New Jersey CFO

ECONed: Sic Transit Gloria Americanus

Richard Smith, a London-based capital markets information technology manager, was kind enough to provide an advance copy of his review for the book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism by Yves Smith, the author of the well-known financial blog Naked Capitalism.

Mr. Smith (real name, and no relation to Yves) helped in the proofing of the copy and fact searches, so he was already well familiar with the text. Perhaps this makes him a not entirely dispassionate source, given the regard that even copy editors can obtain for their associated works. But I thought it was a very nice summary of many of the salient points, and that you would enjoy having the opportunity to read it.

I intend to read the book in order to both learn something, and to be entertained as well. I love reading accounts of this period of time that are both authoritative and well-written, and understandable by the non-expert. Given the author’s performance on her blog, and her detailed industry knowledge and experience, it looks to be a ‘must read’ for those following the financial crisis and its associated developments.

Reading ECONned
By Richard Smith

http://jessescrossroadscafe.blogspot.com/2010/03/guest-post-econned-book-review.html

Add comment March 6th, 2010

Sic transit America?

Flagging: a US sailor stands on the flight deck of the aircraft carrier USS George Washington

If a week is a long time in politics, a decade is starting to look like an age in geopolitics. Comparing the America that began the 21st century with the America of today is to witness a country that has in some ways quite radically altered its view of itself and its relationship to the world.

In short, the metallic rust of decline has crept into the American soul. “You could argue that the first decade of the 21st century was the last decade of the American century,” says David Rothkopf, a former Clinton administration official and student of US foreign policy. “We are now entering the multipolar century.”

Self-doubt tarnishes Brand America

Add comment January 16th, 2010

The Demonic Religion of Abortion

It’s getting more and more obvious. Last week, in two separate incidents, those favoring abortion set forth their goals and services in religious language. During a December 2nd “Stop Pitts” rally in Washington and in new video advertisements for a Michigan abortuary religious language was used to seize the moral high ground. Clearly, we are dealing with something spiritual. But what is really being championed here is the work of the devil.

The final speaker at the “Stop Pitts” rally was Rev. Carlton Veazy, head of the Religious Coalition for Reproductive Choice. Veazy encouraged the few hundred rally participants to take on the Catholic bishops “because no one religion, no theological perspective should get the kind of weight that they can [to] put pressure on the Congress.” This is admittedly an odd argument for a religious coalition aiming at political influence, especially since Veazy’s message was deliberately religious: “Don’t let anybody tell you that religious people don’t support choice. You not only have a constitutional right for abortion, but you have a God-given right.”

But perhaps Veazy is consistent after all. Perhaps it is only true theological perspectives (as in deriving from the study of God) that shouldn’t carry any weight. But what if Veazy’s god is really the devil, and Veazy’s position is really a demonic suggestion. After all, nobody has said demonic suggestion shouldn’t be a potent political force. Indeed, Veazy’s program is reminiscent of child sacrifice to Ba’al, the “god” worshipped by the Phoenicians at Carthage. In return for future favors, parents sacrificed their babies on the arms of a bronze statue over burning coals in a ritual that even other pagans in the region identified as demonic. This is one reason Cato always ended his speeches with the statement “Carthago delenda est”—Carthage must be destroyed.

Then there was the video advertisement put out by the Northland Family Planning Centers of Michigan. In this ad, a spokeswoman points to a sign hanging in their abortion facility which reads: “We do sacred work that honors women and the circle of life and death. When you come here bring only love.” But whom should we love? The concept of the circle of life and death is primarily associated with Hindu reincarnation and Wicca, both of which are rooted in polytheism, the worship of multiple gods or “forces”. Universalists, who have emptied Christian doctrine of as much meaning as possible, tend also to go down this road (and I emphasize the word “down”).

In any legitimate Christian theology, and indeed in any world-view derived even remotely from the natural law, these “sacred” powers—these bloodthirsty recipients of our love—can only be construed as demons. Pro-lifers have long realized that the fight over abortion was a fight with principalities and powers, as St. Paul said: “For we are not contending against flesh and blood, but against the principalities, against the powers, against the world rulers of this present darkness, against the spiritual hosts of wickedness in the heavenly places” (Eph 6:1). But it is one thing to know this is so and another actually to see the culture of death take an overtly religious form. It is yet a third thing to call these gods of death by their right names.

