Can crisis inquiry live up to 1930s trailblazer?

Jan 14, 2010 14:32 UTC

Ferdinand Pecora turned a tame United States investigation of the 1929 Crash into an exposé that spawned far-reaching banking reform. Despite flashes of incisiveness from Chairman Phil Angelides, the Financial Crisis Inquiry Commission’s debut with Wall Street bosses Wednesday lacked that kind of promise. It’s early days, but the panel needs to sharpen up.

Mr. Angelides began on a high note, quizzing Goldman Sachs honcho Lloyd Blankfein about the firm’s dual role marketing financial products to customers and, elsewhere in the organization, at times selling the same products short. But Mr. Angelides didn’t have time to press his point, and the other commissioners mostly offered softer questions.

Jamie Dimon, John Mack and Brian Moynihan, respectively the bosses of JPMorgan, Morgan Stanley and Bank of America, took less flak – but that may be because they escaped questioning from Mr. Angelides, who concentrated on Mr. Blankfein.

Even Brooksley Born, famous for battling former Federal Reserve Chairman Alan Greenspan and other bigwigs over derivatives regulation, didn’t press the bank chief executives very hard.

Of course, this is just the beginning. Aside from looking at Goldman’s apparent conflicts, the American International Group rescue, derivatives trading, bank leverage, credit ratings and other potential financial sector causes of the crisis, the government’s role demands scrutiny, too. That includes not just regulatory failures but also policies that promote and subsidize home ownership – raised by Mr. Blankfein in his testimony – and the extremes of leverage allowed at government-linked mortgage giants Fannie Mae and Freddie Mac, an issue brought up by Mr. Dimon.

With all this ground to cover, there is time for Mr. Angelides’ panel to hit its stride. Back in the 1930s, it took the arrival of Mr. Pecora in 1933 – only as counsel to the Senate investigation, and its fourth one at that – to galvanize proceedings and earn his name’s association with the commission, which led to the Securities Act of 1933 and the Securities Exchange Act of 1934.

If Mr. Angelides wants his own name linked with similarly meaningful results this time around, he needs to knock his team into leaner, meaner shape.

COMMENT

Nothing much will be accomplished while things are relatively calm in the markets and economy. But once we start another big leg down, which is coming this year, the social mood will shift and the political backing of the people will be there to really effect some change. By the Spring of 2011 things will look quite different and some real reform will get done.

Posted by Onlooker from Troy | Report as abusive

Can crisis inquiry live up to 1930s?

Jan 14, 2010 01:20 UTC

- By Rolfe Winkler and Richard Beales -

Ferdinand Pecora turned a tame United States investigation of the 1929 Crash into an exposé that spawned far-reaching banking reform. Despite flashes of incisiveness from Chairman Phil Angelides, the Financial Crisis Inquiry Commission’s debut with Wall Street bosses Wednesday lacked that kind of promise. It’s early days, but the panel needs to sharpen up.

Mr. Angelides began on a high note, quizzing Goldman Sachs honcho Lloyd Blankfein about the firm’s dual role marketing financial products to customers and, elsewhere in the organization, at times selling the same products short. But Mr. Angelides didn’t have time to press his point, and the other commissioners mostly offered softer questions.

Jamie Dimon, John Mack and Brian Moynihan, respectively the bosses of JPMorgan, Morgan Stanley and Bank of America, took less flak – but that may be because they escaped questioning from Mr. Angelides, who concentrated on Mr. Blankfein.

Even Brooksley Born, famous for battling former Federal Reserve Chairman Alan Greenspan and other bigwigs over derivatives regulation, didn’t press the bank chief executives very hard.

Of course, this is just the beginning. Aside from looking at Goldman’s apparent conflicts, the American International Group rescue, derivatives trading, bank leverage, credit ratings and other potential financial sector causes of the crisis, the government’s role demands scrutiny, too. That includes not just regulatory failures but also policies that promote and subsidize home ownership – raised by Mr. Blankfein in his testimony – and the extremes of leverage allowed at government-linked mortgage giants Fannie Mae and Freddie Mac, an issue brought up by Mr. Dimon.

With all this ground to cover, there is time for Mr. Angelides’ panel to hit its stride. Back in the 1930s, it took the arrival of Mr. Pecora in 1933 – only as counsel to the Senate investigation, and its fourth one at that – to galvanize proceedings and earn his name’s association with the commission, which led to the Securities Act of 1933 and the Securities Exchange Act of 1934.

