You gotta be on Prozac to be an economist these days, I swear

Posted: July 31, 2013 | Author: | Filed under: Economy | Tags: , , , | 39 Comments

fiscal flash 001There are so many elegant things about my chosen field that I do, in fact, still get excited when I introduce huge numbers of undergraduates to Economics.  I don’t do much of that anymore given that I am better paid and easier employed as a graduate finance teacher churning out hapless MBAs.  But, part of me still knows that we have lots of answers to the big policy questions.  The problem is that Republican Revisionism and Big Money from Big Finance has totally overwhelmed the main stories and theories that we all know well.  The worst situation is that the cult of the Austrian School is being taken seriously by a select group of young, white male journalists and getting more virtual ink than it truly deserves.  Then, there is the absolute fail of the urgency of fiscal policy when unemployment is this high and this pervasive.   The one bright light–despite the howling of goldbugs and Birchers–has been the FED.  There are still economists over there in that outfit.  If you’re used to deconstructing markets like I am, you can see that the markets trust the FED’s policy.  It’s not that the FED directly benefits them any more.  Those days of buying up nasty assets are behind us.  It’s that the Fed understands its priorities are stable financial markets and banking systems and tackling either inflation or unemployment depending on the priority.

Inflation is the thing that is most directly impacted by FED policy.  It hasn’t been an issue since Paul Volcker got rid of it and the FED announced its Taylor Rule boundaries.  It’s the legacy of Milton Friedman and the monetarists which is actually the school that I most fit as a financial economist of a certain age.  That legacy and the legacy of fiscal policy as established by the models and hypotheses first provided by J.M. Keyenes and later proved and improved by a slew of brainy economists with computers and databases–like Paul Samuelson–has been under attack with no theoretical or empirical basis.  It is all political and screed journalist based.  The nonsense has been amplified by a President who seems completely unwilling to trust real economists and relies on lawyers with emphasis on economic policy.  That’s like having a biologist that watches bears in the woods go over your blood work imho.  I don’t care how much freaking experience you have writing policy law, it’s not the same as being grounded in the theory and totally aware of the empirical proofs and disproofs.

So, as the speculation about a possible new fed chair pops up, we get stuff like this. Obama is defending Larry Summers.  The man is an economist but the man is also not what you would call a particularly skillful leader as witnessed by his tenure at Harvard.  He also has said some things about women and science and math that are not very artful and certainly not very helpful to those of us that struggle to be credible despite our obvious genitalia.

Barack Obama has strongly defended Larry Summers against opposition from the left to the possible appointment of the president’s former economic adviser as the next chair of the Federal Reserve.

Mr Obama, speaking at a closed meeting of the Democratic caucus of the House of Representatives, reacted strongly at an otherwise friendly meeting when Ed Perlmutter, a congressman from Colorado, urged him not to appoint Mr Summers.

According to members of Congress present at the meeting on Capitol Hill, Mr Obama urged Democrats to give Mr Summers a “fair shake” and said he had been a loyal and important adviser when the president took office in the midst of a deep recession in 2008.

Mr Summers, a former Treasury Secretary and president of Harvard University, and Janet Yellen, the vice-chair of the Fed, are the leading contenders for the job.

Mr Obama also mentioned by name a third person, Don Kohn, as a possible candidate. He said he had yet to make up his mind on whom he would nominate for the job.

The president said there was little in the nature of policy differences between them, saying you “would have to slice the salami very thin” to find areas in which they diverged.

Don Kohn is a Fed insider and pretty well known as a monetary policy dove just as Obama appears to be a fiscal policy dove.  Let me qualify that description.  They both come from the let people suffer unnecessarily and let the markets work things out school of thought.  In good economic times, that’s an okay stand.  In the face of persistent unemployment that is basically looking at a huge number of people and saying let them eat cake.  That last option is unnecessary because the bottom line is that we know better and can do better by these folks.  It kills me to know what I know and watch the passivity of Obama and the retch-inducing ignorance of Republicans in the face of great suffering.  If, in the long run we are all dead, in the short run we all suffer and face economic and personal devastation in the face of incremental steps and not whole-hearted policy wars on dire economic situations.  Frankly, I think Obama has a problem with the Janet Yellen because she’s likely to tell him to off if she doesn’t like what he has to say.  I really do.  She’s a hard boiled economist with a no nonsense approach.

