Ironically, as the crisis has unfolded, economists have had no choice but to abandon their standard models and to produce hand-waving common-sense remedies. Common-sense advice, although useful, is a poor substitute for an underlying model that can provide much-needed guidance for developing policy and regulation. It is not enough to put the existing model to one side, observing that one needs, "exceptional measures for exceptional times". What we need are models capable of envisaging such "exceptional times".

... ... ...

There are a number of possible explanations for this failure to warn the public. One is a "lack of understanding" explanation--the researchers did not know the models were fragile. We find this explanation highly unlikely; financial engineers are extremely bright, and it is almost inconceivable that such bright individuals did not understand the limitations of the models. A second, more likely explanation, is that they did not consider it their job to warn the public. If that is the cause of their failure, we believe that it involves a misunderstanding of the role of the economist, and involves an ethical breakdown. In our view, economists, as with all scientists, have an ethical responsibility to communicate the limitations of their models and the potential misuses of their research. Currently, there is no ethical code for professional economic scientists. There should be one.

[Mar 7, 2009] H+ Magazine- HaCKinG tHe eConomy

This is a typical casino capitalism, is not it ?
The Big Picture

Today, in fact, over 95% of currency transactions are made between speculators. Our money is used less for real transactions than betting.

[Mar 7, 2009] Obama's economic saviour savaged as Keating lets rip  by Peter Hartcher

Economic groupthink is the most dangerous groupthink. "In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counterhopping clerks. It's a world of many villains. And only one hero."
March 7, 2009 |

When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.

The initial impression was good. The stockmarket surged and the pundits swooned. "Exactly a decade ago, he was Uncle Sam's golden-boy emissary sent into the stormy centre of what was then the world's worst financial crisis [the Asian crisis]," reported The New York Post.

The paper gushed: "Just 36 at the time, he'd been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn't match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies."

"A fantastic choice," said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama's political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was "up to the challenge".

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner's performance since.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."

Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves.

"These reserves are so large at $US2 trillion as to equal $US2000 for every Chinese person, and when your consider that the average income of Chinese people is $US4000 to $US5000, it's 50 per cent of their annual income. It's a huge thing for a developing country to not spend its wealth on its own development."

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."

And Asian capitals know that they have no real influence over the IMF - while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent. This is an artefact of the immediate postwar power structure, when the IMF was set up.

Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis.

As for The New York Post's claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries.

Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy.

China invested most of its reserves in US debt markets. Keating again: "So we have this massive recycling of funds into the system by [the former US Federal Reserve chairman Alan] Greenspan's monetary policy so even if you are greedy Dick Fuld [the former head of the collapsed investment bank Lehman Brothers] or you are hopeless Charles Prince at Citibank, you're being told there's an endless supply of money at a low interest rate and no inflation. So of course the system geared up to spend it.

"That is the fundamental cause of the problem - the imbalance is the fundamental cause."

If Keating's opinion of Geithner had circulated in the US, the Americans would not have been so surprised and disappointed with their new Treasury Secretary. They quickly learned that he had failed to pay $43,000 in taxes owing.

Then, when he announced his much-anticipated plan to rescue the US banking system, share prices slumped by 4 per cent immediately and a new round of weakness in the financial sector began. The pundits turned savagely against him: "So much for the saviour-based economy," wrote Maureen Dowd of The New York Times. Senator Shelby changed his mind: "Aggravating economic problems by contributing to marketplace uncertainty about what steps the Government will take - is that what this is?" he fumed.

US bank stocks weakened so much that nationalisation seems to be the only remaining option to put them quickly out of their misery.

Australia's banks, by contrast, are strong, said Keating, because of his decision as Treasurer to create the "Four Pillars" policy. This requires that the four big banks remain separate, barred from taking each other over. This prevented them "cannibalising each other", in Keating's words. As protected species, they had no need to mount risky takeovers to bulk themselves up defensively.

Their strength certainly wasn't due to the brilliance of their managers, whom Keating described as "counterhopping clerks" who had managed to work their way up the bank hierarchies. A further source of the soundness of the Australian banks, he said, was that they had learned well the lessons of risky speculative lending as a result of "the recession we truly did have to have".

In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counterhopping clerks. It's a world of many villains. And only one hero.

[Mar 7, 2009] Bonds Beat Stocks in ‘Earth-Shattering’ Reversal: Chart of Day By Jeff Kearns and Dakin Campbell

Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president.
March 6 | Bloomberg

Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president.

For three decades, owning equities in developed countries earned more than “on-the-run” 30-year government bonds. The advantage reversed after $36 trillion was erased from equity markets since October 2007 amid the first simultaneous recessions in the U.S., Europe and Japan since World War II.

The CHART OF THE DAY shows Treasuries leading. The Ryan Labs Total Return Indices, which track bonds by continually adding the most recently sold security and removing the old one, returned 1,479 percent in 30 years. It beat MSCI’s Gross World index of buying developed market stocks and reinvesting dividends, which added 1,265 percent.

“Over the last 30 years there’s been no risk premium,” said Douglas Cliggott, manager of the $81 million Dover Long/Short Sector Fund, which has beaten 92 percent of its peers this year. “It’s potentially earth shattering because the equity market hasn’t delivered the goods.”

The returns are a reversal from October 2007, the peak for global stocks. The MSCI gauge rose 2,845 percent to a record 17 months ago, more than double the 1,156 percent gain for Treasuries from 1979.

The Standard & Poor’s 500 Index plunged 38 percent last year, the steepest slide since 1937. Treasuries returned 14 percent for the best annual performance since 1995, according to Merrill Lynch & Co. indexes. Thirty-year Treasuries enjoyed their best year since at least 1988, giving investors a return of 41.2 percent, Merrill’s data show.

[Mar 7, 2009] Bank Rescue Programs- Setting the Stage for More Looting-

Akerlof and Romer define looting as an upscale version of bankruptcy fraud, except that bankruptcy fraud gets prosecuted (in theory) but the white collar rent seeking version, where executives and staff pay and perk themselves to the point where it derails the business, somehow never is pursued in the US. From their abstract:

[Mar 7, 2009] Confusion, Tunneling, And Looting

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt.  Confusion helps the powerful, he argued.  When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms.  The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.
with 75 comments
The Baseline Scenario

Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses.  As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt.  Confusion helps the powerful, he argued.  When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms.  The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States.

Treasury has made it clear that they will proceed with a “mix-and-match” strategy, as advertized.  And people close to the Administration tell me things along the lines of ”it will be messy” and “there is no alternative.”  The people involved are convinced - and hold this almost as an unshakeable ideology - that this is the only way to bring private capital into banks.

This attempt to protect shareholders and insiders in large banks is misguided.  Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven’t these boards resigned?), but the government’s policy is creating toxic financial institutions that no one wants to touch either with equity investments or - increasingly - further credit.

Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO?  If that wasn’t a nationalization moment (i.e., an assertion that the government is now the dominant shareholder), what legal authority does the Treasury have to decide who is and is not running a private company?

Will debtholders be forced to take losses and, if so, how much and for whom? As part of last week’s Citigroup deal, preferred shareholders - whose claims had debt-like characteristics - were pressed into converting to common stock. You may or may not like forced debt-for-equity swaps, but be aware of what the prospect of these will do to the credit market.  Junior subordinated Citigroup debt  (securities underlying enhanced trust preferred shares) were yesterday yielding 26%.

Who can explain exactly how AIG has lost so much money?  Drip-drip injections of government money are not a proper clean-up; there has been no complete recognition of losses and, almost six months later, that company still cannot move on.  Time horizons presumably remain short or are getting shorter for all involved.  This points to a bleak future more generally.

What do rapidly widening credit default spreads for nonbank financial entities (such as GE Capital and many insurance companies) signify? Is it something about expected behavior by the insiders or by government, or by some combination of both?

Confusion in policy breeds disorder in companies, and disorder leads to the loss of value.  This is the reality of severe crises wherever they unfold; we have not yet reached the worst moment.  And, of course, there are many more shocks heading our way - mostly from Europe, but also potentially from Asia.

The course of policy is set.  For at least the next 18 months, we know what to expect on the banking front.  Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I’ve asked).  The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails.

The road to economic hell is paved with good intentions and bad banks.

[Mar 7, 2009] No Surprise to Anyone

Financial Armageddon

I thought it would be a great idea to highlight the latest hard-hitting column from syndicated columnist Paul Craig Roberts, Assistant Secretary of the Treasury in the Reagan Administration and a former editor and columnist for the Wall Street Journal, entitled "Change for the Worse":

The following is part one of a two-part essay.