If Mr. Angelides wants his own name linked with similarly meaningful results this time around, he needs to knock his team into leaner, meaner shape.

Afternoon links 1-13

Jan 13, 2010 20:51 UTC

Must ReadKyle Bass: Testimony before the FCIC (fcic.gov) Bass is a hedgefunder that made big profits betting against subprime. His testimony has many fascinating facts and figures. [The pie charts on page 9 look familiar.]

Obama to push tax on too-big-to-fail banks (Nasiripour) Not a lot of details: “the planned tax would be imposed in a way that targets firms’ riskiest activities, such as proprietary trading. It would be crafted in a way that doesn’t affect a financial company’s retail banking, so that the cost theoretically would not be passed on to retail customers — but it wasn’t clear exactly how that would work.” And will it tax other TBTF firms besides banks? What about insurers? What about GE? Update: WSJ says the tax will target bank liabilities.

Earthquake in Haiti may have killed over 100,000 (Farie/Varner, Bloomberg) The epicenter of the 7.0 magnitude quake was 10 miles from Haiti’s capital city.

Google China spat shines spotlight on cyberspying (Prodhan/Lee, Reuters) Google has consistently tried to thread the needle between the revenue opportunities provided by the Chinese market, and the censorship restrictions imposed by the Communist Party. This attack was so egregious that Google said it’s had enough.

Prime jumbo RMBS delinquencies jump to 9.2%: Fitch (Golobay, HousingWire) ht Implode-o-Meter.

SEC proposes effective ban on naked access (Younglai/Spicer, Reuters)

FDIC’s Bair blasts other regulators for reluctance on banker pay plan (Paletta, WSJ) I’d hoped to share the video archive with all of you but a day later it’s still not available. There are good arguments that additional curbs on pay will be both tough to design and ineffective at curbing risk. A better regulator is failure. But that’s not Dugan’s point. He just wants to protect banks.

VIDEOLennart Green does close up card magic (TED talks)

Clever 2010 calendar (imgur)

Another dose of Martian awesome (Plait, Discover)

A Chinese thanks Google for standing up to the communists (more)…

google thanks

COMMENT

Just read an amazing global tactical allocation report on zerohedge (2 in facts with yesterday macro section) http://www.zerohedge.com/article/global- tactical-asset-allocation-equities

Might be of interest.

Kind regards,
Petter

Posted by Petter Knight | Report as abusive

Crisis inquiry commission hearings today

Jan 13, 2010 14:48 UTC

UPDATE: Wow, if the questioning by Phil Angelides of Lloyd Blankfein is any indication of how these hearings are going to play out, they will be much fun to watch. He really pressed Blankfein and the two got combative. Too bad he didn’t have more time…

UPDATE 2: False start, the other commissioners are mostly asking softball general questions. Angelides is the only one hitting hard.

The Financial Crisis Inquiry Commission begins its hearings today. They’re already under way and can be viewed live on CSPAN 2. A web feed is available here.

A couple interesting links:

Top 10 Questions for the Commission from Eliot Spitzer, Bill Black and Frank Partnoy

Ask Holder to be bolder Tom Ferguson on why AG Eric Holder should be more aggressive as the nation’s top prosecutor.

Starting the day off are John Mack, Lloyd Blankfein, Jamie Dimon and Brian Moynihan. Other CEOs I hope are questioned under oath include Chuck Prince (Citi), Stan O’Neal (Merrill Lynch), Ken Lewis (BofA), Angleo Mozilo (Countrywide), Herb Greenberg (AIG), Jack Welch (GE) and Herb Sandler (World Savings).

Joe Cassano — the guy who ran AIG’s Financial Products division — should also be called. To my knowledge he hasn’t said anything publicly since AIG’s failure. He’s hiding in London, but would he ignore a commission subpoena?

SEC shifts focus, but new complaint again fails Rakoff test

Jan 13, 2010 00:31 UTC

After Judge Jed Rakoff threw out its original $33 million settlement with Bank of America, the SEC shifted the focus of its case. In its new complaint filed today, the SEC still accuses BofA of misleading shareholders for failing to disclose material information. But the issue this time isn’t bonuses, it’s Merrill’s fourth quarter losses.

