MacroScope

Just how big is the benefit that too-big-to-fail banks receive from their implicit taxpayer backing? Federal Reserve Chairman Ben Bernanke debated just that question with Massachusetts senator Elizabeth Warren during a recent hearing of the Senate Banking Committee. Warren cited a Bloomberg study based on estimates from the International Monetary Fund that found the subsidy, in the form of lower borrowing costs, amounts to some $83 billion a year.

Bernanke, who has argued Dodd-Frank financial reforms have made it easier for regulators to shut down troubled institutions, questioned the study’s validity.

“That’s one study Senator, you don’t know if that’s an accurate number.”

Here’s more of the rather heated exchange:

Bernanke: “The subsidy is coming because of market expectations that the government would bail out these firms if they failed. Those expectations are incorrect. We have an orderly liquidation authority. Even in a crisis, we, in the cases of AIG for example, we wiped out the shareholders…”

Warren: “Excuse me, though, Mr. Chairman, you did not wipe out the shareholders of the largest financial institutions, did you, the big banks?

Our recent post on the End of Capitalism triggered much interest and comment.  There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?

Anthony Conforti suggested in a comment that we need a name for what is happening,:

The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?

As the world moves closer to the end of the credit crisis, sovereign wealth funds around the world are experiencing mixed fortunes.

Good news comes from Singapore’s SWF Temasek, which springs back into gains with its portfolio climbing 32 percent between April to end-July after a 30 percent loss in the year to end-March.

Announcing its annual performance report (which should please the country’s taxidrivers), Temasek said it is open to investing in financials and resources in the long term and it has bought stakes in South Korea’s ENK, cylinder suppliers, and Brazil’s oilfield services firm San Antonio.

Sovereign wealth funds are increasingly working in concert to make joint strategic investments.

China, Singapore, Malaysia, Korea, Abu Dhabi and Kuwait are among those which have recently formed investment partnerships with each other.

Why are they doing this? First of all, by linking up capital and resouces, SWFs can leverage up, optimise local knowledge, spread risks and maximise returns.

The world has experienced many crises in the past.

In 1636, during the Dutch Tulip Bulb Bubble, the quest for a perfect black bulb had inflated the price of a black bulb by many hundreds. In a different crisis in 1866, a London wholesale bank Overend, Gurney & Co collapsed with a massive debt, after expanding its investment portfolio beyond its means.

What is common in these events and the present crisis is that investors borrowed and levered themselves, and the eventual bubble burst prompted massive deleveraging and contagion, according to Julian Chillingworth, chief investment officer at London-based asset management firm Rathbones (established in 1742 – 22 years after the South Sea Bubble).

“It’s greed, it’s fear and it’s leverage,” Chillingworth told a group of journalists at a breakfast briefing. He says all the risky and highly leveraged assets were dressed up with “pseudo finance” and the likelihood of contagion and volatility was characterised as a “black swan” event – originally a metaphor for something that could not exist.