Jeff Mirus at Catholic Culture

Add comment December 12th, 2009

Operation Rollback: Wal-Mart’s World of Business

The expansion of international “supply chains” from Asian factories to American consumers has certainly created global trade imbalances and international currency flows that are not necessarily sustainable over the long run. A readjustment of the world economy, not a slackening demand for inexpensive consumer products, strikes me as the greatest threat to the Wal-Mart business model. And, for its part, the chain is already adapting to new circumstances. In recent years, Wal-Mart has expanded well beyond the borders of North America into Europe, Mexico and Asia. It imports factory goods from China and also operates its own retail stores there. But the stores look very different from their American counterparts. In Kunming, near the border with Myanmar, Wal-Mart rents space inside its store to independent vendors, who pay $1.20 per day to hawk Yunnan coffee, tobacco bongs filled with local rice wine and condiments made from eggplant, soybeans and ginger. The atmosphere is “festival-like, even chaotic,” as vendors shout out their wares, sometimes through loudspeakers or while pounding on drums, and customers crowd a stall to fish pears out of a solution of sugar, salt and licorice root–”a Wal-Mart store sans Wal-Martism,” according to sociologist Eileen Otis. Another Chinese employee explains his loyalty to the company by suggesting that Sam Walton was, in fact, a student of Chairman Mao who “adopted the revolutionary strategy of ‘the countryside encircling the city.’&nthinsp;” And so the revolution continues.

How Wal-Mart’s Ruthlessness Led to Its Undoing – Jefferson Decker, Nation

1 comment September 18th, 2009

Our secret government

Add comment August 29th, 2009

Socialism in America

Socialism in America

A great deal has been made in recent weeks about Ronald Reagan’s critique of nationalized or socialized health care from 1961: We can go back a bit further, though, and take a look at an intriguing piece from 1848, a dialogue on socialism and the French Revolution and the relationship of socialism to democracy, which includes Alexis de Tocqueville’s critique of socialism in general…

Add comment August 22nd, 2009

The recovery puzzle’s missing piece

Eric Sprott, a veteran fund manager and researcher based in Toronto, believes the buyers are in la-la land when it comes to interpreting economic data emanating from the world’s largest economy. A few of his salient points include:

• A prolonged U.S. retail sales slump, highlighted by a same-store sales plunge of 32% last month at Abercrombie & Fitch (ANF, news, msgs), shows that consumers are in no mood to buy goods even if factories were ready to make them. A plunge of 5.1% reported by U.S. shopping malls in June was worse than the dire 4.5% forecast.

• Unemployment is not just the worst since 1983 — 29% of the unemployed have been looking for work more than six months; the number of people taking unemployment benefits has reached a record 6.88 million; and six people are looking for work for every job opening, a fourfold increase from just a year ago.

• With consumers on the sidelines, U.S. industry is on the brink. Factories used only 68.3% of available capacity in May 2009. The lowest prior level since the Depression was 70.9% in December 1982.

• Despite the recent uptick in construction, new-home sales are down 73% from their 2005 high, and the cumulative loading of rail cars is down 19.2% from 2008’s depressed levels.

• Price/earnings multiples on U.S. stocks, reflecting investor sentiment, fell only to a multidecadeaverage at 16 rather than to the single-digit lows seen in prior deep recessions.

The Economic Recovery Puzzle’s Missing Piece – Jon Markman, MSN Money

Add comment July 31st, 2009

Securitization was maddeningly complex. Mandated transparency is the only solution.

With so much complexity, and uncertainty about future performance, it is not surprising that the securities are difficult to price and that trading dried up. Without market prices, valuation on the books of banks is suspect and counterparties are reluctant to deal with each other.

The policy response to this problem has been circuitous. The Federal Reserve originally saw the problem as a lack of liquidity in the banking system, and beginning in late 2007 flooded the market with liquidity through new lending facilities. It had very limited success, as banks were still disinclined to buy or trade such securities or take them as collateral. Credit spreads remained higher than normal. In September 2008 credit spreads skyrocketed and credit markets froze. By then it was clear that the problem was not liquidity, but rather the insolvency risks of counterparties with large holdings of toxic assets on their books.

