He’s no FDR
Posted: June 19, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, Team Obama, U.S. Economy | Tags: DeLong, Financial Reform, fiscal policy, Krugman, Romer, the Great Depression, The Great Recession 1 Comment
DeLong skewers the the Stimulus Plan Claim via the Unemployment rate with stylized facts
With the release of financial regulation reform and healthcare reform that has Wall Street breaking open the bubbly, I just want to join the chorus of highly skeptical economists. The tune of the last few days is hard to miss. Take this piece from the NY Time’s Dealbook as an example: Only a Hint of Roosevelt in Financial Overhaul. There’s also Paul Krugman’s Op-Ed Column today Out of the Shadows which is the typical on-the-one-hand-on-the-other hand economist behavior. (Could I just mention in passing that I like the OLD Paul better? The one that was an out spoken advocate for liberal economists? I’m not sure what happened at that White House Dinner, but I’m beginning to think we now have a Manchurian economist at Princeton. Oh, where is our Shrill One?) Oh, and you can still read my first impressions here. I’m going to start with Financial Reform but don’t leave me yet. Brad deLong takes on Christine Romer’s The Lessons of 1937 at The Economist and since he still hasn’t been invited to dinner at the White House, it’s classic Brad.
So what does Krugman think about the Alphabet Soup Agency reheat slugging its way through that perpetual Hall of Wall Street minions we know as our Congress? He believes that it throws some light on the shadow banking industry in that the Alphabet Soup gang at the FED get to see more balance sheets and books. There is also a stab at standardizing the process, but custom fitted Credit Default Swaps remain. The essential riskiness remains. Let’s examine the Krugman critique.
But what about the broader problem of financial excess?
President Obama’s speech outlining the financial plan described the underlying problem very well. Wall Street developed a “culture of irresponsibility,” the president said. Lenders didn’t hold on to their loans, but instead sold them off to be repackaged into securities, which in turn were sold to investors who didn’t understand what they were buying. “Meanwhile,” he said, “executive compensation — unmoored from long-term performance or even reality — rewarded recklessness rather than responsibility.”
Unfortunately, the plan as released doesn’t live up to the diagnosis.
Well, maybe the White House Pastry chef did not completely overwhelm the shrill one.
Tellingly, the administration’s executive summary of its proposals highlights “compensation practices” as a key cause of the crisis, but then fails to say anything about addressing those practices. The long-form version says more, but what it says — “Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value” — is a description of what should happen, rather than a plan to make it happen.
Furthermore, the plan says very little of substance about reforming the rating agencies, whose willingness to give a seal of approval to dubious securities played an important role in creating the mess we’re in.
In short, Mr. Obama has a clear vision of what went wrong, but aside from regulating shadow banking — no small thing, to be sure — his plan basically punts on the question of how to keep it from happening all over again, pushing the hard decisions off to future regulators.
Dismal Economists: Getting Real on those Green Shoots
Posted: June 18, 2009 Filed under: Bailout Blues, Economic Develpment, Equity Markets, Global Financial Crisis | Tags: Depression, Federal Deficit, Green shoots, Health care reform, Obama Poll Numbers Comments Off on Dismal Economists: Getting Real on those Green Shoots
I’ve been concerned about the lack of real evidence for the administration’s green shoot hypothesis. It seems that I’m not the only one. A new Wall Street Journal Poll shows that Americans are increasingly ‘wary’ of the deficit and Obama’s economic intervention as Obama’s poll number’s slip.
But the poll suggests Mr. Obama faces challenges on multiple fronts, including growing concerns about government spending and the bailout of auto companies. A majority of people also disapprove of his decision to close the military prison at Guantanamo Bay, Cuba.
Nearly seven in 10 survey respondents said they had concerns about federal interventions into the economy, including Mr. Obama’s decision to take an ownership stake in General Motors Corp., limits on executive compensation and the prospect of more government involvement in health care. The negative feeling toward the GM rescue was reflected elsewhere in the survey as well.