Yet the complaint still names no names and again asks BofA shareholders to pay for themselves being misled. In other words, Judge Rakoff’s beef with the original complaint would seem to apply to this one as well.

Here’s the allegation:

Bank of America’s failure to make any disclosure concerning Merrill’s October and November losses violated Bank of America’s express undertaking to apprise investors of fundamental changes and rendered its prior disclosures materially false and misleading in violation of the federal securities laws.

Pages 7 to 11 of the complaint recount how Merrill’s loss projections for Q4 kept ballooning while lawyers generated different excuses not to disclose them.

BofA’s last financial communication with the public was Q3 results, which showed a $5.2 billion loss. At that time analysts thought the worst was over, that Merrill would break even in Q4.

But by November Merrill admitted to BofA that they’d lost $4.6 billion in October. On December 3rd — two days before shareholders voted to approve the merger — Merrill gave BofA execs an updated Q4 projection: over $7 billion of losses. Days after the shareholder meeting the loss forecast jumped again to $12 billion.  When Merrill finally reported, its net loss came in at $15.3 billion.

It’s hard to see what tortured legal arguments BofA’s lawyers can muster to justify this disclosure failure…

But like the first complaint, this one names no names. It only refers to “a senior Bank of America executive” who told “senior executives at Merrill” that disclosure may be required. It also mentions that various BofA “lawyers” deliberated on the matter.

Assuming this results in another quick settlement where no one admits wrongdoing, one wonders if it will pass muster with Rakoff.

In last August’s hearing, he complained that SEC had failed to address the “who/what/where” of its case. “Was it some sort of ghost?  Who made the decision not to disclose [the bonuses]?” he asked. Replace “bonuses” with “losses” and you’ve still got the same issue.

Justice isn’t served if shareholders, who were misled, end up paying a fine to the government. And what of deterrence? If executives are never held responsible for their behavior, they’ll never change it.

Of penny stocks and buried treasure

Jan 12, 2010 19:33 UTC

Last Friday bulletin-board traded Marine Exploration announced that it had discovered a shipwreck from 1690 off the coast of the Dominican Republic (ht Ari Weinberg). The company issued a press release trumpeting a “great discovery” and its stock popped 50%. But the release smells fishy…

“The most important find in Dominican waters since the discovery of Captain Kidd’s ship Quedagh Merchant in 2007,” states Wilfredo Feliz, Director of the Dominican Republic Ministry of Culture Sub-aquatic Patrimony Office…

Have there been many “finds” in Dominican waters since 2007?

“Treasure pieces were of incalculable historical value,” according to a news story in Underwater Times.

Incalculable “historical” value, eh? What about monetary value?

Clicking through to the Underwater Times article — no doubt the paper of record on such matters — we find an inventory of what was found: a bell made in 1693; navigation compasses and plumb lines for measuring depth; silver coins, silverware; a pistol, sword sheaths, sword handles and other military items; ornaments and several jewels, notably a ring set with eight diamonds; plates with makers’ marks (castles, lions and fleurs-de-lis); bronze candlesticks; a device for measuring the ship’s speed in knots

Some silver coins and a ring set with 8 diamonds doesn’t sound like much of a haul.

A deeper dive suggests this company isn’t in good shape. They’ve generated $0 dollars of revenue since inception in 2007. They owe $3.4 million. And accounts payable are 3x cash-on-hand. Naturally their auditor — a Mr. Ronald Chadwick based in Aurora, CO — has issued a going concern warning.

The two insiders, Paul Enright and the almost-perfectly-named Robert L. Stevens, have been selling stock non-stop since investing $1 million each in May according to ThomsonOne.

Lots of other fishiness about the company. Their name is plagiarized borrowed from their larger, more successful competitor Odyssey Marine Exploration. Also, as they must be short of treasure maps, they ran a “treasure hunter challenge” on their site. To “win” the competition, entrants would provide map coordinates, which become MEXP’s property upon submission. Winners are entitled to 5% of the recovery value of whatever is found.

One wonders how they maintain a market cap of $20.5 million and whether Stevens and Enright sold a bunch of stock after it popped on the news of this “find.” Not that I’d want SEC to waste their time on this.

The company didn’t return phone calls.