The federal government then decided to buy the toxic assets. The Troubled Asset Relief Program (TARP) was enacted in October 2008 with $700 billion in funding. But that was not how the TARP funds were used. The Treasury concluded that the valuation problem seemed insurmountable, so it attacked the risk issue by bolstering bank capital, buying preferred stock.

But those toxic assets are still there. The latest disposal scheme is the Public-Private Investment Program (PPIP). The concept is that private asset managers would create investment funds of half private and half Treasury (TARP) capital, which would bid on packages of toxic assets that banks offered for sale. The responsibility for valuation is thus shifted to the private sector. But the pricing difficulty remains and this program too may amount to little.

The fundamental problem has remained untouched: insufficient information to permit estimated prices that both buyers and sellers find credible. Why is the information so hard to obtain? While the original MBS pools were often Securities and Exchange Commission (SEC) registered public offerings with considerable detail, CDOs were sold in private placements with confidentiality agreements. Moreover, the nature of the securitization process has made it extremely difficult to determine and follow losses and increasing risk from one tranche and pool to another, and to reach the information about the original borrowers that is needed to estimate future cash flows and price.

This account makes it clear why transparency is so important. To deal with the problem, issuers of asset-backed securities should provide extensive detail in a uniform format about the composition of the original pools and their subsequent structure and performance, whether they were sold as SEC-registered offerings or private placements. By creating a centralized database with this information, the pricing process for the toxic assets becomes possible. Making such a database a reality will restart private securitization markets and will do more for the recovery of the economy than yet another redesign of administrative agency structures. If issuers are not forthcoming, then they should be required to file the information publicly with the SEC.

Mr. Scott is a professor of securities and corporate law at Stanford University and a research fellow at the Hoover Institution. Mr. Taylor, an economics professor at Stanford and senior fellow at the Hoover Institution, is the author of “Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis” (Hoover Press, 2009).

Why Toxic Assets Are So Hard to Scrub – Kenneth Scott & John Taylor, WSJ

Add comment July 21st, 2009

Obama’s Economic Box

Barely six months in office, President Obama already finds himself in an economic box. For despite his aggressive and costly economic policy initiatives, the jobs market shows no sign of healing. At the same time, the housing market foreclosure crisis continues apace, while renewed questions are again surfacing about the soundness of the U.S. banking system. To complicate matters, financial markets are now starting to fret about the longer-run inflationary consequences of the unusually large budget deficits in prospect for as far as the eye can see.

In January 2009, on presenting its $780 billion fiscal stimulus package, the Obama administration assured the public that because of that stimulus package U.S. unemployment would not exceed 8 percent. Yet already by June 2009, unemployment had risen to 9.5 percent; including part-time workers, who would prefer to be working full time, unemployment rose to a staggering post-war high of over 16 percent. Worse still, the jobs market shows every sign of being far from bottoming out.

The degree to which unemployment has exceeded the administration’s forecasts has to raise basic questions about the appropriateness and coherence of President Obama’s economic policy approach.

The degree to which unemployment has exceeded the administration’s forecasts has to raise basic questions about the appropriateness and coherence of President Obama’s economic policy approach. These questions pertain not simply to the very poor design of the fiscal stimulus package. Rather they pertain to the adequacy of the measures aimed at stabilizing the housing market and at resolving the country’s most wrenching credit crisis in the post-war period.

At the most basic level, one has to question how much sense it made for President Obama to allow the fiscal package to become excessively back-loaded at time when the economy needed immediate large scale support. If a large fiscal stimulus was indeed needed, why has only $60 billion of that package been dribbled out by June? And why is less than a third of the package scheduled to come into effect in 2009, the year when the package is most sorely needed?

Similarly one has to wonder about the heavy price that the Obama administration paid for effectively outsourcing the package’s design to House Speaker Nancy Pelosi and the rest of the Democratic congressional leadership. Should it really have come as a surprise to us that the resulting stimulus package would be laden with pork and with expenditures that are going to be very difficult to roll back? Or should we now be shocked that the package fell sadly short of including fast acting and effective fiscal stimulus measures that might have gotten the most bang for the buck?