A solid majority — 58% — said that the president and Congress should focus on keeping the budget deficit down, even if takes longer for the economy to recover.
Laura Zamora, 40, of Orange, Calif., voted for Mr. Obama but says she is frustrated by the economy and finds her support for the president waning. She says she’s facing a possible layoff as a local government worker in California.
“He’s bailing out the private sector. He’s putting all kinds of money into the private sector,” says Mrs. Zamora. “The money should be going to social programs, not to bailing out banks and GM. It should go to people who are unemployed.”
The survey of 1,008 adults, conducted Friday to Monday, had a margin of error of plus or minus 3.1 percentage points for the full sample.
The poll shows as the economy really worsens, people are becoming more reality-based. Speaking of reality based, let’s get back to numbers that show the public’s concerns are much warranted. You will not want to miss this VOXEU study showing what two economists have found when comparing the Great Depression with the current Great Recession. They’ve charted the numbers back-t0-back and are even going as far as saying that we are in a Global economic Depression. You really need to check the graphs and the analysis out in “A Tale of Two Depressions”. Dr. Barry Eichengreen and Dr. Kevin O’Rourke are both research/historical economists and bring the stylized facts home.
This is an update of the authors’ 6 April 2009 column comparing today’s global crisis to the Great Depression. World industrial production, trade, and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better. The update shows that trade and stock markets have shown some improvement without reversing the overall conclusion — today’s crisis is at least as bad as the Great Depression.
New findings:
- World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
- World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
- There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
- The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
- Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.
The Devil in the Details
Posted: June 17, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, Team Obama, U.S. Economy | Tags: banking regulation, Federal Reserve Bank, White paper on Financial reform Comments Off on The Devil in the DetailsA blueprint of the Obama administration plan to extend Federal Reserve Role in the markets was released last night. I 
have to agree with Felix Salmon at Reuters about the increased density of DC alphabet soup. If you want to wade through 85 pages of sleep inducing regulatory policy, knock yourself out here. Frankly, this sort’ve stuff is my job and I had to run for another cup of coffee. Then again, you can rely on some of the folks that get paid to suffer through that kind of torture, like Salmon.
Do you know a FHC from a BCBS? If not, you’re going to have a hard time wading through the government’s white paper on financial reform, which is full of such things. (An FHC is a financial holding company; the BCBS is the Basel Committee on Banking Supervision. The link is to the WaPo leak of the paper, there might be minor changes in the final document.) This, for instance, is a real sentence from the paper:
The United States will work to implement the updated ICRG peer review process and work with partners in the FATF to address jurisdictions not complying with international AML/CFT standards.
But never fear! Your tireless blogger has waded through all 85 pages, and I’m pretty sure I’ve got the gist of it at this point.
In a nutshell: If you thought this was going to make the current horribly-complicated system of financial regulation less complicated, think again.
Please! No More Kabuki Finance Reform!
Posted: June 15, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, Team Obama, U.S. Economy | Tags: banking regulation, Biden, Credit Default swaps, Dodd, Frank, Lawrence Summers, regulation of securities, Timothy Geithner, Vice President MBNA 2 CommentsToday’s Wall Street Journal highlights the Details Set for Remake Of Financial Regulations. The question on every one’s 
mind is will it be real this time instead of some show that shuts down the minute the press leaves the room. (You know when Barny Frank and Chris Dodd trot out the single malt and the Cuban Cigars and party down to Chain, Chain, Chain … chain of Fools.
President Barack Obama is expected Wednesday to propose the most sweeping reorganization of financial-market supervision since the 1930s, a revamp that would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded.
We shall see, we shall see. In today’s WAPO, Timothy Geithner and Lawrence Summers are inkling their strategy in A New Financial Foundation. They identify five key problems in the article they see with the current regulation regime.
First, existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole. As a result, institutions were not required to maintain sufficient capital or liquidity to keep them safe in times of system-wide stress. In a world in which the troubles of a few large firms can put the entire system at risk, that approach is insufficient.
