Commentaries

from Rolfe Winkler:

Geithner’s faulty apologia

Tim Geithner's appearance in front of Congress today was another embarrassment, perhaps more for the people's representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG's counterparties, which included more than Goldman Sachs.

What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG's payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.

Geithner was lucky to be doing battle with such an unprepared, unimpressive group.

His defense, such as it was, amounted to the following:

Had the Fed imposed haircuts on AIG counterparties, it would have led to AIG's credit rating being downgraded and the company (and consequently the economy) would have collapsed.

But AIG had already been downgraded, that's why the government stepped in with a bailout. At that point the firm's liabilities were taxpayer backed, so it strains credulity to say that extinguishing certain CDS it had written would cause systemic fallout in and of itself. Essentially what was happening here was unused insurance contracts were being extinguished. (Imagine a pro-rata refund from your insurer for a homeowner's policy it wants to cancel...)

And there was precedent for this kind of negotiation. Eric Dinallo, former Commissioner of the NYS Dept. of Insurance and current candidate for Eliot Spitzer's old job, had previously negotiated haircuts on CDS written by the monoline bond insurers. They were never forced into a taxpayer bailout. Did anyone at the Fed pick up the phone to consult Dinallo? Why not?

from Rolfe Winkler:

Morning Links 1-22

Geithner has reservations on US banks (Wutkowski/Eder, Reuters) More evidence that Geithner is a goner. Will Volcker replace him? Sheila Bair could be a dark horse. She has lots of Democratic fans on the Hill despite being appointed by a Republican. In any case, Geithner was on PBS last night defending the plan.

A closer look at the Volcker rule (Felix) Capitol Hill may not be taking Obama's rule very seriously. They think it was just a way to spin the news cycle away from the fact that healthcare will fail now that the Dems have lost their 60th vote in the Senate. Moreover, they don't think Obama's actually going to wage the fight against Wall Street that he claims he's ready for.

Bernanke faces tougher vote in Senate (Reddy/Paletta, WSJ)

Fed secrecy claims bogus redacted AIG details already public (Adams, Naked Capitalism) More detail in a second post here.

FDIC and Bank of England to cooperate on resolution of troubled cross-border financials (FDIC) Next time a big financial blows itself up, Sheila Bair and Mervyn King want to make sure they're prepared to deal with it in tandem.

NYC will move (a little bit) of its money (Traub, HuffPo) Bloomberg puts a little bit of support behind the Move Your Money campaign.

Chavez accuses U.S. of using weapon to cause Haiti quake (Moran, Digital Journal) "Venezuelan President Hugo Chavez has accused the United States of causing the devastating 7.0 magnitude earthquake in Haiti, which killed possibly 200,000 people. Chavez believes the U.S. was testing a tectonic weapon to produce eco-type devastations."

from Rolfe Winkler:

Afternoon Links 1-20

Must Read -- Short sale fraud + follow-up (Olick, CNBC) Great sleuthing from Diana Olick. Sounds like outright fraud being committed by big banks. One follow up question: In many cases, the second-lien holder is also the first lien holder. How is that impacting short-sales?

Buffett opposes bank fee (CNBC) See 2/3rds down the page. Obfuscation worthy of a banker. This should come as no surprise as Buffett is Wells' top shareholder. He previously opposed the bank stress tests because it diluted his shareholdings. Nevermind that the stress test forced the bank to raise desperately needed capital. It's a shame, really. As his career winds down, he's sacrificed his reputation as a financial straight-shooter to protect his wealth.

In other Buffett news: He's opposed to Kraft's bid for Cadbury (he's a big Kraft shareholder) and he split his shares, something he never wanted to do. So not a great day for the Oracle.

FT as shameless Fed booster (NakedCapitalism) Yves takes down the FT piece that said the Fed has made a killing on its AIG holdings.

CRE prices up 1.0% in November, not expected to continue (CR) Moody's released its data for CRE prices for November today. They showed a month over month uptick for the first time in a while. That said, this is not a super reliable index due to the few number of data points available. And Moody's says to expect prices to head back down.

Scott Brown successfully capitalized on bank bailout blues (Bottari, CMD) Walker Todd sent a missive over this morning noting, too, that while the healthcare bill's unpopularity certainly played a role in Brown's surprise win, anger over Obama's kowtowing to banks may have pushed him over the edge. Unfortunately, Republicans are equally captured by the bank/homeowner lobby.

Foreclosure efforts failing b/c don't reduce principal (Nasiripour, HuffPo) Helpful confirmation of a fact that is well-known.

from Rolfe Winkler:

Rickards: You can’t print your way out of debt

Reader note: This is Jim's second piece in an ongoing debate with Warren Mosler about the economy. Here are links to previous posts in the series: Writer biographies / Mosler #1 / Rickards #1 / Mosler #2.  There will be one more post from each writer.

by James Rickards

Before I lay siege to Warren Mosler's remedies, let me say he's a brilliant guy I've admired for 25 years going back to his days at AVM.  I got reacquainted in 2004 when I lived in St. Croix and Warren ran for Congress from the Virgin Islands.  His campaign ads were 5-minute infomercials; tutorials on economics and gems of sound fiscal advice.  But this is a debate, so let's begin.

