Kabuki Financial Regulation
Posted: March 10, 2009 Filed under: Equity Markets, Global Financial Crisis, No Obama, U.S. Economy | Tags: AIG, bernanke, CDOs, Fannie, Freddie, Japan's lost decade, Swaps, zombie banks 3 Comments
Much speculation has been made recently about the possible similarities between Japan’s lost decade and financial crisis during the 1990s and the current US Financial crisis. It’s impossible to get through any graduate program in either finance or economics without spending time with the mounds of research the decade ignited. Since many folks are talking and writing about this period in the popular business press and speculating on the chance of an L-shaped recovery similar to the one experienced by Japan, I thought I’d focus some on Japan’s Lost Decade. There are some similarities but some important differences too.
About a month ago, The Economist asked if America’s crisis could rival Japan’s. Their answer was yes. This article examines something we’ve looked at twice before. That would the IMF study of banking crises. Both the Nordic banking crisis and the Japanese banking crisis are including in the database and highlighted by the study. The experience of these rich country crashes have both been bandied about as possible road maps to financial system recovery. Sweden nationalized its banks. There was also the lesson from South Korea. This country recovered after two years. The there was Japan. It let its banks languish. Japan became infamous for its decade of economic stagnation. Are we turning Japanese?
Japan’s property bubble burst in the 1980s and its run up prior to the bubble was smaller than ours. Additionally, Japan has a high domestic savings rate. America is the world’s largest debtor.
Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.
The authors of The Economist articles see both other differences too.
Japan’s central bank took too long to fight deflation; its fiscal stimulus was cut off too quickly with an ill-judged tax increase in 1997; and it did not begin to clean up and recapitalise its banks until 1998, almost a decade after the bubble had burst. But the history of bank failures suggests that Japan’s slump was not only the result of policy errors. Its problems were deeper-rooted than those in countries that recovered more quickly. Today’s mess in America is as big as Japan’s—and in some ways harder to fix.
Let’s look at the first statement about deflation. We’re not experiencing deflation in all sectors. The latest numbers from the BLS still show slight inflation. However, we are looking at some tax increases in the near future. Both Japan and the Roosevelt administration in 1937 instituted tax increases before both of these major financial crisis had be solved. In 1937, it led to a second economic and financial market down turn. In 1997 Japan, it slowed down recovery.
Our dollar is strengthening as the financial crisis impacts the global economy. Japan’s yen is similarly a strong world currency. The dollar is still seen as a 
safe-haven asset. However, Japan is a net exporter while the US is a net importer. Japan is not a debtor nation, but a creditor nation. Japan could still rely on exports to deliver some economic stimulus. The US does not have that luxury. However, while South Korea and Sweden’s currencies weakened and helped make their exports look cheap, Japan’s yen stayed somewhat strong. This crippled Japan’s ability to fully use exports as stimulus making its recovery much longer than either those of South Korea or Sweden. The dollar continues to strengthen which also makes any exports we send to the rest of the world relatively expensive. It also continues our reliance on imports as they stay relatively cheap.
In some ways America’s macroeconomic environment is even trickier than Japan’s. America may have a big current-account deficit, but the dollar has strengthened in recent months. America’s reliance on foreign funding means the risk of a currency crash cannot be ruled out, however. That, in turn, places constraints on the pace at which policymakers can pile up public debt. And even if the dollar were to tumble, the global nature of the recession might mean it would yield few benefits.
I already mentioned that Japan’s households were historically good savers. This meant only the Japanese corporations had to ‘deleverage’ or get rid of debt during the Japanese crisis. I remember watching Japanese commercials at the time from the government extolling patriotic Japanese households to go spend like crazy at the same time the US government was telling Americans to consider saving. Well, that trend is reversing. Japanese households are beginning to decrease their savings rates, while Americans have rediscovered thrift. This is also something we’ve talked about. Here’s how that played in Japan and could play out differently here.
Six Sigma Probabilities
Posted: March 9, 2009 Filed under: Equity Markets, Global Financial Crisis, president teleprompter jesus, U.S. Economy | Tags: Financial Times., global economic downturn, Obama financial disaster, Wolrd Bank 2 Comments
“The black swan for me would be for us to emerge out of this unscathed and return to normalcy,” Taleb said. Compared with the Great Depression, this crisis is “very different, and it requires much more drastic action.”