Capital requirements are always nice in a fractional reserve system. After all, banks only make money by lending out the funds they hold at a higher rate, but this needs to be closely examined; especially with capital from government sources at the risk or implied government guarantee of assets. I talked before about Stiglitz’s concept of Banks Too Big to be Restructured. Many of us feel that these banks don’t need to be better regulatedbut completely busted up. The joint statement appears to say that the Obama Adminstration is prepared to let them dither in Zombie land while making them come up with more capital. (The only thing I can say is how long and with whose money?) I call this passage a stinker, but I’ll wait to see the details in the bill itself. If they regulate it the way they regulated Fannie and Freddie, hide your savings under your nearest mattress and try to get all your income in Eurodollars.
The administration’s proposal will address that problem by raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms. In addition, all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.
At WHAT point does HE own it?
Posted: June 12, 2009 Filed under: Bailout Blues, Diplomacy Nightmares, Global Financial Crisis, Hillary Clinton: Her Campaign for All of Us, president teleprompter jesus, Surreality, Team Obama, Voter Ignorance | Tags: broken campaign promises 3 CommentsThe Political Memo in today’s NYT minces few words in Blaming the Guy Who Came Before Doesn’t Work Long and I’d like to just tag right along with that. Its thesis is clear. The Obama administration wastes no opportunity to turn the phrase “we inherited a lot of problems”.
As President Obama struggles to turn around the moribund economy and confront multiple international issues, he wastes few opportunities to remind the country that the problems are not of his making.
“The financial crisis this administration inherited is still creating painful challenges for businesses and families alike,” Mr. Obama said this week as he proposed spending limits.
“We inherited a financial crisis unlike any that we’ve seen in our time,” he said last week as he thrust General Motors into bankruptcy.
His advisers and allies follow the same script. “The Obama administration inherited a situation at Guantánamo that was intolerable,” James L. Jones, the national security adviser, said of the military prison in Cuba. Secretary of State Hillary Rodham Clinton defended the Obama foreign policy in the same vein. “We inherited a lot of problems,” she said.
Mr. Obama is hardly the first president to point to his predecessor. Ronald Reagan blamed Jimmy Carter for the poor economy he inherited, just as Bill Clinton blamed the first President Bush and the younger Mr. Bush then blamed Mr. Clinton. Former Bush aides like Karl Rove argue that Mr. Obama has done it more extensively and routinely than other presidents have, although the Obama team denies that.
But at a certain point, a new president assumes ownership of the problems and finds himself answering for his own actions. For Mr. Obama, even some advisers say that moment may be coming soon.
I’d really like to extend the question of when does he own it a bit further to what good does saying you inherited all these problems do when your solution is basically a continuation of those same failed policies?
In the two major areas of concern during the election and primary–the Iraq War and the Financial Crisis–we not only seen continuation of the same dysfunctional policies, but we’ve seeing appointment of the same dysfunctional policy makers in both cases. Timothy Geithner (with Obama’s consent and support) has basically been following the same policies of his predecessor Secretary of Wall Street Bailouts Hank Paulson. I know this because oc-08I’ve been following the economic policies quite closely because of obvious reasons. I have had to rely on others for examples in other policy areas. To say there is a plethora is understatement. I am getting tired of flushing spam from seriously delusional Obama voters into byte heaven that mostly reads: “Hillary would have done the same thing” and “he’s just doing what he has to at the moment, just wait it will change, you’ll see.”
Cannonfire has run a series of threads demonstrating how closely aligned President Obama’s policies have been to his predecessor. I’ve spent a few days following the links from The Worm turns and turns. One link is to Paul Craig Roberts at Global Research and the title absolutely says everything. It’s called Watching Obama Morph Into Dick Cheney. This one especially appeals to me because of a post I took a lot of grief for back in the day that used a side-by-side Broke Back Mountain view of the boyz will be boyz.
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