Warren makes eleven points and I agree with two - the elimination of payroll taxes and converting banks into utilities.  Payroll tax elimination spurs consumption and stimulates job creation. As for banks, we need them, we just don't need casinos that call themselves banks.  Bring back Glass-Steagall, separate deposit and loan functions from proprietary trading and banish the latter to hedge funds.  Speculation should survive on its own dime.

I don't need to take the rest point-by-point because they're the same thing - an unlimited belief in the Fed's power to print money.  Warren calls for a $500 per capita state rebate, a federal job for all takers, direct Treasury funding of housing, unlimited deposit insurance, no debt ceiling, Treasury overdrafts at the Fed and federal purchase of foreclosed homes. He doesn't propose free ice cream for children but I don't see why not; just print some money and go for it!

Warren's program would work if the world had as much faith in the dollar as he does.  But it doesn't, and neither do the American people. If we were all captives of a government dollar monopoly with no alternative, then maybe his plan would work for awhile.  But we do have alternatives in land, art, commodities and the oldest form of money - gold.  It's no coincidence that when FDR debased the dollar in 1934 he simultaneously banned private ownership of gold.  He knew citizens would hoard gold when he trashed the dollar so he made that illegal.  One of Reagan's lasting gifts to the American people was a law in 1985 which made U.S. mint gold coins available to average citizens.  Now when the Fed cranks up the printing presses, citizens have a choice.  Foreign central banks have the same choice in terms of gold bullion and commodities such as oil and copper which serve as stores of value and industrial inputs.

Here's where complexity theory comes in.   Each citizen, company and central bank is an interdependent agent with a threshold for dollar rejection based on the thresholds of others.  Some will not flee the dollar unless many others go first.  But some have already bought gold and others are on a hair trigger.  What does the complete system look like? Are we in the critical state where a small shift brings the entire edifice crashing down - the tipping point? It's impossible to say, but we're certainly closer than ever.  Warren's cavalier approach to printing money as the cure for all ills guarantees the greatest disease of all - destruction of the dollar.

from Rolfe Winkler:

Does Volcker give the Fed too much credit?

Paul Volcker's speech to the Economic Club of NY last week (pdf) was generally reported as the latest example of the former Fed Chairman calling for more substantive financial system reform. He did repeat those points, but the focus of his speech was about the importance of the Fed maintaining its regulatory and supervisory authority over the banking system. At a certain point, this seems the stuff of absurdist theater. If the Fed never intends to use its regulatory authority, why insist the authority be maintained?

The problem with his speech is that while he acknowledges the Fed is badly staffed -- mostly with economists/mathematicians, few from business/banking -- he doesn't address the clear failure on the part of the FOMC to 1) grapple with bubbles nor 2) to get serious about sensible reforms. He bemoans "reform light," but that is precisely what the Fed is delivering.

Volcker wants tougher rules for derivatives trading, yet Pat Parkinson -- the man Bernanke appointed as the Fed's top bank regulator -- has long favored a hands-off approach to derivatives. Volcker argues proprietary trading and other risky activities should be spun-off from commercial banks. It makes no sense for such risky activities to be backstopped by the financial system safety net -- deposit insurance and last resort lending from the Fed. Yet Bernanke has done nothing to indicate he'll separate the two.

Volcker is correct that the Fed should play a vital role in regulating the banking system. But this assumes the guys in charge actually use their regulatory power. Bernanke hasn't done so. Instead he adopted his predecessor's deregulatory zeal and penchant for bailing out the system.

Continuing the pattern of the last 25 years, the next financial market emergency is likely to be more disruptive than the last. The Fed has already lost so much credibility that when the next one hits, it's not hard to envision it being neutered.

from Rolfe Winkler:

Morning Links 1-7

Tim Geithner covered up AIG's payments to counterparties (DealBook) Timmy G. knew it looked bad for AIG to pay out 100¢ on the dollar to counterparties like Goldman. So he told AIG to shut up.

Obama buget will raise "carried interest" tax (Comstock, Business Insider) Awesome proposal from the Prez. Recall that hedge-funders and PE guys can treat their partnership income as capital gains. As a result they're only taxed at 15% instead of normal income tax rates of 35%. Last time this came up, Chuck Schumer killed it. This time it's likely to happen.

Obama OKs taxing high-end health plans (Werner, AP) Another good move. It's Republicans who've argued that such health plans should be taxed so this will get bipartisan support if Dems get on board. Unions oppose it so this demonstrates some backbone from Obama.

