Speechification Alert

Great illustration in today's New York Times:  Banker's and the taxpayer cookie jar

Who stole the Cookies from the Cookie jar?Great illustration in today's New York Times: Banker's and the taxpayer cookie jar

Well, it’s my turn to listen to a Obama Speech. Those speeches usually have the same dizzying effect on me that tennis matches do. Instead of watching balls go back and forth rhythmically while lulling me to sleep, I get to watch the head of the President. Teleprompter Right, 1,2,3 to Teleprompter left, 2, 3 …

So the speech is on bank reform which is something I’ve been on about for months now. It’s the anniversary of Lehman’s demise. Stories abound on the Grey Lady today including this call by Dr. Tyler Cowen of George Mason University. He’s a little libertarian for my taste on policy–even managing a h/t to Ayn Rand and Atlas Shrugged–but he gets it all in a way that only an economist could.

But we are now injecting politics ever more deeply into the American economy, whether it be in finance or in sectors like health care. Not only have we failed to learn from our mistakes, but also we’re repeating them on an ever-larger scale.

Lately the surviving major banks have reported brisk profits, yet in large part this reflects astute politicking and lobbying rather than commercial skill. Much of the competition was cleaned out by bank failures and consolidation, so giants like Goldman Sachs and JPMorgan had an easier time getting back to profits. The Federal Reserve has been lending to banks at near-zero interest rates while paying higher interest on the reserves the banks hold at the Fed. “Too big to fail” policies mean that the large banks can raise money more cheaply because everyone knows they are safe counterparties.

President Dwight D. Eisenhower warned of the birth of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We’ve created a class of politically protected “too big to fail” institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong.

We should stop using political favors as a means of managing an economic sector. Unfortunately, though, recent experience with health care reform shows we are moving in the opposite direction and not heeding the basic lessons of the financial crisis. Finance and health care are two separate issues, of course, but in both cases we’re making the common mistake of digging in durable political protections for special interest groups.

I have to admit that I’ve written about similar concerns, however, I can tell Cowen and I may differ on how to correct the situation. That’s typically true of most economists. We agree on the root causes because of our grounding in shared theory but argue which policy might be best based on our political bent. I continue to argue for the role of government as rule setter and referee. However, I really do prefer independent bureaucrats in the position of auditor and enforcer. Congress, however, still has to write the law. This action, to date, has been missing.

So, MarketWatch has provided a pre-speechification programme so that we can get our score card ready. The speech is supposed to “rekindle” interest in regulatory restructuring. I’m not sure we need restructuring so much as we need laws that recognize the systematic problems we’ve developed in financial markets since quants have turned asset pricing into a physics exercise, financial innovations have become exotic, and the entire set up is now one big cartel waiting to pounce on the unsuspecting business sector and consumer. We now have a small number of banks capable of funding the really big capital undertakings and who knows what priorities or friends they’ll choose to fund over positive net present value projects? This should be enough to send any capitalist running for government regulation. Also, get ready for lack of services and fees that would make a loan shark blush. This should make any advocate for the little guy scream for the same. Today, I am the jade dakini. It’s happening in Europe but I doubt it will happen here.

So, what is Obama said to be inkling tomorrow that will be undoubtedly be sacrificed to the demons of political expediency down the road?

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Zombie Negotiations

I’m at the end of my semester which is the time when students that should’ve showed up in my office months ago suddenly feel they can negotiate a different result than the one listed in my syllabus and on my grade sheet.  I’ve noticed this pattern in all my years of teaching.  I get about a handful of them right after the first test that say, sheesh, I don’t think I get this what can I do?  I get more than a handful the week before finals, when their grades are pretty much a given, saying, sheesh, I don’t think I can get this, what can you do for me?

There’s an implicit contract between me and my students and a good deal of it is stated in the syllabus which all of  them get at the beginning of the semester.  Over the years, it’s grown to being a pamphlet of sorts.  Much of this has to do with either accreditation or legal requirements (like what to do if you’re disabled and need help with things).  A lot of it is me trying to be absolutely, positively clear that we agree on the expectations we have in this class. I spend the entire first day going over all of these things and they all nod in agreement, don’t ask many questions, and hope they can leave early.

Why do I feel like the Fed is waving a syllabus in front of a few recalcitrant banks over the results of the so-called stress test?   Are they asking why didn’t you come to us sooner when you had a problem?  How much of a softie is the Fed going to be when a few of them want to renegotiate what it means to get an A,B,C, D, or F?

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Living La Vida Nada

cautionFrom the Federal Open Market Committee’s (FOMC) policy statement earlier today:

Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract.  Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.  Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.  U.S. exports have slumped as a number of major trading partners have also fallen into recession.  Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.  Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

It goes on to state that its goal is to bring long term rates down farther by buying “up to an additional $750 billion of agency mortgage-backed securities”, “$300 billion of longer-term Treasury securities over the next six months” and  “agency debt this year by up to $100 billion”.  The Fed is aggressively using its balance sheet to inject liquidity into the financial system since the already low fed funds rate target is technically as low as it can get now.  The Fed is hinting that we may be looking at the recession’s trough soon.  Given the release of today’s 1st Quarter GDP, we can only hope and pray.