Today’s market close set more new records. We’ve had a bear market that’s just run itself long enough to become the worst bear market on record with one exception. That one exception is the one that started on Black Friday, 1929. The second one, until today, was the bear market in 1937. There’s only been one trend recently in all of the capital markets and that is down. No one knows at this point where the bottom is and how long we’ll stay there.
These kinds of losses and numbers usually bring about what is called a Bear Rally. A Bear Rally occurs about the time investors expect the negative momentum to end. Technical traders would expect this any day now. Well, actually they’ve been expecting it any week now and any month now. They’re still looking for it. First we heard that the market was ‘oversold’ and now we’re hearing that there’s a lot of money (estimates of like $3 trillion) just waiting for the good news to get back in. The deal is that recently we’re not even seeing the hint of bounce. It’s now a black swan market.
I have a suspicion that is why our President seems to want to replace Mad Money Cramer as the tipster-in-chief. Cramer just criticizes him (which POTUS hates) and at the moment Cramer is at a loss for any technical explanation. So first, POTUS told us that there were a lot of bargains at there because of the “profits and earnings ratios” (sic). Now, in a NY Times interview, he tells us to not put our money in the mattress.
What I don’t think people should do is suddenly stuff money in their mattresses and pull back completely from spending. I don’t think that people should be fearful about our future. I don’t think that people should suddenly mistrust all of our financial institutions because the overwhelming majority of them actually have managed things reasonably well. But I think that coming out of this crisis what you’re going to see is, you know, a return to the fundamentals – hard work, investing for reasonable returns over time, saving steadily for your kids’ college education and for your retirement. All of us, thinking about our purchases and making sure that we’re taking care of the necessities before we go after the luxuries. And I think that’s true not only for individual families but I think that’s going to be true for government as well. And if we take those steps, if we return to the fundamentals, if we go back to that ad that used to run, where they say, you know, ‘we earn money the old fashioned way’ — or what is it?
So, now we have a lecture on budgeting and spending our money on fundamentals and not luxuries while the omnibus spending bill will just get signed without any significant review and revision. Evidently, what is good for the people, is not what they should expect from their government. I’m clearly on record supporting a huge stimulus bill. In fact, I’ve said that the last stimulus bill was not big enough in TERMS of stimulus and size. The President would be well-advised to review that last paragraph and consider what he’s due to sign shortly. The forecast of job creation in the stimulus bill was based on an average 8% unemployment rate. We just achieved a higher rate than that last month and the increasing downward trend is not expected to stop. The current budget bill would provide an opportunity to transfer funds for earmarks into spending that could possibly address the shortcomings in the stimulus bill.
In FDIC We Trust
Posted: March 7, 2009 Filed under: Equity Markets, Global Financial Crisis, Main Stream Media, president teleprompter jesus, Team Obama, U.S. Economy | Tags: banking regulation, joseph stiglitz 6 Comments
I continue to read current economic thought on the state of the economy and the state of the Obama administration’s response. I don’t’ know if you’ve ever made a trip to Project Syndicate, but it’s an interesting site where you can read contributions by brilliant people to newspapers around the world. It’s another one of those places that I’ve found since I’ve completely given up on the US MSM’s ability to provide real news, insight, or criticism of the world today.
Joseph Stiglitz is a frequent contributor. He’s a 2001 Nobel Laureate Economist. This is a contribution of his to The Guatemala Times from March 6, 2009. It’s called How to Fail to Recover. I’ve talked a lot about how the stimulus package isn’t big enough, that it contains too many tax cuts and that it is a bandage approach to a systemic problem that started in the financial system with bad lending practices egged on by Washington and greedy megainvestors. I feel vindicated because that is Stiglitz take too.
The stimulus package appears big – more than 2% of GDP per year – but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut.
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America’s 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger – indeed, California alone faces a shortfall of $40 billion.Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. Meanwhile, investment and exports are plummeting as well. America’s automatic stabilizers the progressivity of our tax systems, the strength of our welfare system – have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP.
In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.
The real failings in the Obama recovery program, however, lie not in the stimulus package but in its efforts to revive financial markets. America’s failures provide important lessons to countries around the world, which are or will be facing increasing problems which are or will be facing increasing problems with their banks.