President Obama has presented the most irresponsible budget in U.S. history. His fiscal year 2010 budget projects federal spending of $3.5 trillion and a federal deficit of $1.75 trillion. In other words, 50 percent of the government's budget consists of red ink.

And Americans are angry that sub-prime borrowers took mortgages they couldn't afford.

The bald fact is that the U.S. government is going to have to borrow — or print — half of the money it intends to spend in Obama's first budget. This fact has fallen through the cracks as New York Times headlines proclaim, "A Bold Plan Sweeps Away Reagan Ideas."

It certainly does sweep away Reagan ideas. No Reagan budget ever presumed that the federal government could borrow half of its annual expenditures. Indeed, Obama's budget deficit for 2010 alone exceeds the totality of "Reagan Deficits" for Reagan's two terms of office.

As presidential budgets are marketing devices rather than financial statements, they are imbued with optimistic assumptions. Obama's budget is based on optimistic assumptions about the extent of decline in gross domestic product. A more realistic projection of GDP decline would reveal that Obama's budget is the first since World War II in which more than half of the government's expenditures must be financed by red ink. I suspect that the red ink component of the FY 2010 budget will surpass World War II budgets.

To whom can the U.S. government turn for $1.75 trillion for FY 2010, on top of $1.2 trillion for FY 2009?

Not to taxpayers. Obama's net tax increase comes to $170 billion over 10 years, or $17 billion a year, a drop in the bucket. A supply-side economist could have told him that not even these paltry revenues will be realized.

Not to private savers. Americans are over their heads in debts.

Not to foreigners. Thanks to Clinton-Bush financial deregulation and Wall Street and bankster greed, the rest of the world is in financial turmoil and hasn't $1.75 trillion in savings to lend. Possibly, the stock market will collapse further, and whatever remaining wealth Americans have will flow into "safe" U.S. Treasuries.

The only other alternative is the printing press. Printing press finance would destroy the dollar as reserve currency and ignite high inflation. The United States would be unable to pay for its imports, and Americans whose incomes do not rise with the rate of inflation would be plowed under.

This prospect is not a "war on terror" scare tactic like "anthrax," "weapons of mass destruction," "al-Qaida connections" and "Iranian nukes."

The economic catastrophe that the United States faces is very real. But there is no awareness of this reality in Obama's budget. The crux of Obamanomics is the assumption that the economy can run forever on consumer loans, if we can just get the banks to lend, and the federal government can run forever on loans from China, Japan and Saudi Arabia.

Obama is requesting $130 billion for wars in Iraq and Afghanistan during 2010 plus a $75 billion supplemental request for the wars during 2009. This $205 billion is on top of $534 billion for the Pentagon in 2010, for total military spending of $739 billion.

The Chinese government's budget shows China's military spending at $59 billion in 2008. (The Pentagon claims Chinese military spending is between $97 billion and $139 billion.) Russia's military spending in 2009 is projected to be about $50 billion.

In the midst of the greatest economic crisis in U.S.
history, when trillions of dollars are being added to U.S. national debt, Obama's budget spends more on two pointless wars than the total military spending of China and Russia combined. Obama's wars serve only the profits of the military-security complex and the promotion rate of military officers. The longer the wars continue, the larger the number of officers who can retire at higher ranks, thus further swelling future annual deficits and the national debt.

Moreover, as is becoming apparent, the Bush-Obama war in Afghanistan cannot be fought without fighting a war in Pakistan.

As if this isn't enough war, Obama parrots Dick Cheney's charge, totally unsupported by any evidence, that Iran is making nuclear weapons. The chances are high that the new White House Moron will have us at war in Afghanistan, Pakistan, Iran and Iraq. As Obama's wars expand, the $205 billion for war in Iraq and Afghanistan will become $400 billion annually and then $600 billion annually.

Obama's "troop withdrawal" from Iraq has proved to be just another con job. Obama has announced that the withdrawal doesn't include the 50,000 U.S. soldiers who will remain in Iraq indefinitely — like the U.S. troops that have been kept in Japan and Germany for 64 years and in Korea since the early 1950s.

Meanwhile, Medicare is on the ropes. The latest Medicare trustees report says that Medicare's funds for hospital payments will be exhausted in 10 years. To make ends meet, Obama proposes cutting payments to Medicare providers.

Obama's plan is to make doctors and patients pay for Medicare. One way to get national health insurance is to make it uneconomic for private health care to service Medicare patients. Already many doctors will not accept Medicare patients because of the low payments, endless paperwork and risk of prosecution for "over-billing." Looking at one recent Medicare patient medical bill, Medicare and supplemental insurance paid 29 percent of the billed amount, requiring the doctor to eat 58.5 percent of his charges and the patient to pay 12.5 percent. The doctor was paid $93.16 on a $320.89 bill. And Obama wants to reduce payments to providers?

What is Obama thinking? A country that can't afford Medicare can't afford national health insurance. Medicare provides only for the elderly, and it provides very little. A person pays the Medicare tax as long as he earns and on the totality of earnings. For the rich, the Medicare tax can exceed the cost of a gold-plated private insurance policy.

Basic Medicare leaves a person unprotected. To provide better coverage, it is necessary to enroll in Medicare Part B, for which the premium is $308.30 per month, or $3,699.60 per year. On top of this, a person needs a privately supplied supplemental policy to complete Medicare coverage. AARP's policy, which after deductibles are met covers half of drug costs, cost the "Medicare protected" elderly $273.50 per month, or $3,282 per year. The drug prescription plan passed by Congress costs the individual yet more.

The two supplements to Medicare cost the Medicare patient $6,981.60 per year. In addition, if the Medicare patient has much retirement income besides Social Security, he pays income tax on 85 percent of the $3,699.60 Medicare Part B premium, as it is part of taxable Social Security, which for someone in the 25 percent bracket is another $925 dollars.

In the late 1970s, Democratic Sen. Russell Long, chairman of the Senate Finance Committee, told me that as Social Security was collected as a tax on wages and salaries, the U.S. government had promised never to tax the benefits. So much for any commitment that the U.S. government makes to the American people.

A top Social Security income, minus the Medicare Part B premium, is $23,220 per year. Deduct the AARP policy, and the elderly who have paid in maximum Social Security taxes get $20,000 per year. Of course, few Social Security retirees receive the maximum payment.

AARP's Public Policy Institute reports that in 2006 the average annual Social Security benefit for a retired worker was $12,372. Such a worker would have little left after paying the Medicare Part B premium and an additional premium for a supplement.

[Mar 6, 2009] Twelve Year Lows The Big Picture#comments#comments#comments

  1. karen Says: March 4th, 2009 at 12:25 pm

    TALK BACK: Analysts Caused Permanent Exodus From Market
    12:17 PM ET 3/4/09 | Dow Jones
    A reader comments on analysts:

    Is it any wonder that most individual investors left the [stock] market and will never return?

    Wall Street should have gotten rid of all analysts and started over with kids that made it through third-grade math. General Electric Co. is the biggest joke yet.

    When analysts are done killing the market, where do they work? At a butcher shop?

[Mar 6, 2009] CNBC stays mum after takedown by Jon Stewart By DAVID BAUDER

If you did not see it last night, please watch Jon Stewart took on CNBC and the entire U.S. financial system:
Mar 5, 2009 | AP

If you make a date to be on a late-night talk show, it's best not to back out.

John McCain learned that lesson the hard way with David Letterman last fall, and CNBC reporter Rick Santelli just took it on the chin from Jon Stewart. Santelli and his network wouldn't comment Thursday on Stewart's brutal takedown during Comedy Central's "The Daily Show" on Wednesday.

Santelli became an instant online star when millions of people watched copies of his CNBC criticism that President Barack Obama's housing plan was "promoting bad behavior" by rewarding people who might otherwise be foreclosed. He was booked to appear on Stewart's show Wednesday.

But he backed out Friday, with CNBC spokesman Brian Steel saying that "we all made a decision it was just time to move on to the next story."

Said Stewart: "I guess the phrase would be bailed out."

During a report at the Chicago Board of Trade on Feb. 19, Santelli turned to those around him: "This is America. How many of you people want to pay for your neighbor's mortgage that has an extra bathroom and can't pay their bills?"

When the traders began booing, Santelli said, "President Obama, are you listening?"

"How many people would have liked to see Rick Santelli on this program," Stewart echoed on "The Daily Show," his audience responding with a cheer. "Are you listening? Are you listening, Rick Santelli?

"I have to say I find cheap populism oddly arousing," Stewart said.