Lunchtime Links 1-12

Jan 12, 2010 17:53 UTC

China surprises with bank reserve hike (Xin/Rabinovith, Reuters) The Fed could learn something from the PBOC. This sudden move to tighten bank lending maintains the PBOC’s reputation for acting without warning. If the Fed had a similar rep, U.S. lenders wouldn’t be so cavalier taking interest rate risk.

Special bankruptcy court for banks mulled in Senate (Younglai, Reuters) Interesting proposal for Dodd’s Senate financial reform bill. Can’t really comment until details are made available.

Citi unit grows — with Fed’s help (Enrich, WSJ) The fact that Citi subsidiary GTS is so important to the global financial system — and that its failure would be disastrous — is a good argument that regulators should find a way to wind it down…

Obama weighs tax on banks to cut deficit (Calmes, NYT) No details here either, but I expect whatever is proposed to pass, as the proposal will come not long after banks announce bonuses. Plan would raise as much as $120 billion. Taking money away from the financial sector, including its customers, is a necessary step towards de-leveraging the economy.

Devaluation sparks chaos in Caracas (Lyons/Crowe, WSJ)

Single stock dividend futures launched (Hedgeweek, ht Nick Gogerty) Not sure what the value of these is, but Nick points out that the leverage available to those trading futures means someone in need of a trading fix will get it…

Mark McGwire admits using steroids (ESPN) He cries a lot, complains of the pressure he was under and the difficulty of a 162 game schedule.

At a mighty 104, gone while still going strong (Fernandez/Schmidt, NYT)

Expense reports (Dilbert)

You played the joker too, right?

jack

COMMENT

Jack is NOT amused. LOL!

Posted by EF | Report as abusive

Yield curve can’t drive profits if banks won’t lend

Jan 11, 2010 20:41 UTC

A steep yield curve should mean fat profits for banks. It hasn’t.

Unable to find qualified borrowers and worried that interest rates have nowhere to go but up, banks are stockpiling cash and securities while letting loans dwindle. It turns out banks won’t lend till rates rise. The trouble is, if rates rise their capital will take another hit, leaving them little to support new lending.

The yield curve is a proxy for the difference between short-term rates at which banks borrow and long-term rates at which they lend. In theory, a “steeper” curve means a wider profit margin.

As the following chart shows, bank profit margins aren’t keeping pace with the steepness of the curve.

(Click here to enlarge chart in new window)

NIMs

Why not? One issue is that banks aren’t lending. You can’t make money borrowing short if you’re not willing to lend long. Indeed, banks are shrinking their loan books while socking away cash:

(Click here to enlarge chart in new window)

loans-cash

Why do this?

Cash is more liquid than loans, of course, so higher balances protect banks from the volatility of credit markets. Also, it prepares them for stricter liquidity requirements coming from regulators.

The fall in lending is more controversial, but banks are absolutely right to be curtailing loans. One reason, 10% unemployment means a dearth of credit-worthy borrowers. Another important one: Rates have nowhere to go but up.

A bank originating a new 30-year mortgage at 5.3% is taking significant interest rate risk. Remember, the bank has to borrow short to fund the mortgage, by selling CDs for instance. One year CDs average 1.6% according to Bankrate. Because rates can’t go lower, deposits are likely to get more expensive over the 30-year life of the mortgage. What looks like a healthy interest rate spread today (5.3% – 1.6% = 3.7%) is going to tighten.

The risk involved in originating new mortgages is a big reason the vast majority are now purchased or backed by Fannie, Freddie or FHA.

Instead of loans, banks have been plowing assets into more liquid securities according to Paul Miller of FBR Research. But as credit markets have healed, the interest rate spread on these assets have also come down, limiting profit potential.*

When will banks lend again? Miller argues that “for any meaningful margin expansion…the Fed needs to raise rates.”

The yield curve may be steep, but it’s steep at low rates. Banks can’t capture the whole spread because they have to pay significantly more for deposits than the Fed funds rate of 0-0.25%. To make money, banks need to lend at higher rates.

Also many carry floating assets – credit card and corporate loans, ARMs – that key off indices like LIBOR. A Fed hike would instantly improve their yield.

Trouble is higher rates mean lower real estate prices and higher default rates, which will continue to bleed bank capital. It’s a troubling paradox: Banks can’t make money on new lending without higher rates, but higher rates will increase credit losses on old legacy loans. It’s another reason the Fed is stuck.