It’s not that we’re doing badly. It’s that we’re creeping along and not growing fast enough in the face of all this deep, long, persistent unemployment and no one’s hair is on fire that can do anything about it.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.7 percent in the second quarter of 2013 (that is, from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.1 percent (revised).

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3 and “Comparisons of Revisions to GDP” on page 18). The “second” estimate for the second quarter, based on more complete data, will be released on August 29, 2013.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential investment that were partly offset by a negative contribution from federalgovernment spending. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the second quarter primarily reflected upturns in nonresidential fixed investment and in exports, a smaller decrease in federal government spending, and an upturn in state and local government spending that were partly offset by an acceleration in imports and decelerations in private inventory investment and in PCE.

We cannot creep our way back to prosperity.

The fact that the donor class and corporate profits are doing well is what’s driving this anemic policy response.  The people most effected by the inactivity are either fighting it out with racial resentment or feeling the usual helplessness that goes with being a picked-on out class.  That infighting is helping those at the top ignore the plight of the folks that find they are quickly losing ground.  That is why any of these FED appointments is basically a win for the status quo.  It is also why the though of Larry Summers as FED chair gives me the heebiejeebies.

Like I said, real economists reacted to this news today like this:  Economists React: Better GDP, but Trend Still Sluggish.  Here’s some examples.

While this is a better than expected report, it isn’t very strong. If you look at the past three quarters, the economy has not done very much. That is the economic environment facing the Fed as it meets today. –Joel Naroff, Naroff Economic Advisors

The fact that declining federal spending continues to be a drag on economic growth is another reminder that now is not the time for Washington to impose self-inflicted wounds on the economy. The Administration continues to urge Congress to replace the sequester with balanced deficit reduction, and promote the investments our economy needs to put more Americans back to work, such as by rebuilding our roads and bridges. –Alan Krueger, White House Council of Economic Advisers

–The U.S. economy grew modestly in the second quarter because of hefty fiscal restraint, but growth exceeded expectations and looks to turn convincingly higher in the second half of the year. Sequestration chopped federal nondefense spending 3.2% annualized in the quarter, and civic worker furloughs slowed consumer spending to 1.8%, despite motor vehicle sales hitting five-year highs. On the plus side, residential construction clocked in with a fourth consecutive double-digit gain, exports bounced back strongly, and state and local government expenditure rose for the first time in a year. Most importantly, businesses appeared less concerned about the knock-on effects of sequestration. –Sal Guatieri, BMO Capital Markets Economics

All during this economic bust up we’ve had government as a drag on the economy.  This has been at every level of government.  It is a massive fail on the part of our modern democracy.

Again, we cannot creep our way back to prosperity.  This is especially true if all levels of government are holding back everything but the profits of a few large corporations and the taxes of the people who have gained so much over the last three decades.  It just ain’t right and it just isn’t good economic policy.

The LIBOR Scandal: It’s not just for the Brits any more

Posted: July 14, 2012 | Author: | Filed under: Global Financial Crisis | Tags: , , | 28 Comments

I’ve been trying to figure out a way to describe how serious the LIBOR scandal is without resorting to esoteric finance and economics models.  LIBOR–the London Interbank Offered Rate–is the rate at which many international banks lend money to other banks.  As such, it’s the underlying rate for prime rates around the globe.  It is akin to our Fed Funds rate.  It’s a rate watched by central banks closely and can be targeted by them.  It is not directly under their control but monetary policy can influence it.  Many, many loans are attached to the LIBOR rate and changes in the LIBOR rate.  As such, it allocates loanable funds to many many projects around the world.  It directly allocates funds to projects which–when missed–can lower the economic welfare of many countries.  Here’s just  a small bit that will give you an idea of how important the rate is from footnoted entries at Wiki.