Perhaps the most troubling aspect of the Obama fiscal stimulus package is the serious way in which it compromises the country’s long-run public finances and fans long-run inflationary expectations. The nonpartisan Congressional Budget Office estimates that the Obama budget not only implies unusually large budget deficits over the next two years but it implies that, even when the economy eventually fully recovers, the deficit will remain in the region of between 4 and 6 percentage points of GDP. As a result, over the next decade, the public debt will rise in a manner that has never occurred before in peacetime, from around 41 percent of GDP in 2008 to 82 percent of GDP by 2019.

Over the next decade, the public debt will rise in a manner that has never occurred before in peacetime from around 41 percent of GDP in 2008 to 82 percent of GDP by 2019.

The rising tide of unemployment must also raise questions about the Obama administration’s efforts to stabilize the housing market, which the administration correctly views as a necessary condition for producing a meaningful economic recovery. One has to expect that a weaker job market will only exacerbate the country’s present foreclosure crisis, which is adding supply to an already glutted housing market. The Center for Responsible Lending estimates that 2.4 million homes could be in foreclosure in 2009 and as many as 8.1 million homes over the next four years. Yet, the Obama administration’s loan modification program announced earlier this year has to date only resulted in 190,000 offers at mortgage loan modification.

Rising unemployment also has to raise questions about whether the Obama administration is not being overly sanguine about the health of the U.S. banking system. For it would seem that unemployment will now well exceed the worst-case scenario in the bank stress test presented by the administration earlier this year. Yet, despite a weakening unemployment outlook that is sure to boost bank losses, the Obama administration is now cavalierly backing away from its earlier initiatives to reduce the toxic assets that remain on the banks’ balance sheets.

Less than six months into his term, President Obama already faces difficult economic policy choices. He can choose, as he now seems to be doing, to counsel patience and assure us that all is well at considerable cost to his credibility on economic policy management. Or he can own up to the facts that he misread the economy in January and that his economic team now needs to go back to the drawing board. For the sake of the U.S. economy, one has to hope that he has the courage to review the overall coherence of his policy approach before it is too late.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was managing director and chief emerging market economic strategist at Salomon Smith Barney and a deputy director in the International Monetary Fund’s policy and review department.

FURTHER READING: Lachman wrote “Does Bernanke Really Deserve a Second Term?” and “Despite the Doubters, It’s Still Top Dollar” on the likelihood that the Chinese renminbi will eventually replace the U.S. dollar as the world’s preeminent international reserve currency. He also penned “Can the IMF Really Save the World Economy?” and “The World Economy’s Europe Problem.” His article “Don’t Repeat Japan’s Mistakes” warns against the policies Japanese authorities followed during their financial crisis in the early 1990s.

Obama Is Stuck In an Economic Box – Desmond Lachman, The American

Add comment July 15th, 2009

We’ve Wiped Out All The New Jobs Of The 21st Century

What’s the best way to express just how bad the job market is? You could look at the soaring unemployment rate, or perhaps the ever-shortening work week. How about this: Total nonfarm payrolls, notes economist James Hamilton, are now back to where they were in mid 2000, and in a few months they’ll certainly be back to pre-2000 levels. 21st century job creation: gone.

All Jobs Created in the 21st Century Are Now Gone – Clusterstock

Add comment July 10th, 2009

The end of the recession will merely be the start of a long, painful journey, says Edmund Conway.

t’s a game of far more than two halves: more tactical than cricket, more stomach-churning than boxing and more complex than bridge. Throughout a magnificent summer of sport, one competition has lasted longer than any other, and generated the most heated debate. Its goal? To guess when the recession will end.

Every week, it seems, has brought new economic indicators, good or bad. Indeed, the whole thing has recently descended into farce: first, economists were tripping over themselves to declare that we were heading for a “V-shaped” recovery, in which we soared out of the downturn at speed. Then they realised that the economy had contracted in the first three months of the year at the fastest rate since, most probably, the 1930s (the quarterly figures don’t go back that far), and started talking about “double dips”.