Stewart then turned to CNBC itself, airing a selection of clips from personalities like Jim Cramer giving opinions and predictions about the economy that in retrospect looked spectacularly ill-informed.

"If I had only followed CNBC's advice, I'd have a million dollars today," Stewart said, "provided I'd started with $100 million."

[Mar 6, 2009] Darth Wall Street Thwarting Debtors With Credit Swaps (Update2) By Caroline Salas and Shannon D. Harrington

March 5 | Bloomberg

Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.

By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.

Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody’s Investors Service projects defaults will more than triple this year to the worst level since the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets.

“Before, you really had to worry mostly about where you were in the” company’s capital structure, he said. “Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It’s something that’s going to come up more and more.”

[Mar 6, 2009] Was the ‘00-03 Crash Bush’s Fault- ‘09 Obama’s-

The Big Picture

I am not an Obama cheerleader. For the record, I found his selection of Larry Summers to be awful, and his choice of Tim Geithner as Treasury Secretary ill-advised. But to hold him responsible for a market collapse on day 41 of his Presidency — following 8 years of gross negligence and ruinous incompetency under the Bush regime — is simply too much stupidity for any damaged nation to bear.

  1. Patrick Neid :

    “By the idiot squad’s reasoning, the 2000 tech wreck was all George Bush’s fault. Funny, I don’t recall hearing any of that from them in 2000-01.”

    Your memory is starting to fail you. Bush was blamed via Enron, as a starter, for the policies of the 90’s. Not to be outdone he was further blamed for 9/11 contributing to further stock declines.

    As to Obama, he deserves every bit he now starting to get because of his moronic cabinet choices and the stupidity of the countless plans they have been putting forth. Everyday, him and his minions scream depression and Armageddon unless they get their central planning policies. You get what you vote for.

    See you at the bottom.

  2. Anon:

    And I recall hearing something about a National Security briefing a month ahead of 9/11: Bin laden determined to strike in US.

    Bush immediate response was to give a speech outlawing stem cell research.

  3. Concerned American:

    There is not a nickel’s worth difference in Republicans and Democrats.
    - They both want your money and want to give it to someone else.
    - They are only interested in what benefits them not the country as a whole.
    - They have no conscience.
    - Most are incompetent

    The TWO AND ONLY TWO parties have been established to make you, Sheeple, think you have a choice.

    No one cares about fixing anything. They only care to find someone else to blame in the other party.

    It really doesn’t matter how we got here at this point. I put most blame on the total failure of the Bush Administration. I am not sure what we expect when we elect people who have never had a real job, never had to find employment nor prove them self, never had to buy medical insurance etc. Exactly what had Bush accomplished in his life except buying the Governorship of Texas and doing nothing there?

    So we are surprised? We will be surprised next time too? How stupid is that?

  4. ben22:

    Since a lot of people were talking about zero sum game yesterday got me thinking about a quote from one of my fav. movies:

    “It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.” - Gordon Gekko

  5. Marcus Aurelius:

    Let’s not forget the (R) Congress fucktards. Teri Schiavo and endless other inane bullshit (gay marriage threatens the foundations of our country, the war on Xmas, naming everything they could after Ronald Reagan, etc.). And they’re still at it - now they’re trying to push a Bill declaring we have won a victory in Iraq. We are living the results of their twisted priorities.

  6.  Ethel-to-Tilly:

    There’s an incredible amount of negative bullshit going on in the world that the market is reacting to that never makes the news in the US - hey - we have to talk about Chandra Levy! It’s partisan know-nothings who are trying to pin the market drop on Obama while ignoring all the other negative stuff that is actually going on.
  7.  Bruce N Tennessee:

    Labor costs up 5.7%…?? 5.7%?

[Mar 6, 2009] Goldman Cuts Global GDP Forecast to 0.6% Decline

Is additional 30% decline of S&P500 based on current P/E 10 and bottom P/E 7 plausible ?

Goldman Sachs Group Inc. predicted a deeper global recession than it previously anticipated and said the slump could yet worsen.

Goldman Sachs now expects worldwide gross domestic product to shrink 0.6 percent in 2009 compared to a previous forecast for a 0.2 percent contraction, London-based economist Binit Patel said today in a report to clients.

“The economic environment overall is still likely to remain challenging and uncertainty is high,” Patel wrote.

Already stuck in its worst recession since World War II, the world economy is deteriorating even as central banks slash their interest rates to record lows and governments rescue banks and introduce stimulus packages. U.S. stock futures extended declines after the Goldman report.

Goldman released its new forecast as the European Central Bank by Martin Hutchinson

 Mar 2, 2009  | PrudentBear

Wall Street over the last generation has been a prolific generator of casinos, in which the dealing community can make a very nice living indeed by providing investment and “hedging” services to outside investors.

[Mar 5, 2009] How capitalism corrupts by Daniel Gallington

Mar 4, 2009 |

Karl Marx believed that capitalism corrupted everything it touched - including governments that enabled it. Ironically, what happened recently to our economy was the result of the same dynamic - in the form of financial sector political influence on our government not to regulate the markets.

... ... ...

Is there a lesson in this for us? In a strange way there is, and the recent collapse of many of the world's "free" commercial markets makes the lesson easy to see.

In our country, of course, elected government from both political parties have preferred - at least traditionally - a "hands-off" policy with regard to the "elements of production" of our economy - whether it is the credit or equity markets, the banking system or the actual producers of goods and services. And, just as Marx understood, these sectors of the economy accumulate enormous power; however, because there is - again traditionally - very little official connection between the vast private economic sector and our government, the two parts did not, as Marx feared, combine to oppress the rights of the people.

However, as we have learned several times now, the economic power of the private sector, especially if unsupervised, is unable to prevent itself from exploiting whatever ways are found to take lots of easy money out of our economy in the short term, especially if our government allows it. And that is what happened.

Lots of fast, easy money, on an ever-widening scale has traditionally been the precursor for economic disaster in the United States. And, one way this happens is for personal compensation to be determined by measures that involve fundamental conflicts of interest. Sometimes these conflicts of interest arise to criminal behavior: For fraud (i.e., "Ponzi schemes"), insider trading and just plain old embezzlement. We have seen all kinds of it in recent months.

But most of the time, quick money schemes are simple unspoken conspiracies with built in - and mostly unregulated - conflicts of interest. And, so far at least, it looks as if we have had several such very large-scale scams in this category, most of which require new and informed government oversight.

The most notorious was practiced in the real-estate boom and bust. Like most seemingly complex financial matters (and like real estate booms and busts in the past) it was really very simple: No one in the real estate business-related sector made money unless the loan to buy the property - and the bigger the better - was approved. So, almost every loan was approved - not as a long-term investment vehicle, but as a quick, fee-generating money turn, peeling a fee or percentage off the top, then bundling it (actually burying it) to sell to banks, investment houses and institutional investors, many of which were buying it with our "good" 401(k) money.

In short, the loans were gotten rid of before they went bad, just as the participants in these scams knew they would. In effect, we had a huge real estate "Ponzi scheme." And - in the end - we learned that even the executives at Fannie Mae and Freddie Mac (both quasi-government organizations called "government sponsored enterprises") had their multimillion-dollar bonus packages tied to the totals of the (mostly bad) loans they acquired and "securitized" in the rotting real estate market. Talk about conflict of interest.

Now, the lesson from Marx: The government must "run" the economy - but not in the sense that puts it in the role of actually owning or managing business enterprises. These ventures have proven mostly incompatible with our free enterprise system, and, like the Russians learned, they are hugely inefficient and unresponsive to the market.

However, it must be the continuing responsibility of our government to - at least - police the quality and integrity of our financial markets, especially the banking and nonequity parts of it. And the failure to do this has been the collective failure of all our administrations - and all of our Congresses - at least since the 1980s.

Were they simply bought off by the business and financial sector lobbyists? Probably: For years, business and financial sector "political inaction" money has been rampant on the Hill, the presidential elective process and even within the executive branch: Witness the ludicrous executive compensation schemes at Fannie Mae and Freddie Mac. And, in the end, it was this basic failure of government supervision - with the same result as government corruption - that brought us down. Just as Marx warned it would.

Daniel Gallington is a senior fellow at the Potomac institute for policy studies in Arlington, Va.

[Mar 5, 2009] Does Creeping Nationalization Make Reprivatization Harder-

Naked Capitalism
Anonymous said...
I am sorry but there are some of us that call this corporate government arrangement by its proper name of fascism.
just another social scientist said...
Anonymous 12:12 am

The real irony here is that, while this may be fascism by fiat, the powers that be are acting in every way possible to void the authoritarian underpinnings by deliberately handing the reigns over to "the market" via private corporate governance. They have utterly abandoned their role of overseer while fully backing the financial strategies of this elite strata.