———–

*Last week regulators issued a warning to banks about interest rate risk, their first since 1996. It’s likely the warning stems from regulator concerns over banks’ holdings of securities.
COMMENT

I actually think it is 180 degrees opposite. The steep yield curve IS the reason banks aren’t lending.

The quote listed “Instead of loans, banks have been plowing assets into more liquid securities according to Paul Miller of FBR Research” is accurate.

Why would a bank lend to a “risky” borrower when they can throw their cash in a 2 year Treasury note with a 100 bps higher yield then their cost of capital (i.e. 0%)? Add in a spread on high quality credit and they are printing money without taking on hardly any risk.

Lunchtime Links 1-11

Jan 11, 2010 15:41 UTC

Shoddy tayloring (George Cooper) The author of my favorite book on the financial crisis now has a blog. His first post tears down Bernanke’s recent speech absolving his/Greenspan’s easy money policies for inflating housing bubble. It’s a bit technical, but very good.

Venezuelan devaluation helps Chavez, for others it’s unclear (Molinski/Crowe, DJN) Speaking to economist Steve Hanke last month about North Korea’s devaluation, he predicted that Venezuela would be next. His thoughts today: “Venezuela is in a death spiral. There will be more bad news.”

Hank Greenberg’s self-serving, off-base salvo at Goldman (NakedCapitalism) Smith writes a great take-down of the Greenberg’s “interview” in Saturday’s WSJ.

Banks prepare for big bonuses, and public wrath (Story/Dash, NYT) The writers estimate that Goldman’s pay will average $595k, and JP Morgan Chase investment bankers will average $463k.

Saint Elizabeth and the Ego Monster (Heilemann/Halperin, New York Mag) We already knew that John Edwards is among the phoniest candidates in recent memory, but this has interesting detail. Turns out Elizabeth’s virtuous image was a “mirage.”

All choices lousy for stadium fix (Brown, Cinci Enquirer) When will taxpayers learn that it’s a losing bet to subsidize stadiums? A former professor of mine, Allen Sanderson at UofC, has argued cogently that subsidizing stadium construction is a bad investment.

Dubai’s first foreclosure may open floodgates in world’s worst market (Fattah, Bloomberg)

America slides deeper into depression as Wall St. revels (Evans Pritchard, Telegraph)

Toxic corn (biolsci.org) If I’m reading this right, it says three varieties of Monstanto genetically-modified corn are harmful to your health…

Childproof drawer…

COMMENT

Moin from Germany,

excellent find The Cynical Economist.

I have seen this just last week on Arte and have asked myself if this kind of BLOCKBUSTER DOCUMENTARY will it ever make into the news ( MSM ) in the US…..

I think i know the answer….. ;-)

CFPA can’t arrive fast enough for the elderly

Jan 9, 2010 19:20 UTC

Odd that AARP is only just now throwing its support behind the proposed Consumer Financial Protection Agency, after the House watered down many key provisions in its reform bill. WSJ’s Michael Crittenden reports that the lobby group for retirees wrote a letter to Senators Dodd and Shelby of the Senate Banking Committee which said:

When seniors are defrauded or otherwise taken advantage of, the results are particularly devastating since they gernerally are beyond or near the end of their earning years. (no link)

Too true.

The elderly are great targets for financial scam artists. The creeping fog of dementia is the obvious reason.

Less obvious is how many elderly fall victim simply because they’re lonely. In 2007, the NYT reported the poignant case of 92-year-old Richard Guthrie, whose name was sold to scam artists by a telemarketing firm:

”I loved getting those calls. Since my wife passed away, I don’t have many people to talk with. I didn’t even know they were stealing from me until everything was gone.”

Another reminder comes from a must-read article in yesterday’s Times about an elderly woman in California who was sold progressively filthier mortgage products by Herb and Marion Sandler’s World Savings, now a unit of Wells Fargo. “Elder abuse” and “predatory lending” are the key descriptive phrases and they are absolutely correct.

The same article quotes an AARP study saying 70% of the nation’s elderly have been solicited to take out a new mortgage in recent years. These are the kinds of folks who probably paid off their mortgage years ago and now own their house free and clear. Letting them take cash out can seem a good way to help make ends meet, but it can also be a fast-track to foreclosure and homelessness.