Cramer Responds to New White House Meme
Posted: March 5, 2009 Filed under: Equity Markets, Global Financial Crisis, president teleprompter jesus, Team Obama, U.S. Economy | Tags: axlerove, blogzkrieg blots, cramer, Obama Propaganda 7 Comments
We’ve been talking about Cramer, Suze, and Santelli recently and listening. They’ve stepped into the arena in defense of the US Everyman and the investments we make in our homes, our pensions, and our children. These folks have made money but are not the high rollers that gambled away our savings, drug the weakest among us into bad mortgages, and bankrolled the campaigns of Obama, Biden, Dodd, Grahm, Leach and a bunch of other pols who did not and do not have our interests at heart. When Cramer started talking about Obama-proofing your investment portfolio and finally begged POTUS to stop ignoring the messages screaming out of Wall Street Markets, he became just another target for the Blogkrieg Botz. Two days ago, I outlined what I saw was a concerted on-line effort to assassinate his character and professional standing. The MSM has also been repeating what was sure the latest Axelrove meme. Cramer doesn’t know what he’s talking about. Cramer makes money off you at your expense. He’s one of those bad guys. Meanwhile, the infusions of taxpayer dollars to the real culprits behind the meltdown as well as the complete lack of any regulatory reform sallies forth unabated. Barney (subprime mortgages r us) Frank is now calling for a super regulator and is planning on holding ‘hearings’. Just what we need. More hearings while the pensions and home values of every one of us continue their decline.
Today, Cramer hit back and I say more power to him.
The lines are drawn pretty clearly: If you can help people make money to be able to retire, enjoy life, pay for college, pay down debt, etc., you are a “good guy,” so to speak. If you take the other side of the trade, you are, well, let’s say, a less favored fellow. And if you gun for the gigantic investor class that is out there that includes 90 million people in one form or another, whether it be 401(k)s or individual stocks or pension plans, then you are on my enemies list.
I am a member of that ‘gigantic investor class’. But it also includes people like Penny Pritzker who was head of Obama’s Finance Committee during his election and is now one of his advisers. If you’d like to read about her and her part in the Financial Crisis, just Google away. It’s every where. Just read about this FAILED BANK that was really one of the first that greed brought down. At the time it was one of the most expensive bank closings on record costing in the realm of about $500 million. Of course, that sounds like chicken feed now. But she’s just typical of the mega rich that gamed the system. She’s also the typical mega investor that funded Obama and owns him lock stock and barrel. That’s probably why the Blogzkrieg Bots are on the warpath of the likes of the Cramers of the world. They’re messing with the Obamessiah’s imagine and that could cost the megainvestors in Obama their tax payer bailouts.
First, they eviscerate your character and your professional ability.
I am a fight-not-flight guy, so I was on my hackles when I heard White House Press Secretary Robert Gibbs’ answer to a question about my pointed criticism of the president on multiple venues, including the Today Show.
“I’m not entirely sure what he’s pointing to to make some of the statements,” Gibbs said about my point that President Obama’s budget may be one of the great wealth destroyers of all time. “And you can go back and look at any number of statements he’s made in the past about the economy and wonder where some of the backup for those are, too.”
They do it in the Media, they do it from their podiums, they hire folks on Craig lists to visit blogs to convince every one there is a swell of outrage for the Obamessiah.
Then they send out the message that Cramer isn’t acting in your interest. Obama is the one fighting the nasty ‘bankers’. His program is going to help every one of you little guys.
Gibbs went on to say, “If you turn on a certain program, it’s geared to a very small audience. No offense to my good friends or friend at CNBC, but the president has to look out for the broader economy and the broader population.”
How much I wish it were true right now that stocks played less of a role in peoples’ lives. But stocks, along with housing, are our principal forms of wealth in this country. Only the people who have lifetime tenure, insured solid pensions and rent homes but own no stocks personally are unaffected. Sure that’s a lot of people, but believe me, they aspire to have homes and portfolios. If we only want to help those who have no wealth to destroy, we are not helping the majority of Americans; we are not helping the broader population.
Then third, it’s the nastiness that he inherited from Bush that’s causing all these problems and Cramer’s just a closet Republican, a Racist, a R@tf*cker!
You can argue, of course, that Obama inherited one of the worst hands in the world. I had been a relentless critic of the Bush administration’s “stewardship” of the economy, calling repeatedly for changes to avert the disaster that I saw coming, although perhaps Gibbs hasn’t seen my CNBC meltdown. Seemed pretty prescient to me.
I, like everyone else, have made less authoritative and wrong statements in the past, but that rant still stands as something that I am sure everyone in the Bush administrations’ Treasury and Fed listened to. My calls to sell 20% of your stocks in September at Dow 11,000 and then all of your stock if you need the money for the next five years at Dow 10,000 in October, might have eluded Gibbs, too.
