Commentaries

Now raising intellectual capital

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.

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.

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.

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.

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.

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.

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.

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.

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.

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. 

  •