From what I understand the systemic issue is the fact that "the market" as they understand it does not exist, and that financial entities are acting in a manner which violates free market principles. In this instance there is no market solution, so calling government action fascist is somewhat meaningless. Nationalization, ironically, may be the easiest way for price discovery to occur, thus catalyzing market behavior rather than limiting it.
Anonymous said...
So since creeping reluctant nationalization doesn't fix the problems, it leaves the entity permanently unable to leave the nest, and it's just another pit into which more and more taxpayer wealth is poured, in one form or another, often secretly or by deception.
Anonymous said...
Ok, how about if we say that we have lost "rule of law" by the unprosecuted financial criminality instead of fascism. Rule of law used to be touted as a bedrock component of Western society.....not so much anymore or do we have a two-tier legal system aoong with our two-class society.

Would a social scientist believe that this will rile the masses to DO SOMETHING?
Anonymous said...
I find it so odd that we even have conversations about this. It's so obvious that the government doesn't bail out small banks, nor does it bail out large non-banks (see, e.g., reluctance to bail out GM). So here's a bold idea...bring back Glass-Steagall and also limit the size of banks and financial insurers. Is this too obvious a solution? Couldn't some politician with huge approval numbers (hint, hint) just come out and say this, that we will have to break up these behemoths to protect ourselves from future black holes?

I don't believe the world is simple. I actually believe the world is complex beyond our wildest imaginations and our most powerful minds. But come on, allowing the credit of the country to be concentrated in institutions prone to making less than optimal decisions because of skewed temporal incentives is just stupid. Honestly.
marin belge™ said...
"Does Creeping Nationalization Make Reprivatization Harder?"


The US has only one way to rebuild itself. Grassroots. From new. Anything like rebuilding old stuff will end up in cronyism at best. Proto-fascism at worst.

Your French reader with "on the job experience" concerning nationalization during our socialist times, thirty years ago.

Quite a bit concerned at this stage
Anonymous said...
I believe Bernanke and Geithner have reached a plateau of arrested development. You hit the nail on the head when you opined that Bernanke "romanticized" the previous economic period and hopes to return to that suboptimal status quo.
Charlie said...
"An even more sobering possibility is that Bernanke and Geithner believe that the current lousy state of financial markets is the result of irrational pessimism. If the government throws enough liquidity at the market, animal spirits will return and all will be well."

They have the virtue of being half right. In the real economy, what has happened. Housing prices crashed. Well, they needed to. People aren't buying cars. OK, so 16 millions cars sold a year was excessive. There is tremendous overcapacity and we could go to 8-10 million sales a year with no problems. People aren't buying other durables since they can wait a year to buy a new laptop. Big deal.

Higher education, which is also widely inflated, and a major burden for the middle class, can be dealt with by more government student loans.

We can exist nicely in this zombie state for a while. Tinker with the employment numbers so they don't look scary.

[Mar 02, 2009] The Risk of Military Keynesianism

The main problem here is that military Keynesianism is highly correlated with national socialism as a political trend.

The global military-industrial complex has expanded by leaps and bounds in the last decade, led by the United States. Will the economic crisis finally take a bite out of military spending, John Feffer asks, or serve as another rationale for maintaining the status quo?

[Mar 02, 2009] Tim Duy's Fed Watch When Does Faith in Financial Engineering Wane

"...the big trouble with dumb bastards is that they are too dumb to believe there is such a thing as being smart." -- Kurt Vonnegut, Jr. And let's not forget that Bernanke made his academic carrer on playing the "dominant doctine" card (Milton Friedman deregulation nonsense)

Which brings me back to the original question - having spent down conventional monetary ammunition over the past 25 years, when does Federal Reserve Chairman Ben Bernanke revert to a overtly inflationary policy?  The answer:  When he no longer believes there is a way to financial engineer the US (and global) economies out of the current environment.  Then you are left with only two options - sit back and allow deflationary forces to take hold (a true liquidationist position), or initiate the time honored process for eliminating a debt overhang, inflation.

But Bernanke has not given up hope, audacious though it may seem, that the answer is financial engineering.  Yves Smith noted last week:

...What is amazing is the degree to which Bernanke has been unable to process what has happened over the last year and a half. It isn't simply that he is trying to restore status quo ante; he seems to see the only possible operative paradigm as the status quo ante. Worse, he has a romanticized view of it too.

We had a massive stock market bubble, followed by an even bigger asset orgy, with housing at the epicenter, but plenty of other types got dragged along with it. Having asset appreciation fueled by debt is NOT how a healthy economy operates. It is going to take some time for the excesses to work themselves through...

This reminded me of a Bernanke speech from 2005:

Some observers have expressed concern about rising levels of household debt, and we at the Federal Reserve follow these developments closely. However, concerns about debt growth should be allayed by the fact that household assets (particularly housing wealth) have risen even more quickly than household liabilities. Indeed, the ratio of household net worth to household income has been rising smartly and currently stands at 5.4, well above its long-run average of about 4.8. With real disposable income having risen over the past few quarters, most consumers are in good financial shape--a positive indication for household spending. One caveat for the future is that the recent rapid escalation in house prices--11 percent in 2004, according to the repeat-transactions index constructed by the Office of Federal Housing Enterprise Oversight--is unlikely to continue. A plausible scenario is that house prices will either move sideways or rise more slowly during the next few years, eventually bringing the rate of return on housing in line with the relatively low prospective rates of return that we currently observe on virtually all assets, both real and financial. If the increases in house prices begin to moderate as expected, the resulting slowdown in household wealth accumulation should lead ultimately to somewhat slower growth in consumer spending.

Leaving aside the issue of housing prices for a moment, consider the issue of household net worth.  I always feel that academics misinterpret balance sheets, particularly household balance sheets.  Here Bernanke is saying that debt is not a problem because it is matched by an asset of equal or greater value.   Ergo, you have positive net worth, so everything is good.  But that debt needs to be supported by a positive cash flow, and the many assets on household balance sheets generally do not generate cash flow, especially owner occupied housing assets.  This differs from a corporate balance sheet, where the assets are supposed to be combined in some fashion that generates a positive cash flow.

The cash flow that supports most household debt is independent of assets; it is the result of employment income.  To be sure, perhaps some of those assets support the employment, such as a car.  But even in this case a Toyota Camry performs the same function as a Lexus.  Claiming the latter is necessary for employment is largely a fantasy. 

Bernanke praises the power of the household balance sheet, and further supports his contention that households are financially strong by the disposable income growth at the time.  What he missed, however, was the importance of declining savings rates, which were quickly converging on zero.  When saving rates hit zero, free cash flow for households is gone, and without free cash flow, the ability to increase debt diminishes unless either interest rates fall further or we can divorce credit access from ability to repay.  In this speech, Bernanke effectively endorsed the illusion that asset value growth could replace ability to repay for underwriting purposes.  Debt accumulation and thus spending can be supported indefinitely as long as asset values increase. 

I suspect that Bernanke still believes his basic framework was correct, even if underwriting conditions loosened more dramatically than desirable. But with saving rates at zero this system was remarkably vulnerable to negative shocks to the consumer.  This, I believe, is one of two fundamental failures of the Bernanke system.  The first negative shock was the housing slowdown.  Again ignoring the housing price declines, just leveling prices was, as Bernanke indicated, sufficient to limit the debt accumulation that supported additional spending, and left spending to growth at the disappointing pace consistent with income growth.  But income growth was sure to slow as job growth slowed in response to housing and there was little in the way of easily accessible savings to compensate.  In addition, households were hit with a massive energy price shock and, with no room in income left to compensate, spending was forced to drop dramatically.

In short, by minimizing the importance of low saving rates (a cash flow issue) and emphasizing the role of increasing asset values (a balance sheet issue), Bernanke fundamentally misunderstood the vulnerability of households to negative shocks to real income.

Now, however, saving rates are positive, albeit still very low by historical standards.  Still, there would be room for economic traction by bringing saving back down to zero.  Harder than it sounds as, unlike 1982, we have limited room to reduce interest rates to encourage spending.  Moreover, household net worth is now eviscerated by housing and equity price declines, that consumers are cutting back in a desperate struggle to deleverage and rebuild net worth.  It is on this latter point that I believe the economic leadership in the nation still believe there remains possible policy traction.