I said it here just a few days ago and I will say it again. There is a very active proproganda wing of this POTUS.
You are right about the paid bots only these are a whole new crew. Criag’s List today had a job posting for Bloggers Needed. They are offering $5.00 per finished conversation…whatever that means. It’s listed under the computer jobs. I do believe this is recruitment to become an Obot. Thanks to the stimulus porkulus, jobs are being created in this sector. {{snark}}
So as they hire more kids on taxpayer dime, you will see more manufactured Obots. They only get paid per conversation so remember to ignore them and they will quit their new bot jobs when they don’t get paid for a ‘completed’ conversation. Spread the word.
I can’t tell you how many folks have come to my site today to say they’ve noticed the uptick in that propaganda effort. Here’s the type of criticism they don’t want to hear from Cramer who supported Hillary Clinton in the primary.
But Obama has undeniably made things worse by creating an atmosphere of fear and panic rather than an atmosphere of calm and hope. He’s done it by pushing a huge amount of change at a very perilous moment, by seeking to demonize the entire banking system and by raising taxes for those making more than $250,000 at the exact time when we need them to spend and build new businesses, and by revoking deductions for funds to charity that help eliminate the excess supply of homes.
We had a banking crisis coming into this regime, but now every area is in crisis. Each day is worse than the previous one for this miserable economy and while Obama’s champions cite the stimulus plan, it’s really just a hodgepodge of old Democratic pork and will not create nearly as many manufacturing or service jobs as we hoped. China’s stimulus plan is the model; ours is the parody.
And here’s the money line from the mad money man:
If that makes me an enemy of the White House, then call me a general of an army that Obama may not even know exists — tens of millions of people who live in fear of having no money saved when they need it and who get poorer by the day.
Hey Cramer, Obama knows the army is out there. Be prepared to be called a deadender for Hillary. Have you got the call-outs for being racist yet? How about a ‘bitter knitter’? You’re not a woman, but if they can find something akin to calling you a dried up old va-jay jay get ready for that too. Because there are a lot of folks out there, and the purpose of propaganda and the Blogzkrieg Bots is to silence you. They will try to intimidate you into silence. Don’t let them.
How Low Can We Go?
Posted: March 5, 2009 Filed under: Equity Markets, Global Financial Crisis, U.S. Economy | Tags: Barro, Cabellero, Depression Recession, Economic Forecasts, Krugman, Mankiw Comments Off on How Low Can We Go?
The Financial media and economics blogosphere is full of wonky goodness this week with all kinds of forecasts of the economy. The big question is how bad will it get? The secondary questions deal with economic forecast assumptions built into the Obama Budget. Are they overly rosy or realistic? I’ll save the wonkiest battle for last even though it is the most interesting. It is between Mankiw and Krugman (with me agreeing with Mankiw for a change on a technicality) but it’s based on some pretty high level math so let’s start with the the least technical shot across the bow of the good ship Hopey Changey.
Robert Barro has the most blunt assessment of the big question in this week’s WSJ. His opinion piece just asks the question out right. What Are the Odds of U.S. Depression? Barro is a member of what you could possibly call the elite team of economists in the country. His credentials and CV are impeccable. His record of academic publishing is unassailable. He teaches at Harvard. He also tends to be a voice from the right. However, he’s presenting research in this opinion piece so this isn’t based on dogma, but some high level number krunching. He’s actually put the probability of a ‘great’ depression at 20%.
The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.
Our research classifies just two such U.S. events since 1870: the Great Depression from 1929 to 1933, with a macroeconomic decline by 25%, and the post-World War I years from 1917 to 1921, with a fall by 16%. We also assembled long-term data on GDP, consumption and stock-market returns for 33 other countries, sometimes going back as far as 1870. Our conjecture was that depressions would be closely connected to stock-market crashes (at least in the sense that a crash would signal a substantially increased chance of a depression).
I’d really suggest you buck up and actually read his story line about his data because it is very interesting. He basically looks back at periods when there were severe stock market crashes (like now) and looks at trends. His database is not restricted to US history but includes severe recessions and depressions from 34 different countries.
His assessment of forecasts is based on looking at the Fed scenarios. He tips his conservative bent at the end of this quote by basically saying none of the policies we’ve seen to date are going to do much. I highlighted his proposed time line. He does think we’re going into a situation that will be worse than the 1980s recession but most likely not as bad as the Great Depression of the 1930s.
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