The problem is that many elderly aren’t capable of making a rational decision because they don’t understand the financial products they’re being sold. Hell, folks with all their faculties don’t understand option ARMs. The salesmen/mortgage brokers didn’t understand the products either, but they didn’t care, since they get paid by the volume of loans originated.

It seems obvious that AARP would throw its considerable weight behind a strong CFPA that can act as an FDA for financial products. But why now?

The House Financial Services Committee already gutted many of the key features of the CFPA in its reform bill. Among other things, the requirement for “plain vanilla” products was dropped. And dealer-based auto lenders won a big loophole. Rep Ed Perlmutter did his darndest to water-down the bill, and was bought for only a few thousand bucks by the financial lobby. Could AARP have bought his support?

Bankers celebrated, since some were worried they wouldn’t be able to sell balloon-note loan terms to high risk or low income customers, for instance.

Well, thank goodness for that. Wouldn’t want to take a meal ticket away from folks selling confusing, dangerous financial products.

Update: Previously this post was titled “…for the baby boom” instead of “…for the elderly,” but reader Dorothy H. makes a very good point that senility is still a long way off for the boomers!

COMMENT

You are 100% correct in calling the ARM loans sold to many by World Savings as FILTHY Mortgage products. Not to sure that I agree with you that the brokers selling these loans for/with the bank didn’t understand them, although I will agree that most probably didn’t care. They were making money hand over fist,from the front end to the back. Why would the majority of them concern themselves with quality or integrity when they could line their pockets so easily?

Posted by Carolina Bagnarol | Report as abusive

Bank failure Friday

Jan 9, 2010 16:25 UTC

Only one failure last night (the first of the new year and the first since the week before Christmas).

#1

  • Failed bank: Horizon Bank, Bellingham WA
  • Acquiring bank: Washington Federal S&L, Seattle WA
  • Vitals: assets of $1.3 billion, deposits of $1.1 billion
  • Estimated DIF damage: $539m (loss rate 41% of assets)

Lunchtime Links 1-8

Jan 8, 2010 18:25 UTC

Bank regulators issue interest rate advisory (FFIEC) This may sound boring, but it’s rather important. The FFIEC — a collection of bank regulators including FDIC, OCC, the Fed, OTS and NCUA — hasn’t issued such a warning since 1996. It wants banks to make sure they can handle rising interest rates….which seems to me a HUGE disincentive to lend. 5% mortgages originated today will lose mucho value as rates go back up. This is a huge reason banks “aren’t lending,” because up is the only direction for rates to go!

Employers unexpectedly cut jobs in December (Mutikani, Reuters) The jobs report is an important catalyst for the dollar and gold. If the employment situation improves, it will be easier for the Fed to tighten (good for dollar, bad for gold). If unemployment stays high, the Fed will keep rates low indefinitely and likely keep printing money to buy assets (bad for dollar, good for gold).

U.S. now renter’s market (Timiraos, WSJ) Hooray for deflation! As I’m fond of reminding folks, rents midtown west neighborhood of Manhattan crashed over 20% last year. That’s oodles of spending power freed up to pay for other things. Yes, it’s probablematic for landlords and the banks to which they owe money. But it’s good for the economy overall. Letting house prices fall will have a similar stimulative impact.

Why does it feel worse than reported? (EconomPic Data) Comparing Gross Domestic Product with Gross Domestic Purchases demonstrates how we lived beyond our means for so long and why getting back to equilibrium feels so painful.

Bubble warning (Economist) Not a new thought (argued it myself in sep ’08), but Economist is great at summarizing issues.

Swiss speeding motorist fined $290,000 (Rhodes, Reuters) Finland also does a means test for speeding tickets. This makes so much sense. Can a millionaire with dangerous driving habits be reformed if he’s only looking at a fine of a couple hundred bucks?

The Messiah complex (Brooks, NYT) Brilliant comment on the plot of Avatar. Brooks’ last two paragraphs are particularly good.

R.I.P., WTO (Blustein, Foreign Policy) Will the WTO die in 2010? I have to admit, I’m questioning my own belief in free trade. My default position is to favor it at every turn due to the wealth effects of comparative advantage. That said, I wonder if cross-border trade is growing faster than our ability to manage it…

Great find on Antiques Road Show (PBS)

Happy birtday Stephen Hawking (Wired)

COMMENT

There is nothing wrong with Free Trade, as long as it is among countries with similar wage levels and (trade) rules.