When Recovery Comes, It Won’t Feel Like It – Ed Conway, Daily Telegraph

Add comment July 9th, 2009

Bilkers, suckers and Wall Street atrocities – Is Madoff Really Worse Than Fuld?

Somewhere back around 1946 or 1947, Nick Etten–by now a pretty much forgotten first baseman for the Yankees–signed a one-year contract in the amount of $15,100. This sum struck many observers as an odd number, but not one canny New York baseball writer, possibly Red Smith. “The $100,” he wrote, “is for fielding.”

That pretty much sums up my reaction to the 150-year prison sentence handed out to Bernard Madoff. As I assay the punishment-to-crime ratio implicit in the judge’s decision, I attribute 25 years as penal recompense for Madoff’s particular peculations–his swindling of a few thousand institutions and individuals–and the balance of 125 years as society’s get-even for Wall Street’s recent crimes against humanity, for which Madoff can stand as an almost perfect symbol.

We cannot get at Stanley O’Neal, or Jimmy Cayne, or Joseph Cassano and his merry band of AIG rogues, or Dick Fuld–men whose actions and recklessness ultimately led to the destruction of trillions of dollars of personal wealth and the hopes and necessities that wealth was intended to underwrite and secure.

We cannot get at Goldman Sachs, which seems about to report as profitable a quarter as any in its history, a fact which, under the circumstances, will rank, if true, with the greatest moral obscenities and perversions of process I have witnessed in what is now starting to feel like quite a long life.

But we can get at Bernard Madoff, and if he must stand proxy for the fury we feel at Wall Street, and for our frustration that the real malefactors not only seem beyond adequate punishment, but are being rewarded with non-dues-paying membership in a tight little club of taxpayer-financed vulture finance, then so be it: 150 years and every penny for Madoff, not a nickel nor a month from the real bad guys.

This is not to say I don’t feel Madoff’s victims’ pain. Not possibly, not to that extent, to be sure. I am not bankrupt. But every morning now, when I arise, the first thing I do is some simple arithmetic that suggests I no longer have resources adequate to get me to my grave, assuming the actuarial tables are correct. Until last December, I never heard the name “Madoff.” I owned good stocks. The people who advised me never for one second showed themselves deficient in intelligence or good faith. And yet here I am.

Is Bernie Madoff Really Worse Than Dick Fuld? – Michael Thomas, Forbes

Add comment July 6th, 2009

Say that ten times – a convincing mantra

So maybe we could summarize the recent strength in the leading economic index this way. The main reason we think the economy is improving is because many of us think the economy is improving.

I Think The Economy Is Improving, Therefore It Is – Econbrowser

Add comment June 29th, 2009

Is inflation our next big worry?

Why inflation is around the corner

The government wants inflation to some degree. Congress and the White House have spent nearly $3 trillion recapitalizing U.S. banks, revamping the domestic manufacturing industry and replacing a portion of the consumption spending Americans have not been able to afford. The economy is recovering as a result, but U.S. debts are also ballooning. The nonpartisan Congressional Budget Office projects that the U.S. deficit will exceed $1.8 trillion this year.

The government doesn’t plan on paying off that debt or the interest on it without some help from the Fed. Earlier this year, the central bank announced it would directly purchase $1.75 trillion worth of U.S. debt in the form of mortgage-backed securities, U.S. Treasurys and agency debt. In essence, the Fed’s action “prints” more money and injects it into the economy.

Is Inflation Our Next Big Worry? – Catherine Holahan, MSN Money

Add comment June 26th, 2009

Kool-Aid Drinkers Survive Financial Overhaul

June 19 (Bloomberg) — President Barack Obama doesn’t need to just overhaul financial regulation. He needs to exorcise the ghost of Alan Greenspan.

For far too long, regulators weren’t willing to regulate, inspired by the view of the former Federal Reserve chairman that too much oversight is a greater threat to markets than too little. That turned out to be a bigger cause of the credit crisis than the particular structure of the agencies overseeing the financial system.