Libor rates are calculated for ten different currencies and 15 borrowing periods ranging from overnight to one year and are published daily after 11 am (London time) by Thomson Reuters.[4] Many financial institutions, mortgage lenders and credit card agencies set their own rates relative to it. At least $350 trillion in derivatives and other financial products are tied to the Libor.[5]

Companies will use LIBOR as a base rate for discounting when evaluating capital projects. This means if the rate is too high or too low, it can impact the decision to build a factory, buy a machine, or expand a project. Let’s just say that nearly every financial and economic decision that’s evaluated based on opportunity costs or discounting uses a rate that’s base on the FED funds rate or LIBOR. It’s probably the most important interest rate in the world.

I’ve promised to write on this before.  I usually have some time on Saturdays for this kind of analysis and that usually means that it may get passed over too.  Last week, there were many discussions on this and most of them had some good explanations of LIBOR basics.  Still, you have to really understand financial and economic decision making to really grok how big of a deal the LIBOR rigging scandal is and will be for some time.  You also have to understand how much our sophisticated markets depend on trust and effective regulation.  Financial markets can be opaque.  They are subject to adverse selection, principal-agent issues, information asymmetry and moral hazard.  They are also the electricity that runs the real sector.  You don’t build a car factory or a levee with out funding from some source sold in a financial market. That’s why you evaluate that decision using cash flow discounting.  For every speculator that won the bet on which way the rate would move, there was one that lost that bet too.  So, gaming the rate is like fixing the spread on every MLB game including the World Series games.

Over and over, we’ve seen that the financial markets–and the folks that participate in them–are not worthy of trust.  We’ve also had some indication that our regulation over them has not been effective.  There are many reasons for that.  Purposeful deregulation, underfunding, and ideological appointments as well as regulator capture have all played a role.

Now, we now that we have trust issues with our regulators in larger ways than we thought possible.  Once again, Timothy Geithner is playing a central role in the questions of what did the NY FED know about the LIBOR gaming and when did they know it? Major newspapers are reporting that the NY Fed was aware of this as early as 2007.  This is as scandalous as the rate gaming itself.

Federal regulators had evidence that major banks could be manipulating one of the world’s most important interest rates a year before the practice came to an end, according to documents released by the Federal Reserve Bank of New York on Friday.

As early as 2007, the officials at the New York Fed suspected that this key rate, which serves as the basis for the interest rates that consumers pay on many loans, did not accurately reflect market forces, the documents show. Then, in April 2008, the New York Fed was explicitly warned by an employee of the British bank Barclays that it was participating in a ruse to “fit in with the rest of the crowd,” referring to other major banks.

The documents, released in response to congressional inquiries, add to the mounting questions about whether federal regulators were aggressive enough in addressing irregularities at the heart of the global financial system.

The new disclosures show that the New York Fed shared its concerns about the London-based Libor rate with British regulators. But the Fed offered no evidence that it had taken additional steps, including exercising its own authority as the regulator of some of the largest U.S. financial firms, to address the rigging of the rate.

“The New York Fed helped to identify problems related to ­LIBOR and press the relevant authorities in the UK to reform this London-based rate,” the Fed said in a statement. The Fed declined to say what other steps it might have taken and is still exploring whether there are more details it can release.

The ma­nipu­la­tion by Barclays did not end until some point in 2009, offering the freshest evidence of how regulators struggled to oversee the largest banks during the global financial crisis.

Again, this is appalling.  It implies that sitting Secretary of the Treasury Timothy Geithner knew about this.  It appears that Geithner made the BOE aware of the situation by memo.  How much farther the interaction goes is unknown at this point.

The Federal Reserve and the U.S. government knew back in 2008 that Barclays was filing false reports about Libor, the interest rate that international banks charge one another for short-term loans, according to documents released Friday. The documents show that a staffer at the U.K.-based bank told the New York Federal Reserve—which was then run by current Treasury Secretary Timothy Geithner—more than four years ago about the false reports before the admission was circulated through the federal government.