US-Canada, US-EU trade has been very beneficial for all sides since WWII.

The problem with world wide Free Trade is that in China alone the is a billion people willing to work for 25 cents per hour, and three billion more people elsewhere in Asia and South America.

That’s where Free Trade doesn’t make sense.

Anyway, the whole problem will be solved by triple digit oil price and carbon tariffs within the next five years. Jobs will be coming back to North America.

Please read this book and you will feel much better …
http://www.jeffrubinssmallerworld.com/bl og/

Rolfe should invite the author for an interview.
I find the book an absolute master piece.

Posted by Mark | Report as abusive

Mosler’s 11 steps to fix the economy

Jan 8, 2010 14:08 UTC

by Warren Mosler

1.  A full ‘payroll tax holiday’ where the US Treasury makes all FICA payments for us (15.3%).  This will restore ‘spending power’ and, by allowing households to make their mortgage payments, will fix banks from the bottom up.  It may also keep prices down as competitive pressures may lead businesses to cut prices, passing on their tax savings to consumers even as sales increase.

2.  A $500 per capita federal distribution to all the states to sustain employment in essential services, service debt, and reduce the need for state tax hikes.  This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP would be restored.

3.  A federally-funded $8/hr job and healthcare benefits for anyone willing and able to work. The economy will improve rapidly with my first two proposals and the private sector far more readily hires folks that are already employed. In 2001 Argentina implemented this proposal, putting to work 2 million people who had never held a ‘real’ job. Within 2 years, 750,000 of those 2 million were employed by the private sector.

4.  Making banks utilities. The following are disruptive, serve no public purpose and should be done away with:

–Secondary market transactions
–Proprietary trading
–Lending against financial assets
–Business activities beyond approved lending and bank account services.
–Contracting in LIBOR. Fed funds should be used.
–Subsidiaries of any kind.
–Offshore lending.
–Contracting in credit default insurance.

5.  Federal Reserve — The liability side of banking is the wrong place to impose market discipline.

The Fed should lend in the fed funds market to all member banks to ensure permanent liquidity. Demanding collateral from banks is disruptive and redundant, as the FDIC already regulates and supervises all bank assets.

6. The Treasury should issue nothing longer than 3 month bills. Longer term securities serve to keep long term rates higher than otherwise.

7.  FDIC

–Remove the $250,000 cap on deposit insurance. Liquidity is no longer an issue when fed funds are available from the Fed.
–Don’t tax good banks for losses by bad banks. This serves only to raise interest rates.

8.  The Treasury should directly fund the housing agencies to eliminate hedging needs while directly targeting mortgage rates at desired levels.

9.  Homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the government at the lower of the mortgage balance or fair market value of the home.

10.  Remove ‘self imposed constraints’ that are disruptive to operations and serve no public purpose.

–Dump the debt ceiling – Congress already votes on spending and taxes.
–Allow Treasury ‘overdrafts’ at the Fed rather than forcing it to sell notes and bonds. This is left over from the gold standard days and is currently inapplicable.

11.  Federal taxes function to regulate aggregate demand, not to raise revenue per se, and therefore should be increased only to cool down an overheating economy, and not to ‘pay for’ anything.

COMMENT

The electorate is in dire straits. How could it be otherwise, when they’ve been “educated” to believe that any damn fool’s opinion is a good as anyone else’s; when their “education” is nothing more than a species of brainwashing; when they largely read nothing and spend their time watching the television; when “thinking” for them means mental maneuvers that elicit comfortable emotions; and so on and on and on. For heaven’s sake folks, this is a country that re-elected George Bush! How stupid and passive and brainwashed can you get?

Posted by Sam | Report as abusive

FDIC nibbles nicely at bank risk

Jan 8, 2010 01:04 UTC

Rolfe Winkler2.jpgSheila Bair looks to be leading the regulatory race to the top. The agency she oversees, the Federal Deposit Insurance Corporation, has recently unveiled a handful of clever ideas to contain risky bank behavior and protect the nation’s deposit insurance fund. Rival watchdogs fighting for turf will find it difficult to ignore FDIC’s latest tactics.