The collapse in housing prices was the second fundamental blow to the Bernanke framework; note that an actual decline in housing prices was not in his forecast.  So the key to restoring growth, in the Bernanke framework, lays in restoring housing prices, and asset prices in general.  This is the focus of policy - if we can jump start the debt markets, we can rebuild asset prices, and therefore thereby encourage a rebound in consumer spending.  This is, again, a balance sheet approach to household finances, and ignores the importance of tighter underwriting conditions, not to mention that this approach is limited as, over the longer term, if savings rates were forced back to zero, consumers will be pushed back from one precarious position (weak economy) to another (no savings cushion). 

Leaving aside those challenges, another problem is the one to which Yves alludes to - the persistent belief that current asset prices are currently "wrong."  There appears to be little thought given to the likelihood that past prices were "wrong."  Instead, policymakers appear to believe that prices have intrinsic values.  The trick is to get market participants to recognize those values.  The belief (delusion) that the current price is simply wrong is not limited to Bernanke; it is pervasive among policymakers.  James Kwak directs us to an interview with Treasury Secretary Timothy Geithner, commenting:

The idea that houses have a “basic inherent economic value” other than the prices they can fetch in the housing market is, I think, a fallacy. And so the idea that therefore houses will naturally return to some “basic inherent economic value” that is higher than current market prices is, I think, wishful thinking of the kind that has hampered responses to this crisis from the beginning. They could; but they could just as well not.

The saddest part of policymakers who cling to the notion of intrinsic housing values is that economists long ago rejected the notion that such prices existed when they rejected the labor theory of value.  Is Bernanke a monetarist, neoclassicalist, or a Marxist?  Value is determined by a constellation of social conventions at some point in time.  If the social convention is that financing is limited by ability to repay, then cash flow (largely income), not asset appreciation, is the appropriate metric for valuing houses.  "Restarting" the credit markets alone will not alter this convention; it was the willingness to disregard this convention that was the fundamental failure of credit markets. 

This is not meant to imply that restarting credit markets is not a worthy effort.  The opposite is true; functioning credit markets are important to economic growth...but functioning likely means a return to conventional underwriting metrics, and thus housing prices will remain depressed.  Indeed, I think a good argument can be made that, under conventional norms, homes price should decrease until mortgage payments are less than the rental equivalent (after accounting for the hassles and costs of home ownership).

Policymakers are assuming that restoring proper functioning in credit markets - and confidence in general - is equivalent to a housing price rebound.  They seem incapable of envisioning a world in which this is not the case.  This tunnel vision prevents policymakers of trying to devise policy which assumes that the many of the assets in the banking system are simply "bad."  For Bernanke and Geithner, there are no bad assets.  Only misunderstood assets. 

And therein lays the key to predicting when the Fed shifts gears; when Bernanke abandons the notion that proper credit market functioning is alone sufficient to restore housing values (asset values more generally) to their former glory and support acceptable growth.  At that point, the Fed will again consider the wisdom of what it has defined as quantitative easing, an expansion of the balance sheet via a deliberate expansion of liabilities.  Until then, we can expect the Fed to continue its focus on financial engineering.

[Mar 02, 2009] NY Times: "When Will the Recession Be Over?"

3/01/2009 | CalculatedRisk

The NY Times asked several economists and forecasters 'When Will the Recession Be Over?'

Here are a few excerpts:

Beware the False Dawn
By STEPHEN S.ROACH (Chairman of Morgan Stanley Asia)

IT would be premature to declare an end to America’s recession at the first sign of a resumption of growth. After the unusually steep declines in the economy late last year and early this year, a statistical rebound in the second half of 2009 would hardly be shocking. ...

But any such whiffs of growth are likely to herald a false dawn, because the consumer remains in terrible shape. ...

This points to an unusually anemic upturn, at best — not strong enough to keep the unemployment rate from rising to near 10 percent over the next year and a half. Since it’s hard to call that a recovery, it looks to me as if this recession won’t end until late 2010 or early 2011.

A Long Goodbye
By A. MICHAEL SPENCE (Stanford Professor, Nobel prize, economics)
THE short answer is not soon.

The recession is global: exports, production and consumption are in high-speed descent. The headwinds are powerful because of excessive leverage, damaged balance sheets and the resulting tight credit.
Governments and central banks are the only major sources of credit, liquidity and incremental demand ... If governments are quick and clear in their intentions and intervene in a coordinated way in both the real economy and the financial sector, we will probably have an unusually long and deep global recession through 2010. If they don’t, it is likely to be worse than that.
An Ordinary Crisis
TODAY’S financial crisis is the biggest in recent history, when measured by its speed, the scale of its capital losses or its global reach. Yet viewed from another perspective the crisis is surprisingly ordinary, following the same path as dozens of previous bubbles.
If we go by the first measure [started in mid'80s] we may see two or more decades of readjustment. If we go by the second [started turn of the millennium], we are still probably in the early stages of the credit correction, meaning that while the technical recession could be over by the end of the year, the broader credit cycle will likely remain a significant drag on economic activity well into the next decade. Either way, we have a long way to go.
There are number of other short Op-Eds from Nouriel Roubini, James Grant and others.

[Mar 2, 2009] Black Hole Alert AIG to Get as Much as $30 Billion More

naked capitalism

I'd like to know how much of the protection AIG sold to banks is insuring assets or speculative prop positions held by those banks, as opposed to being a reinsurance leg of other CDS transactions sold on by the banks to their customers. I suspect many banks can't afford to substitute for AIG on losing positions, rather than profiting directly from the AIG bounty. If AIG hadn't `handed over' the $18.7B, the counter-party banks would be insolvent rather than profit-challenged. Nice game of dominoes.

Anyway, threatening to void all purely speculative CDS obligations on a date certain would lead to a rally in the underlyings... :-)

[Mar 2, 2009] The Great Solvent North  by Theresa Tedesco

...Most people don’t know that the vision behind Canada’s banking system, made up of a few large, national banks with branches from coast to coast, actually had its beginnings in the United States. Canada’s system is the product of a banking framework inspired by Alexander Hamilton, the first American secretary of the Treasury. Hamilton envisioned the First Bank of the United States, chartered in 1791, as a central bank modeled on the Bank of England.

Canadians found inspiration in Hamilton’s model, but not all Americans did. In the 1830s, President Andrew Jackson opposed extending the charter of the Second Bank of the United States, perceiving it as monopolistic. Money-lending functions were then assumed by local and state-chartered banks, eventually giving rise to the free-market, decentralized system that America has today.

Today, Canada’s system remains truer to Hamilton’s ideal. The five major chartered banks, the few regional banks and handful of large insurance companies are all regulated by the federal government. Canadian banks are relatively constrained in the amounts they can lend. Canadian banks are required to have a bigger cushion to absorb losses than American banks. In addition, Canadian government regulations protect the domestic banks by limiting foreign competition. They also keep banks broadly owned by public shareholders

... ... ...

Since Mr. Obama seems to admire the Canadian banking system, his administration might want to take a page out of its playbook.

This would entail building a national banking system based on a small number of large, broadly held, centrally and rigorously regulated firms. Imitating the Canadian model would require sweeping consolidation of American banks. This would be a very good thing. Washington had difficulty figuring out the magnitude of the financial crisis because there are so many thousands of banks that it was impossible for regulators to get into all of them.

Washington is already on the path to achieving consolidation. Eventually, some of the larger banks into which the government is injecting taxpayer money will probably be deemed beyond help, and will either be allowed to die or be partnered with other banks. The market will take its cues from this stress-testing, and make its own bets on which banks will survive. It’s hard to predict how many will have survived when the dust settles, but the new landscape might consist of only 50 or 60 banking institutions. More radically, Washington could take over the licensing of banks from the states, or, at the very least, consider more stringent regulation of global and super-regional banks. After all, the Canadian system is considered successful not only because it has fewer banks to regulate, but because regulation is based on the tenets of safety and soundness.

There is no time to waste. Reconfiguring the American banking structure to look more like the Canadian model would help restore much-needed confidence in a beleaguered financial system. Why not emulate the best in the world, which happens to be right next door? At the very least, Hamilton would have approved.

Theresa Tedesco is the chief business correspondent for The National Post.

[Mar 2, 2009] US to Convert Preferred Shares in Citi to Common at 32% Premium to Market Price

The gravity of the situation is that now bondholders include major pension funds.  Also more cautious 401K  investors might be exposed, although majority of 401K lemmings already jumped from the cliff being invested mostly in stocks...  Interplay between domestic and international markets (with London as a Trojan horse and major threat to US markets) is also important issue.
naked capitalism
Anonymous said...
Those calling for a haircut to bondholders and swapholders (US depositors have first claim over those parties) have to realize that the result may be a toxic systemic "event" of unknowable magnitude. Ask yourself whether you want MetLife to go under.