Barclays has been fined about $450 million for its role in fixing the rate. The Libor (London Interbank Offered Rate) scandal has swept through the banking world, with other institutions, including Citigroup, JPMorgan Chase, the Royal Bank of Scotland and Deutsche Bank, all acknowledging that they are being investigated.

Congress is just getting up to speed on this.  Interestingly enough, it appears the driving force is Maxine Waters.

The House Financial Services Committee will get a private tutorial next week on the LIBOR scandal a day before Federal Reserve Chairman Ben Bernanke is expected to be pressed by lawmakers about the central bank’s role in overseeing Wall Street giants being investigated for possibly manipulating the benchmark interest rate.

Reps. Spencer Bachus and Barney Frank, the committee’s top Republican and Democrat, have set up a July 17 briefing for staff with the Congressional Research Service, according to a memo obtained by POLITICO that was circulated Friday to members of the Financial Services Committee.

Bernanke will testify before the committee on July 18 in a regularly scheduled hearing on monetary policy.

Some liberal lawmakers have privately been agitating for a separate hearing focused solely on the rate setting scandal instead of simply being given an opportunity to quiz officials when they come before the committee for other business.

According to a Democratic lawmaker, Rep. Maxine Waters (D-Calif.) had started to circulate a letter demanding a hearing on LIBOR but she was encouraged not to send it to Bachus and Frank.

The decision to at least temporarily forego a hearing comes as allegations of international banks manipulating the LIBOR benchmark interest rate hit Washington, D.C., this week. A newly released memo revealed that Treasury Secretary Timothy Geithner had expressed concerns about the problem as far back as 2008 during his tenure as president of the New York Federal Reserve.

The memo, sent to the head of Bank of England, Mervyn King, Geithner had made recommendations on ways to “improve the integrity and transparency of the rate-setting process.”

The big question is did the FED investigate or look into the role of its member banks in the rigging scam?  This scandal hopefully will allow us to look at the huge money center banks again and their monopoly power over so many markets.  I’ll be following this closely.

Friday Reads

Posted: June 8, 2012 | Author: | Filed under: 2012 presidential campaign, campaign financing, morning reads | Tags: , , , , , , | 35 Comments

Good Morning!

I admit to being completely exhausted.  So, let’s see what I can dig up while I’m half asleep.

Josh Holland at AltNet thinks right wingers shouldn’t get too excited about Scott Walker’s win in Wisconsin on Tuesday.

An honest reading of the published exit poll leads to an important conclusion about Walker’s victory that has little to do with unions, Walker’s policies, the economy or any of the other factors that have pundits’ tongues wagging.

Fully 70 percent of those voters polled believed that recall elections are either never appropriate (10 percent) or are only appropriate in the case of official misconduct (60 percent).

The governor won 72 percent of this group. And it’s worth noting that a third of those voters who said “official misconduct” is a good reason to recall a governor voted to oust Walker, who has seen six of his staffers charged with 15 felonies in the “John Doe” probe.

While Walker himself has not yet been charged, reports suggest that the investigation is circling closer to him. Over the past seven weeks, he transferred $160,000 from his campaign funds to a legal defense fund, according to the Milwaukee Journal-Sentinel.

Mohamed A. El-Erian –CEO and co-Chief Investment Officer of the global investment company PIMCO speculates on US economic growth at Project Syndicate. He wonders “Is American Healing Fast Enough?”

Six internal factors suggest that the United States’ economy is slowly healing. For some observers, these factors were deemed sufficient to form the critical mass needed to propel the economy into escape velocity.

While I hoped that they might be proven right, the recent stream of weak economic data, including May’s timid net job creation of only 69,000, confirmed my doubts. With this and other elements of a disheartening employment report now suddenly raising widespread worries about the underlying health and durability of America’s recovery, it is important to understand the positive factors and why they are not enough as yet.

For starters, large US multinational companies are as healthy as I have ever seen them. Their cash balances are extremely high, interest payments on debt are low, and principal obligations have been termed out. Many of them are successfully tapping into buoyant demand in emerging economies, generating significant free cash flow.