From Market Watch:

The central bank’s Federal Open Market Committee said that spending has stabilized and that the pace of the downturn appeared to be somewhat slower. The economy could remain weak in coming month but policy actions and “market forces” were aligned to create a gradual upturn, the statement said.

Fed watchers saw little drama in today’s announcement.

“The only major difference between today’s statement and the previous one on March 18 is that today’s cited the fact that most evidence points to a slowing rate of economic decline. Anyone with two eyes and a brain knows this to be the case,” wrote Josh Shapiro, chief U.S. economist at MFR Inc. in a note to clients.

Economists had expected the policy-setting panel to maintain the status quo. The FOMC kept its target interest rate unchanged at an ultra-low 0%-to-0.25% range.

The economy has fared dismally over the past six months — collapsing by the sharpest rate in more than 50 years. The unemployment rate has spiked and business investment has slowed.

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Super Heroes of Macroeconomics

Somebody must have a lot of time on their hands to write a song called “Hey, Paul Krugman” but still, if the angsty, artsy fartsy creative class that foisted this POTUS on us is finally waking up, then Twitter me when the Revolution comes.  I’ve even read the orange cheeto place  and seems even a few of them are beginning to see the writing on their blackberries.

So, Paul is still appalled and speaking out against the Zombie Plan.   I’d say this is another sfz! warning to the White House.  What I can’t repeat enough is that it’s not just Paul.  It’s not just me.  It’s everyone with any knowledge of macroeconomics and the financial system.

Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.

fiscal-flash-001I don’t know if you’ve ever sat in an economics class, but most of you who have will attest that few economics professors are what you would call the dramatic, excitable types.  However, I’ve seen more animation out of them recently than I’ve seen in all recent Marvel Comic Books.

From “Reasons Why The Obama Administration will not solve this crisis by the end of 2009” at The Underground Investor:

Consider that President-elect Obama voted FOR the horrible $700 billion bailout plan that accomplished less than zero in fixing the global economy while only transferring wealth from people that were struggling the most to the unethical financial executives that created this problem. These were my exact words in October, 2008, verbatim, about the eventual effect of the bailout plan: “Don’t believe the media spin. This will fix nothing. Even if and when the government overpays Wall Street and US banks by 300%, 500% and 1000% for their toxic assets, this temporarily recapitalizes these financial institutions but only creates A MUCH BIGGER PROBLEM for the future.” If I understood why the bailout plan would most definitely fail, as I blogged here, and the next President of the United States could not, that is a scary thought. On the other hand, if President Obama understood that the bailout plan would likely accomplish nothing but the transference of wealth from hard-working citizens to corrupt financial executives and still voted for the bill, then this action needs no further discourse.

From FT’s Willem Buiter:

Why are the unsecured creditors of banks and quasi-banks like AIG deemed too precious to take a hit or a haircut since Lehman Brothers went down?  From the point of view of fairness they ought to have their heads on the block.  It was they who funded the excessive leverage and risk-taking of banks and shadow banks.  From the point of view of minimizing moral hazard – incentives for future excessive risk taking – it is essential that they pay the price for their past bad lending and investment decisions.  We are playing a repeated game.  Reputation matters.

Three arguments for saving the unworthy hides of the unsecured creditors are commonly presented:

  • Unless the unsecured creditors are made whole, there will be a systemic financial collapse, with dramatic adverse consequences for the real economy.
  • If the unsecured creditors are forced to take a hit, no-one will ever lend to banks again or buy their debt.
  • The ultimate ‘beneficial owners’ of these securities – notably pensioners drawing their pensions from pension funds heavily invested in unsecured bank debt and owners of insurance policies with insurance companies holding unsecured bank debt – would suffer a large decline in financial wealth and disposable income that would cause them to cut back sharply on consumption.  The resulting decline in aggregate demand would deepen and prolong the recession.

I believe all three arguments to be hogwash.

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Zombie Banks must DIE!

zombie-road-signWell, the Obama administration has decided to take the Zombie route which is something I’ve repeatedly argued against.  But why just take my word for it?  Let’s start with Nobel prize winning  economist Paul Krugman reporting  on his NY Times blog today in a thread aptly titled Despair over Financial Policy.

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

Just about every economist and financial blog on the web, especially the progressive ones, have warned against this option since similar plans put Japan into its lost decade of recession, high deficits, unemployment, and financial malaise.  This is worse than I even expected of the Obama administration.  This basically means more BIG subsidies for BIG investors.  It is nothing less than a massive transfer of wealth to the people and institutions most responsible for this mess from those of us that will suffer the most and have the most to lose. This threatens our jobs, our children’s future, and our country’s standing as the world’s largest single country economy.  This is THE single worst possible decision.