New Japanese finance minister calls for more stimulus, weaker yen (Kajomoto/White, Reuters) Debt surpassing 200% of GDP doesn't faze the new guy...

Redrado fight roils Argentina's markets (Cowley, WSJ) Argentina's president wants to fire the central bank chief for refusing to release reserves to pay down debt. He says he won't go. He has the backing of Congress too. RBS says it's an opportunity to buy Argie debt.

Banks favorite Dem set to replace Dodd (Grim, HuffPo) Tim Johnson is from SD, the home of credit card processors. He's the only Dem who voted against credit card reform. He also opposes cramdowns and is a supporter of pay-day lenders...

Fed conflicted on MBS purchase program (Aversa, AP) The Fed has promised to stop printing money to buy mortgage-backed securities this March, after buying $1.25 trillion total. There are many who think the Fed is trapped and can't step away. Not only will they never sell what they bought (effectively monetizing mortgage debt) but they'll continue buying to support the housing market. Minutes from the latest Fed meeting suggest that some officials indeed think the program will have to keep going...

from Rolfe Winkler:

Lunchtime Links 12-29

Was the global financial crisis a mathematical error? (Steve Keen, Business Spectator) Keen's latest. Another great piece explaining the flaws of neoclassical economics. (ht Yves)

Not just Tiger's temptations (Glanville, NYT) Another great column from ex-Cub/Phillie Doug Glanville.

Housing crash leads to falling divorce rate (Waller, WSJ)

Fed proposes selling term deposits to absorb excess reserves (Torres, BusinessWeek) To prevent banks from lending too much of the free money it gave them, the Fed will sell them CDs.  Earning interest on free money is another reason why it's good to be a banker...

In new way to edit DNA, hope for treading disease (Wade, NYT) "Only one man seems to have ever been cured of AIDS, a patient who also had leukemia. To treat the leukemia, he received a bone marrow transplant in Berlin from a donor who, as luck would have it, was naturally immune to the AIDS virus."

Video tour of 96 sq ft house (Unclutterer)

Lots 'o lights (imgur) Impressive Xmas decorating.

from Rolfe Winkler:

Sprott: Is it all a Ponzi?

In his latest missive to investors (pdf link here), Eric Sprott asks if our Ponzi economy is at risk of collapse. In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion. So who bought all the rest? According to Treasury, "other investors" bought $510 billion, up from just $90 billion in 2008. With the Fed's printing press turned off, the question for next year is whether "other investors" can buy more Treasuries than they did this year...

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Sprott has over $4 billion under management, the majority of which is in physical bullion, both gold and silver.

This blog has also argued that the American economy is a pyramid scheme:

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.

Like pyramid schemes, fractional reserve banking systems simply don't work in reverse. "It's A Wonderful Life" demonstrates why.There must always be new money coming into the system to refinance debts. If investors/depositors suddenly demand their money back, the system crashes.

Deflation to a central banker is like withdrawals from a Ponzi scheme. Too much at once and the scheme collapses. The Fed's (impossible) job is to make sure it never does.

from Rolfe Winkler:

Evening Links 12-16

Fed repeats "exceptionally low" for "an extended period" (Fed statement) The Fed maintains that it isn't raising rates for the foreseeable future, but repeated that it plans to end MBS asset purchases by April next year. Too bad we can't get a surprise rate hike in order to chase risk back out of credit markets...

Wells' CLO deal called "landmark" (Paulden, Bloomberg) The return of CLOs would be the latest sign that Wall Street is dancing again.

Big decision looms on Fannie and Freddie (Timiraos/Hagerty, WSJ) Suggests Obama could expand his commitment to Fannie and Freddie beyond $400 billion while he's still able to unilaterally. If he waits till next year, Congress would have to approve.

Man of the Year: Ben Bernanke (Time) Ha! Ben should have said thanks but no thanks. Ten years ago Time christened Rubin/Greenspan/Summers as The Committee to Save the World. In the fullness of time, all have been proven failures. Time's endorsement is final confirmation that Bernanke too is a failure.

Norway raises rates (Kremer, Bloomberg) More fodder for yesterday's Norway thesis. Higher rates make for a more attractive currency...

Some debt-laden graduates wonder why they bothered with college (ABC News) Full of choice quotes: "You're led down this path of needing to go to college," [says one indebted grad]. "The college diploma is the new high school diploma."

Spend more. Get less. The worst fun city in America (Wachs/Eskenazi SFWeekly)

Let the Fed regulate

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. 

Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks.

  ”I really want the Federal Reserve to get back to its core enterprises,” Dodd said. In recent years, the Fed’s regulation of bank holding companies and consumer lending “was an abysmal failure,” he charged.    No, the Fed didn’t cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed.

But there are three more important reasons to keep the Fed in a major role as a regulator of financial institutions. (more…)