Company cash is not the only source of considerable spending power waiting on the sidelines. Rich households also hold significant resources that could be deployed in support of both consumption and investment.

The third and fourth positive factors relate to housing and the labor market. These two long-standing areas of persistent weakness have constituted a major drag on the type of cyclical dynamics that traditionally thrust the US out of its periodic economic slowdowns. But recent data support the view that the housing sector could be in the process of establishing a bottom, albeit an elongated one. Meanwhile, job growth, while anemic, has nonetheless been consistently positive since September 2010.

Great!  The richer are richer and big corporations are making it big abroad.  What about the poor American worker? Evidently the Fed must think things are shaping up because Bernanke and Yellen are both hinting that the days of historically low interest rates might be nearing the end.

In spite of May’s weak jobs report, Fed Chairman Ben Bernanke still sees no reason for the central bank to expand its efforts to boost the American economy. The Fed is assessing whether the economy would continue to grow fast enough to reduce the unemployment rate without further intervention, he said.

This is an interesting youtube by Mauro Martino at Northeastern University. It’s aninfographic of fundraising by the presidential candidates from March 2011 to Feburary 2012.

David a Graham of The Atlantic gives us some analysis.

There’s a lot going on here, but the animated graphic shows how much each of the candidates raised each week and what states it came from, based on the amount of contribution per capita. The top half lists the states on a spectrum from most liberal to most conservative.

What’s great about the graphic is it shows just how drastically Mitt Romney and Barack Obama are in a different monetary league than the other Republican candidates who battled Romney for the nomination. That’s most obvious in the spikes — Ron Paul, Newt Gingrich, and Rick Santorum seldom did better than Romney even on their best days, but Romney’s highest peaks are exponentially larger than theirs.

The disparity becomes clear in the geographic breakdown, too. Romney and Obama tend to raise the most money in the same set of states: D.C., Massachusetts, California, New York, Florida, Texas, Connecticut, and Colorado. Of those states, five are solid Democratic, one is solid Republican, and two are swing. But they’re also the states with the highest concentrations of wealthy people. Meanwhile, the circles for Santorum, Gingrich, and Paul are fairly consistent across the map. At a time when the role of money and politics is fiercely debated, this visualization shows just how far out of proportion the relation between money and votes is. Obama has no chance of winning Texas, but it’s a cash cow for him; the same goes for Romney and California. It’s not hard to imagine how that distorts incentives for candidates. It’s not just that Romney and Obama are playing in a different league. Until August or so, they might as well be playing in a different nation, one comprised of 10 states or so.

Alec MacGillis asks: “Why we are listening to Bill Clinton on Wall Street?” over at TNR in an interesting article called “Let Us Bow Down before the Big Dog”.

Left largely unsaid, though, is that it is also hardly unsurprising for Clinton to be speaking up in defense of high finance. Remember: this is the man who as president presided over the alliance of Wall Street and the Democratic Party, embodied in his treasury secretary, Goldman Sachs veteran (and future Citigroup executive) Robert Rubin. It was Clinton who signed the repeal of Glass-Steagall, the 1933 law breaking up securities firms and commercial banks; it was Clinton whose advisers, notably Rubin and Larry Summers, blocked Brooksley Born’s push for tighter regulation of derivatives; it was Clinton who lowered the capital gains tax in 1997, vastly boosting the bottom line of private equity managers like Mitt Romney who, via the carried interest loophole, had their compensation treated as capital gains rather than ordinary income.

Surely it is no accident that Clinton’s other recent remark undermining Obama was also related to Obama’s allegedly over-populist stance toward high finance and the very wealthy. In an interview last fall with Newsmax — yes, Newsmax — Clinton critiqued Obama’s talk of raising taxes on millionaires who currently pay at very low rates (“The Buffett Rule”) by saying that it was a bad idea to raise anyone’s taxes “until we get this economy off the ground.” He added for good measure: “We don’t have a lot of resentment against people who are successful. We kind of like it, Americans. It’s one of our best characteristics that, if we think someone earned their money fairly, we do not resent their success. Americans lost the fact that, whatever you think about this millionaire surcharge — I don’t really care because I would pay it but it won’t affect me because I already paid income because I live in New York. I will pay more, but it won’t solve the problem.” Clinton tried to clarify these remarks later, but not before Crossroads GPS, the group founded by Karl Rove, built an Obama attack ad around the remarks.