This from Calculated Risk:

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.

From Yves Smith  Naked Capitalism:

The New York Times seems to have the inside skinny on the emerging private public partnership abortion program. And it appears to be consistent with (low) expectations: a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper.

Key points:

The three-pronged approach is perhaps the most central component of President Obama’s plan to rescue the nation’s banking system from the money-losing assets weighing down bank balance sheets, crippling their ability to make new loans and deepening the recession….

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
Yves here. If the money committed to this program is less than the book value of the assets the banks want to unload (or the banks are worried about that possibility), the banks have an incentive to try to ditch their worst dreck first.

In addition, it has been said in comments more than once that the banks own some paper that is truly worthless. This program won’t solve that problem. Back to the piece:

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

Yves here. Hiring asset managers to do what? Some investors get 85% support (more as is revealed later), others get dollar for dollar? This makes no sense unless very different roles are envisaged (but how will the price for assets given to the asset managers be determined? Or are these for the off balance sheet entities that should be but are still not yet consolidated, like the trillion dollar problem hanging around at Citi?) Back to the article:

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.

Yves again. While the first TALF deal got off well, Tyler Durden points out its capacity is 2.7 times pre-credit mania annual issuance levels, which means the $1 trillion considerably overstates its near term impact. And credit demand by all accounts is far from robust. Cheap credit is not enticing in an environment of weak to falling asset prices and job uncertainty.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

Later in the article, there is language that intimates that the banks will put up assets and take what they get. However, the failure to mention a reserve (a standard feature in auctions) does not mean one does not exist. Or the alternative may be, since bidding will almost certainly be anonymous, is to let the banks submit a bid, which would serve as a reserve. That is the common procedure at foreclosure auctions, when the bank puts in a bid equal to the mortgage value (so either a foreclosure buyer takes the bank out or the bank winds up owning the property).

From Financial Armageddon:

No Surprise to Anyone

If there is anything to be learned from the current crisis, it is the fact that Washington has a habit of screwing things up.

From setting up corrupt and self-serving government-sponsored enterprises that fail to accomplish their stated goals, to ill-conceived and underfunded insurance schemes, guarantee programs, and safety nets that don’t provide the benefits claimed, to rules and regulations that leave those who are “protected” high and dry, it’s amazing how often good intentions go wrong when the politicians are in charge.

From George Washington’s Blog:

Does a Single Independent Economist Buy the Geithner-Summers-Bernanke Approach?

Does a single independent economist buy the Geithner-Summers-Bernanke approach?

On the left, you have:

  • Nobel economist Joseph Stiglitz saying that they have failed to address the structural and regulatory flaws at the heart of the financial crisis that stand in the way of economic recovery, and that they have confused saving the banks with saving the bankers
  • Nobel economist Paul Krugman saying their plan to prop up asset prices “isn’t going to fly”. He also said:

    At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached. This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers.

On the right, you have:

  • Leading monetary economist Anna Schwartz saying that they are fighting the last war and doing it all wrong
  • Former Assistant Secretary of the Treasury and former editor of the Wall Street Journal Paul Craig Roberts lambasting their approach
  • Economist John Williams saying “the federal government is bankrupt … If the federal government were a corporation … the president and senior treasury officers would be in federal penitentiary.”
  • Prominent economist Marc Faber and many others tearing their approach to shreds.

Of course, other Nobel economists, high-level fed officials, former White House economist, and numerous others have slammed their approach as well.

Sure, the economists for the banks and other financial giants which are receiving billions at the government trough think that the Geithner-Summers-Bernanke approach is swell.

And perhaps a couple of economists for investment funds which use their giant interventions into the free market to make some quick money.

But other than them, no one seems to be buying it.

I may be one of the few in the chorus singing soprano, but I’m in a very huge chorus singing sfz! that this is the worst possible of ALL choices.  This is nothing more than a wealth transfer that will accomplish nothing other than keeping banks and financial institutions that are basically bankrupt on live support long enough to drain the daylight out of any recovery.  This President is AWOL from his job. Not only is he AWOL, but he is incompetent.  He can go on Leno, he can go on sixty minutes, he can give lavish St Patrick’s Day parties and he can hold town meetings in California but he is totally incapable of staying in Washington and doing his job.  By allowing this, he will have stolen more from every single honest taxpayer in this country than even Darth Cheney and the Texas Village idiot did with their adventures in nation building and subsidy of the oil and gas industries and the military industrial sectors.  If somebody in Congress doesn’t act to stop this, I say we start calling them to demand impeachment proceedings.  We’ll be lucky if we come out of recession by the time my daughters reach retirement.

There I said it.  If President Obama doesn’t stop this nonsense now he should be impeached for criminal misuse of  tax payer’s money.