Maybe "liquidationism" is the right approach but let's be honest about the full consequences.


Michael Fiorillo said...
Some questions from an observer of the fascinating and occasionally diabolical world of finance:

1. With Citi's market value having fallen so low, and with all the justifiable concerns about its prognosis, haven't its bondholders already taken big hits, and wouldn't that consequently provide an avenue for its (at least temporary) stewardship by representatives of the people of the United States?

2. Can't a creative legal theory be devised to sidestep the sanctity - note the religious connotation - of the contract, vis-a-vis Citi CDS owners who don't own the bank's bonds?

Wouldn't that relieve some of the stress the system is undergoing? And while we're at it, why not declare all naked CDS positions null and void?

Anonymous said...
"2. Can't a creative legal theory be devised to sidestep the sanctity - note the religious connotation - of the contract, vis-a-vis Citi CDS owners who don't own the bank's bonds?"

The Congress of the United States can pass laws under the commerce clause of the constitution to declear all CDS void. Holders would have a right to sue the Feds for compensation. However, compensation could be limited to the lower of purchase price or fair market value, which would screw over holders. But nothing good in life is free.

Anonymous said...

Funny, CITI launders money because it is the only liquidity available.

The problem with corrections or at least reinstating rules and regulations that only apply to US markets is it just chases greed to foreign unregulated markets.

I wonder if the manipulators even understood how much destruction they could cause. Of course, why should they care, they are not going to be held responsible.

Anonymous said...
American's are willing to put up with enormous income inequality relative to other western democracies to the extent they believe upward mobility is a reality. If that belief erodes in the face of a wrecked economy so will their willingness to submit to exploitation by the robber baron class and the population will turn to the government to level the playing field, and no amount of media manipulation (that means you, you scum bag shill Santelli) will stop it. Voilà, New Deal 2.0.

[Mar 1, 2009] Reader Sanity Check on What to Do Next With Banks

Reaganomics was a kind of Lysenkoism in US variant with economic instead of generics as a target. This nationalization discussion is a straw man PR trick and discussion of it is worthless. The real discussion should probably be about bankruptcy as banks in question are probably insolvent.  But as one reader noted:  "However, Summers/Bernanke/Geithner will not allow the FDIC to comply with its legal mandate to seize insolvent banks because they are puppets of the big 6 banks."
Nice remark about "Cato prostitutes"...  ;-)
naked capitalism
Anonymous said...
This whole debate over the term "nationalization" is worthless. The common use of the term is government seizing valuable assets without fair compensation for state ownership. Very few people want that. Anyone who uses the term "nationalization" in proposing a solution to the banking crisis is either a bad salesman of receivership / bankruptcy or is trying to help the big banks by undercutting support for receivership / c11 / c7.

For the life of me, I cannot understand why someone as smart as Yves continues to use the word "nationalization" in proposing a solution. The majority will never support a solution that fits the general definition of "nationalization". Never. It means government ownership and government operation.

People want to fix the banks without costing the taxpayers any money. That means bringing the big 6 banks (c, gs, ms, jpm, wfc, bac) back into line by forcibly wiping out equity (common and preferred) and giving equity to the creditors in exchange for haircutting their debt claims.

This can be done in bankruptcy, and this can be done under FDIC authority in a receivership. FDIC has legal authority to do this, right now. However, Summers/Bernanke/Geithner will not allow the FDIC to comply with its legal mandate to seize insolvent banks because they are puppets of the big 6 banks.

Anonymous said...
In the early 1970s, average Americans assumed Keynesianism was a basically good model for running the economy. They didn't have a sophisticated understanding of it, but they associated it with the good years of the 1950s and 1960s, so they liked it.

A decade later, thanks to the economic troubles of the 70s and a heaping helping of conservative rhetoric, those same Americans had begun to accept rational market theories and the belief that government can't possibly do anything right (except, of course, create Jeffersonian democracies in the Middle East). Again, they didn't have a sophisticated understanding of conservative ideas, and God knows they weren't about to get one from talk radio, but they associated conservatism with good times, so it was OK.

Until it wasn't. Now we get to watch neoclassicism die as hard as the New Deal.

doc holiday said...
The other night when my mutiny failed, I posted this (first part below) and wasn't sure if anyone saw it, so I'm re-posting along with two other puzzle pieces that are starting to form a very bad image somewhere within my cerebral cortex.

1. Steve Hanke, Professor - Applied Economics, John Hopkins University, and an economist with the Cato Institute:

Prof Hanke, however, said he foresees another recession raising its head after the economy turns around this time due to the Fed stretching the size of its balance sheet.

There will be danger right around the corner [after things stabilize] because the Fed has had this huge expansion of its balance sheet and then fine-tuning and shrinking it again will be difficult and we could be back into a recession again.

Richard Kline said...
So doc holiday, I do not regard anyone affiliated with the Cato Institute as having even the tiniest shred of intellectual credibility. None. Now, that is perhaps marginally unfair as some of those who show up there have, at other times in their life, done some scholarship of reasonable substance. That was then: The Cato Institute is flatly an ideological quote machine for the wealthy Right in America.
That is why it was created. That is by whom it is funded. Carefully selected Names are given well-paying fellowships there to lend their [slender but media-boosted] credibility to that agenda, and by so doing completely discredit themselves from the first check they cash. The only reason to listen to anything over a Cato Institute byline is to know what the Wealthy Right wants you to think as of today.

---And so we no: "No stimulus ever works. Ergo, those who back stimulus are ignorant proponents of failure on the public's dime." Totally political swill.

The efficacy of stimulus is debatable, the moreso in the present macroeconomical context of the US. But this isn't intellectual debate: it's pure spin.
Anonymous said...
burnside, is that across all ages, or is that people in their late '50s and '60s? Because that sounds a lot like what I hear from the older folks. The status quo made perfect sense to them, they don't understand why (and can't even conceive to what extent) it fell apart, and just want to make sure they escape any fallout.

To them (and I'm not trying to be snide here, but this is just an objectively discernible behavior of that age group) escaping fallout means rolling back taxes, no new regulation, and trying to get others to subsidize your lifestyle. That's the method they've always followed since they were young in the 1970s: inflation, oil shocks, and the presence of foriegn competition for the first time since the '20s were creating pressure, and their way out of it was to cut investment into infrastructure (which at that point was in good stead, after 40 years of New Deal era expenditures), deep cuts on social spending, and every man for himself.

And for much of their life, it seemed to work: infrastructure is slow to crumble, the lack of social insurance isn't really felt by those who can get by without it, and the bubble economy created an illusion of uber-wealth from the '80 right into the early years of this decade.

Those people have one worldview, and there is no way they could change, even if they wanted to.

Majorajam said...
Hemant makes a great point. What is very much underappreciated here are the foreign policy considerations, and their implications for this crisis.
Have a look at the list of major Citi stake holders. Now have a guess at the popularity of the decisions of all the sovereign wealth funds who got conned into these 'investments' in our financial industry. If the federal government were not willing to take a bath right along with them, you might say that'd be something of a bitter pill. We're about to run off somewhere in the vicinity of $tn in treasury issuance- the implications speak for themselves.

Then of course there's our special relationship with the house of Saud, and all that means in terms of influence on OPEC decisions and to a lesser extent, Arab- Israeli issues. In light of these things, The stipend to Citi, BofA, etc. shareholders is likely to be peanuts.

Not that this excuses Treasury for not decapitating the board (although the state of affairs can hardly be blamed on Pandit. And not that I don't understand the frustration at the broader injustice...

Anonymous said...
Majorajam said; “Hemant makes a great point. What is very much undersppreciated here are the foreign policy considerations, and their implications for this crisis.”

What is really under appreciated here are the foreign policy considerations that intentionally created this crisis;


“Given this storied history and two years of congressional testimony on oil trading skullduggery, one would expect to find volumes of current information available about this oil trading juggernaut. Instead, this company’s activities are so secret that its web site ( is a one page affair and lists only the addresses, phone and fax numbers of its offices in the U.S., London, Geneva, and Singapore. No officers’ names, no bios, no history, no press releases. And while the Wall Street firms of Goldman Sachs and Morgan Stanley have been fingered by Congressman Bart Stupak (D-Mich) for gaming the system, Phibro has completely escaped scrutiny during a seven year period when crude oil has risen an astonishing 697%.