Generating the most buzz is a sensible plan to tie the amount that banks pay for deposit insurance to the riskiness of their compensation plans. Banks with schemes that favor short-term gains would pay more than those that, for example, include multi-year claw-backs on bonuses. The agency will vote on the plan next week.

Of course, this comes as the Fed is also implementing its own proposal to include executive pay in its overall assessment of bank stability. It’s not clear which agency will be more stringent. But a little competition among the two wouldn’t be the worst outcome after years in which banking regulators rivaled each other in their laxity.

Linking pay to insurance premiums follows a handful of other changes FDIC is making. It recently revised the formula it uses to assess how much interest undercapitalized banks can pay to attract deposits. The net effect of the changes will be to reduce the rates banks can pay by an average of 12 basis points, analytics firm Market Rates Insight estimates.

This is a clever way to limit moral hazard. Failing banks, more concerned with survival than profitability, often make last-ditch attempts to attract new deposits by offering ultra-high rates on savings products wrapped by FDIC insurance.

Similarly, FDIC is pushing for a form of schmuck insurance from the buyers of failed bank assets. To mitigate some losses the fund incurs on assets in receivership, FDIC  is pushing for the buyers of the assets to make payments linked to the increase in their share prices following the announcement of a deal.

In isolation, these may look like incremental, if sensible, changes to the way FDIC does business. But in the context of a regulatory turf battle over power and resources in Washington, it’s an encouraging sign indeed.

Keynesianism, Monetarism and Complexity

Jan 7, 2010 19:47 UTC

by James G. Rickards

The debate between Keynesianism and Monetarism is over; they both won. Obama’s approach to the crisis is breathtakingly simple – print money and spend it fast. For Keynesians, stimulus substitutes for private demand until the latter is jump started and stimulus can be reversed.  For Monetarists, the logic is equally simple – increase the monetary base to expand GDP.  Don’t worry about inflation until you see the whites of its eyes. Then withdraw the money after the job is done.  Easy.

But what if Keynesianism and Monetarism are both fatally flawed? The evidence for a Keynesian multiplier is that there isn’t one.  At best it’s fractional, maybe 60 cents for each dollar spent.  Intuitively its hard to see how taking a dollar from the private sector and washing it through government creates any growth at all; experience says that part of the dollar is wasted; evidence bears that out.  For Monetarists, the relationships among money, prices and GDP break down once velocity is considered.  Targeting money against potential 3% real GDP growth is child’s play if velocity is constant.  When velocity drops in hard to measure ways, central banks are driving blind.

Apart from these flaws, Keynesians and Monetarists are wedded to the linearity of stocks and flows.  The idea is that some stock, such as money or deficit spending, can be dialed-up to create some flow, such as GDP growth in predictable ways.  But markets are complex nonlinear systems; inputs and outputs bear no predictable relationship except in sub-critical states.  The key question for policy is whether the financial system is in the critical state, i.e. dynamically unstable.  This is impossible to answer because the computational complexity defies analysis.  But it is possible to say with certainty that we are closer to the critical state than ever because of globalization, derivatives and leverage.  As scale increases parametrically, complexity and risk increase exponentially.  Critical thresholds at which diverse actors reject dollars in a cascading collapse are too near for comfort.  Pushing the system by money printing and deficit spending are not reversible probes but lethal catalysts which may ruin the U.S. dollar and federal finance.

What is needed is what has always worked: sound money, low taxes and light regulation.  This means raising interest rates and all that implies for valuations and bank collapses.  Lower taxes means higher deficits but there is a world of difference between deficits caused by spending and those caused by lower taxes; the former crushes creativity while the latter frees animal spirits.  Light regulation does not mean no regulation.  Reinstating Glass-Steagall and separating deposit taking from gambling would be a good start.  If this medicine causes hardship, use spending to mitigate that with unemployment benefits, food stamps, rental assistance and education, rather than profligate spending on inefficient technology and state jobs.

Keynesian and Monetarist approaches are not merely based on flawed assumptions about multipliers and velocity.  They are dangerous in a complex nonlinear world.  Classic sound policy and a dose of humility are needed now.

James G. Rickards is a writer, lawyer and economist.  Twitter.com/JamesGRickards.

COMMENT

I think people should understand the concept of demand and supply and then relate these concept with the Monetarism..

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