What is utterly lost in the pundits’ exaltation of Clinton’s comments on Bain is that there is, in fact, a real debate going on within the Democratic Party, and that the reaction to the Obama campaign’s attacks on Bain are bringing out the intra-party tensions. On the one side are Democrats like Obama who have seen many former Wall Street supporters turn away from them for daring to hold them responsible for the 2008 financial collapse, for proposing reforms like closing the carried-interest loophole, and for generally believing that the explosive growth of the financial sector the past three decades has not exactly been healthy for the country. These Democrats argue that, while attacks on Bain might not play so well in the Acela Corridor, they may well resonate in Ohio. On the other side of the debate are Democrats like Clinton and Cory Booker, the mayor of the 68th biggest city in the country, who have managed to remain in the good graces of Wall Street, not least because they are not in the position of having to fix what went terribly wrong in the fall of 2008, and who also, it must be noted, are indebted to the high-finance world — Booker for its crucial support of his campaigns, and Clinton for its support of his post-White House philanthropic efforts.

Big dogs never bite the hand that feeds them.

So, this is my offering this morning.  What’s on your reading and blogging list today?

Oh to be a Fly on those Fabled Marble Walls

Posted: June 23, 2009 | Author: | Filed under: Global Financial Crisis, Team Obama, U.S. Economy | Tags: , , , , | Comments Off on Oh to be a Fly on those Fabled Marble Walls

Walter WinchellThe Federal Open Market Committee (FOMC) meets today. Those folks are the ‘deciders’ when it comes to monetary policy. This should be an interesting meeting for a number of reasons. First, new regulations proposed by the Obama administration definitely put the Fed in the catbird seat. Second, Bernanke is coming close to his expiration date. Third, a number of prominent economists are wondering about the Fed’s exist strategy from the current wide open floodgates and the pressure is on not to enable another bubble. Fourth, we find that three banks have suspended their Tarp Dividends meaning that all is not happiness and light in bank balance sheet land. The intrigue of all this pulls this financial economist away from her research agenda which is not good for my CV but very good for turning the dismal science into a Walter Winchellesque moment. Now, just where to begin …

‘Good Morning, Mr. and Mrs. North and South America and all the ships at sea…let’s go to press!’

Let’s go to Banking. Headline: The Scam Continues on you, Mr and Mrs. North and South America. Let’s dish the dirt on those banks that are behind in their loan payments to the U.S. taxpayer as reported today by the WSJ who keeps track of that sort’ve thing. It seems three banks have suspended their TARP ‘dividends’. They can miss six before they technically default. (Ask yourselves, if I missed five housepayments would I still be IN my house or out in the street by number six?) The banks are: Pacific Capital Bancorp (CA), Seacost Banking Corp of Florida (FL), and Midwest Bank Holdings Inc (IL).

Treasury spokeswoman Meg Reilly said Monday that “a number of banks” that got taxpayer-funded capital under TARP are no longer paying dividends to the government. “Treasury respects the contractual rights of [TARP recipients] to make decisions about dividend distributions, and that banks are best positioned to decide how to manage their own capital base.”

The moves are a sign of the deepening misery for large swaths of the U.S. banking industry, suffering under bad loans and the recession even as large firms such as J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. rebound from the crisis, including by repaying their TARP funds last week. The halted dividends also raise questions about the Treasury’s assertions that the capital infusions represented sound taxpayer investments because they were only going to healthy institutions.

“Here the government has given the banks money at great terms, but the fact that they can’t keep up with it is worrisome,” said Michael Shemi, an investor at New York hedge-fund firm Christofferson, Robb & Co. “It tells you of the deep problems of community and regional banks.”

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