Phibro is the old Philipp Brothers trading firm that has resided secretly and quietly on Nyala Farms Road in Westport, Connecticut as a subsidiary of the banking/brokerage behemoth, Citigroup, since the merger of Traveler’s Group and Citicorp (parent of Citibank) in 1998. Traveler’s Group owned Phibro at the time of the merger. Despite the fact that Phibro has provided Citigroup with $2 billion in revenue over the past three years, the 205-page annual report for Citigroup in 2007 carries only the following one-sentence footnote on commodity income that acknowledges the existence of this company. “Primarily includes the results of Phibro Inc., which trades crude oil, refined oil products, natural gas, and other commodities.”

Combing through government archives, the first noteworthy appearance of Phibro occurs on April 6, 2001, when the Wall Street law firm of Sullivan & Cromwell sent a letter to the Commodity Futures Trading Commission (CFTC), the Federal regulator of oil and other commodity trading, acknowledging that it was representing “the Energy Group.” The letter was noteworthy because it delineated just who had teamed up to grease the oil rigging in Washington: namely, two investment banks (Goldman Sachs and Morgan Stanley); a house of cards that would later collapse (Enron); a proprietary trading firm inside a Frankenbank (Phibro inside Citigroup); and two real energy firms (BP Amoco and Koch Industries).

What the Energy Group had long lobbied for and finally received from its Federal regulator was the breathtaking ability to trade oil contracts and oil derivatives secretly in the over- the-counter (OTC) market, thus avoiding the scrutiny of regulated commodity exchanges, their CFTC regulator, and Congress. The April 6, 2001 letter was essentially to say thanks and interpret the new rules as favorably as possible for the Energy Group.

The change in the law occurred via the Commodity Futures Modernization Act of 2000 (CFMA) and is called the Enron Loophole. (Since Enron’s trading room went belly up along with the company, and Phibro is still trading oil secretly all over the world, it should perhaps now be called the Phibro Loophole.)

What the CFTC also granted the big Wall Street trading firms was a license to sneak under the radar by using computer terminals located in the U.S. while trading oil on foreign exchanges like the Intercontinental Exchange (ICE) located in London but owned by an Atlanta, Georgia outfit that was funded and launched by Wall Street firms and big oil.

On June 3 of this year, Dr. Mark Cooper, Director of Research for the Consumer Federation of America, correctly outlined the problem to the Senate Committee on Commerce, Science and Transportation:

“The speculative bubble in petroleum markets has cost the economy well over half a trillion dollars in the two years since the Senate hearings first called attention to this problem…Public policies have made these markets the playgrounds of the idle rich, while consumers suffer the burden of rising prices for the necessities of daily life. We have made it so easy to play in the financial markets that investment in productive long term assets are unattractive…The most blatant mistake occurred when Congress allowed the Commodity Futures Trading Commission to forego regulation of over the counter trading in energy futures…Because there is no regulation of this huge swatch of activity, regulators have little insight into what is going on in energy commodity markets…Large traders who trade in commodities in the U.S. ought to be required to register and report their entire positions in those commodities here in the U.S. and abroad…If traders are unwilling to report all their positions, they should not be allowed to trade in U.S. markets. If they violate this provision, they should go to jail. Fines are not enough to dissuade abuse in these commodity markets because there is just too much money to be made.”

The only correction I would make to the otherwise flawless argument above is that Wall Street is far from the playground of the “idle” rich. Wall Street executives spend every waking minute (and I’ve heard even dream about) how they can separate us from our money, our homes and a voice in Washington. How appropriate that Citigroup’s slogan is “the Citi never sleeps.”

Let’s say the CFTC was not a compromised regulator, was not an audition stage and revolving door for million dollar jobs in the industry it regulates. Let’s say it genuinely wanted to report back to Congress on just how big a player Citigroup is in the oil markets. According to a February 22, 2008 filing with the Securities and Exchange Commission (SEC), Citigroup has over 2,000 principal subsidiaries (meaning it really has more but it’s not naming them). Of these, a significant number are secret offshore entities where records are unavailable to regulators. (For a mind boggling look at this sprawling octopus click here: )

So the CFTC can’t get its hands on all records and even in jurisdictions where it can, it first has to know under what names, out of a possible 2,000, Citigroup is trading oil and then aggregate the positions.

On May 6 of this year, Tyson Slocum, Director of the Energy Program at the nonprofit watchdog, Public Citizen, testified before Congress on yet another roadblock preventing a meaningful investigation of oil price manipulation:

“Thanks to the Commodity Futures Modernization Act, participants in these newly-deregulated energy trading markets are not required to file so-called Large Trader Reports…These Large Trader Reports, together with the price and volume data, are the primary tools of the CFTC’s regulatory regime…So the deregulation of OTC markets, by allowing traders to escape such basic information reporting, leave federal regulators with no tools to routinely determine whether market manipulation is occurring in energy trading markets…The ability of federal regulators to investigate market manipulation allegations even on the lightly-regulated exchanges like NYMEX New York Mercantile Exchange is difficult, let alone the unregulated OTC market.”

Next comes what can only be described as an act of insanity on the part of the Federal Reserve. After allowing for the repeal in 1999 of the depression era investor protection legislation known as the Glass-Steagall Act in order to let Citigroup house retail bank deposits, investment banking, insurance, stock brokerage and speculative proprietary trading under one roof (the perfect storm that intensified the Great Depression) the Federal Reserve decided on October 2, 2003 that Citi wasn’t scary enough. It needed to allow this company that had already been named in hundreds of lawsuits for securities frauds and manipulations and could not remotely manage itself as a financial firm to ramp up its oil trading business by allowing it to take possession of crude oil on tankers because it would “reasonably be expected to produce benefits to the public.” Here are excerpts from the Fed’s release suggesting the expansive plans Citi had in the oil storage and transport business:

“…Citigroup has indicated that it will adopt additional standards for Commodity Trading Activities that involve environmentally sensitive products, such as oil or natural gas. For example, Citigroup will require that the owner of every vessel that carries oil on behalf of Citigroup be a member of a protection and indemnity club and carry the maximum insurance for oil pollution available from the club. Citigroup also will require every such vessel to carry substantial amounts of additional oil pollution insurance from creditworthy insurance companies. Furthermore, Citigroup will place age limitations on vessels and will require vessels to be approved by a major international oil company and have appropriate oil spill response plans and equipment. Moreover, Citigroup will have a comprehensive backup plan in the event any vessel owner fails to respond adequately to an oil spill and will hire inspectors to monitor the loading and discharging of vessels. Citigroup also has represented that it will have in place specific policies and procedures for the storage of oil… The Board believes that Citigroup has the managerial expertise and internal control framework to manage the risks of taking and making delivery of physical commodities… For these reasons, and based on Citigroup’s policies and procedures for monitoring and controlling the risks of Commodity Trading Activities, the Board concludes that consummation of the proposal does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally and can reasonably be expected to produce benefits to the public that outweigh any potential adverse effects.”

Voting in favor of this unprecedented action was then Federal Reserve Chairman Alan Greenspan as well as current Chairman, Ben Bernanke.”

Link, more;

Deception is the strongest political force on the planet.

i on the ball patriot

Elizabeth said...
I may be in the minority but I actually like this approach. Bondholders are not off the hook.

Nationalization- all the bondholders are off the hook. The US govt goes it alone. Liquidation - absolute disaster and destruction of value.

Anonymous said...
"*You don't wipe out the institutional investors who stepped up (perhaps stupidly) to put in additional capital but they are still not out of the woods - their fate and the US taxpayers is tied together."

"Liquidation - absolute disaster and destruction of value."

Chapter 11 / receivership doesn't destroy value. The bankers destroyed value over the past 10 years making bad investments. Chapter 11 /receivership restructuring gives the bankers exactly what they are entitled to and not a penny more.

And the US taxpayer has already had his pocket picked for over 1 trillion dollars, mostly for equity that would be wiped out in a c 11. Fair is fair. Stop the bleeding of the US taxpayer, and force a haircut on bondholders (pimco, etc) and counterparties (gs, barclays, rabo, etc).

If there really is value in the bank assets as Bernanke/Geithner claim, let the creditors have it by taking stock in the bank. If there isn't let them take losses. Either way, it is not the taxpayer's problem.

Haircuts are only a problem to bank management who will see their equity comp vaporized.

Juan said...
3:53, The US taxpayer didn't lie, so they shouldn't be held responsible for the US bankers lies.

Is somewhat analogous to

We do not accept a situation where people who had no part in the process of taking a loan, and in most cases never benefited from the loan, are burdened with repayments for such loans. Classical examples of such debts, commonly referred to as odious debt, include debts inherited by democratic governments from dictators as is the case with Mobutu in the Democratic Republic of Congo (formerly Zaire) and Banda in Malawi and from colonial and apartheid regimes as typified by South Africa.

There is such thing as illegitimate debt that, until recently, has primarily impacted people of the 'global south'...

d4winds said...
Your perspective on CDS's as getting free counterparty risk insurance from Uncle Sam, the 3rd party, is dead on.

But the market in "naked" CDS's, where the protection buyer does not own an underlying bond, is even more perverse. These positions amount to one party betting on the value of the firm's debt against another party subject to collateral postings--margin calls--when neither party owns the underlying security.

Our forefathers outlawed such instruments on stocks by state laws after the Panic of 1907, to whose severity they contributed. The contracts were created by so-called "bucket shops" [on Wikipedia]. By contrast to the CDS market today with its free insurance from the USG, back in 1907 the margin calls had to be covered by the private party.

The Commodity Futures Modernization Act of 2000--Phil Gramm was its architect and WS vigorously lobbied for it--specifically exempted securities like CDS's from the state anti-bucket shop laws. After enactment of this act, the CDS market exponentially exploded.

So, the CFMA expressly legalized a gambling activity our ancestors had learned from bitter experience to outlaw; and, now the uncompensated 3rd party (taxpayer) is guaranteeing the gambling debts. But the insurance scheme kicks in only if their bets, like those by GS and AIG, were big enough. Poor devils like Indymac who just didn't bet big enough did not receive this free insurance and have had to go the way of FDIC receivership/Chapter 11.

"decisions of all the soverign wealth funds who got conned into these 'investments' in our financial industry"

It is not only the SWFs that were conned but also millions of modest means fixed-incomers reaching for yield and the safety of AAA rated C and GMAC and ..... How can the government follow the libertine solution of simply wiping out the bondholders and stockholders when the radical GWBush/Greenspan government is responsible for creating and sustaining the financial meltdown.

The financial crisis is the culmination of thirty years of policy by and for banking, corporate, and wealthy interests at the expense of the middle and less well off American classes.

There has been no area left untouched in the rush to dump financial responsibility (transfer risk) for retirement, healthcare, unemployment, etc on the average citizen while continuously rewriting the rules to make it increasingly easy to steal from him/her.

O'bama has fired the opening salvo, starting with the no brainer of immediately raising taxes on the leaches who are responsible for this mess. Libertarian bull shit about nationalization is just that, BS.

For now, the overthrow of the US by home grown financial terrorists has been narrowly avoided. The chaos following an abrupt, and poorly considered, nationalization is just what the Bush crowd was after.

ruetheday said...
"O'bama has fired the opening salvo, starting with the no brainer of immediately raising taxes on the leaches who are responsible for this mess."

If his plan encompassed hiking the taxes on dividends and capital gains, instituting a Tobin-esque tax on ALL financial transactions, and instituting a punitive new top marginal income tax rate on unearned income over $1 million per year, I'd be inclined to strongly agree. Simply raising the income tax rate on all households earning over $250k/year punishes a whole lot more people than the "leaches responsible for this mess".

Gentlemutt said...
It is a bit early for much of a groundswell in support of substantive reform.

For example, how much had the national zeitgeist changed between, say, October 1929 and March 1930 on the one hand, and October 1929 and 1935 on the other hand? We'll get there, but let's face it --- Murdochland shapes opinion but also holds up a mirror to this nation, and it is not going to change its tune until its remaining advertisers respond to general sentiment and demand it.

And funnily, by coincidence of the sort history seems to relish, the presumably-quite-honest mayor presiding over the crime scene made and still makes his own $billions supplying the tubes and pipes of the financial interweb, so until his ever-extensible reign concludes it is reasonable to presume there is substantial inertia opposing a real reform of America's "trading culture."

In the meantime, pretty much everyone can agree on the value of enforcing laws now on the books -- including those dusty SEC regs and Sarbanes-Oxley for all those overpaid execs who signed off on demonstrably false 10-Qs and Ks.

Frankly I'm a bit surprised Mr. Cuomo has not already jumped out in front on this one in NY state. All he has to do is chase the guys at the top since they exposed themselves to criminal prosecution when they signed off on the fake financials, and they in turn will try to cut deals by squealing on their sometimes even more egregiously overpaid underlings in the capital markets and real estate divisions. This will be a new twist on trickle-down economics.

Mr. Cuomo, while we wait for reform, I stand ready to help for the necessary project at hand...Ferdinand Pecora calls to you.

March 1, 2009 9:57 AM
Independent Accountant said...
I say force all the big banks into bankruptcy. Indict their senior managers for securities fraud as well as the lawyers, SEC employees, rating agencies and CPAs who shilled for them. Remember Eisenhower's 18 January 1961 warning about the "military-industrial complex"? We now have a bank-NYBigLaw-SEC-DOJ-Fed complex. Repeal the Federal Reserve Act. Investigate the SDNY US Attorney's office. Bring back the guillotine. End fractional reserve banking. While we're at it, replace our Supremes who have not overturned the "gold clause" cases of the 1930s.

[Mar 1, 2009] On Downward Mobility

The inability to recognize the worth of others' labor (especially unskilled labor) remains perhaps the most unjust aspect of our society.
naked capitalism

What is sad about this is not just the desperate shape some are in, but here, people who are comparatively fortunate (they have found new work) are troubled because the work is low status.

These individuals are mourning the loss of their former lives. That loss is compounded by the fact that the US is so stratified along income and class lines. A loss of a job tests one's friendships.

Selected Comments

Richard Kline said...
There is so much that is so apt in this post, Yves. Yes, the FIRE engine was driven by a taste for wealth, but what has kept Americans politically inert for a generation is the quest for status. That is my view. The money is great, but with it comes membership in The Right Set; this is more about self-image and the feedback from one's immediate intimates than a formal class divide, but it is very real. If folks see themselves have it relfected back to them that they are part of the Right Crew, they are insensible of any questions or social justice, sustainability, a world in balance or all the rest. They have theirs, and they are not in a hurry for their society to get anywhere else. That is not exactly a criticism on my part; it's human nature coupled seamlessly to the deep sociology of Americans.

I see folks all the times, making low six figures and living the life. Of course, that's Not Enough, and especially if they are under, say, 45, they are socialized to be in debt far over their head to act like they take home twice what they do. That's the saddest/sickest part of all that. But the fear of status loss is very real. Years ago, I decided to commit to scholarship, and deliberately took a no-status job exactly because when I walked out the door at day's end I left everything behind there and could concentrate on what mattered to me. The job's gotten harder, but the goal remains the same. But I rub shoulders with the Right Set in my urbarn core hood daily, and it is easy to see that I don't exist in their eyes, or anyone like me. "What do you do?" is ever the first question, with the status assessment goal so implicit that the questioners don't even notice.

The worst thing I have to say for those folks quoted in the NYT article, and it gives me no pleasure, is "You will never get It back." Not over 50, with a decade and more of poor to ugly economy coming at us. They will never get their status card back. And like the woman said, it can be worse than a parent dying. Americans in urban cores, especially in the Right Set have no real neighborhoods or lasting sodalities. Their social networks are largely situational: work and school plus whatever family members happen to live in whatever part of the country they have come to. If you lose you Right Set position, there is nothing left but your rapidly diminishing assets---and your debt. . . . This world is crazy, lemme tellyah.

It is hard to wish for 20% unemployment in my country to show the many in the Right Set that they have more than their position to them and that their society as skewed and framed has less meaning than they have accorded its recent incarnation. But my wishes won't make that happen or not happen; we will get it or not, and perhaps some wisdom thereby, like it or not.

[Mar 1, 2009] Buffett Says Economy Will Be `in Shambles' for 2009, Likely `Well Beyond' By Rick Levinson

...The Standard & Poor’s 500 Index will probably gain in three-quarters of the next 44 years, just as it did in the period since Buffett took over Berkshire Hathaway Inc. in 1965, he said today in his annual letter to the company’s shareholders.

While Buffett and business partner Charlie Munger can’t predict how stocks will perform in 2009, they’re certain “that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond,” he wrote.

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Groupthink : Two Party System as Polyarchy : Corruption of Regulators : Bureaucracies : Understanding Micromanagers and Control Freaks : Toxic Managers :   Harvard Mafia : Diplomatic Communication : Surviving a Bad Performance Review : Insufficient Retirement Funds as Immanent Problem of Neoliberal Regime : PseudoScience : Who Rules America : Neoliberalism  : The Iron Law of Oligarchy : Libertarian Philosophy


War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes


Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law


Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least

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