Donald Kohn, the Fed’s vice chairman, summed up the prevailing regulatory attitude in 2005, saying, “The actions of private parties to protect themselves — what chairman Greenspan has called private regulation — are generally quite effective,” while government regulation risks undermining “financial stability itself.”

Unless Obama can change that mindset, which is entrenched in many of the institutions overseeing banks and markets, the details of his 88-page reform plan won’t matter much.

And while there appears to be a newfound appreciation for government oversight, we can’t be certain yet about the intentions of those shaping the Obama plan. Some of them, after all, were one-time advocates of Greenspan’s views, or at least failed to challenge them.

Greenspan’s Disciples

Treasury Secretary Timothy Geithner, one of the architects of the Obama overhaul, was a big promoter of the kind of so- called financial innovation that ultimately helped bring about the crisis.

During a speech in early 2007, Geithner argued that innovative products such as credit default swaps and collateralized debt obligations “should help make markets both more efficient and more resilient.”

And Geithner, at least back then, echoed Greenspan’s belief that regulators shouldn’t try to stop bubbles from forming. In the same speech, the then-chief executive of the Federal Reserve Bank of New York also said, “We cannot identify the likely sources of future stress to the system and act preemptively to diffuse them.”

Geithner wasn’t alone in espousing Greenspan’s hands-off approach. His co-pilot on the new Obama plan, National Economic Council Director Lawrence Summers, held similar views.

Summers aligned with Greenspan to kill off attempts to regulate derivatives markets when he worked in Bill Clinton’s administration. That deprived regulators of influence over a key and fast-growing market, an area in which risks to financial institutions would fester.

Regulatory Tension

In unveiling his regulatory plan Wednesday, Obama noted that there is always tension between those who favor the market’s “invisible hand” and those who favor “the guiding hand of government.”

He rightly added that such tension isn’t always a bad thing. Yet in recent years, the invisible hand ruled.

Under Greenspan’s laissez-faire approach, markets would police themselves and risk would be spread far and wide. The theory was that losses would be more easily absorbed if a broad base of investors, rather than a few banks, held risk.

Even as cracks began to gape in the financial system in early 2007, Geithner continued to hew to this view. While acknowledging in his speech at the time that problems with subprime mortgages may signal a gathering storm, he said that credit-market innovations should help ease any pain: “If risk is spread more broadly, shocks should be absorbed with less trauma.”

Hidden Risks

It didn’t work out that way. Rather than dispersing risk, many of the policies espoused during the Greenspan era simply caused risks to regroup out of investors’ and regulators’ sight.

This meant that investors couldn’t know who was holding what types of assets, which ultimately led them to stop trading with one another. Credit markets began to freeze.

Greenspan and his followers also trumpeted financial engineering, hailing the creation of exotic securities that would supposedly help to disperse risk. In the end, much of the innovation — like structured investment vehicles or CDOs — proved ephemeral.

Even those who weren’t Greenspan disciples, such as Fed Chairman Ben Bernanke, failed to challenge the prevailing orthodoxy. Bernanke has been reluctant to abandon the financial- innovation theme promoted by his predecessor.

In a speech this April, Bernanke acknowledged that financial innovation is currently “perceived as the problem.” That said, the Fed chairman rose to its defense, saying that, “Innovation, at its best, has been and will continue to be a tool for making our financial system more efficient and more inclusive.”

Given that so many regulators and political leaders sipped from the Greenspan Kool-Aid cup, it will take time to see if the financial crisis has sobered them up.

If not, Obama can play with regulatory organizational charts all he wants, and it won’t make much difference.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

Greenspan’s Ghouls Stalk Obama’s Finance Plan – David Reilly, Bloomberg

Add comment June 22nd, 2009

Forgetting What We Learned

ILLITERACY IN HIGH PLACES

by Paul Craig Roberts

If a person lives long enough, he can watch everyone forget everything they learned.

The hubris is extraordinary. A bankrupt government that has to send its Treasury Secretary begging to China thinks it can spend limitless amounts in a futile effort to control the culture, mores, and political system of distant Afghanistan.

Add comment June 6th, 2009

indicators show the economy turning around…..but

The signs of a V-Shaped economic recovery are all around, for anyone willing to see. New claims for unemployment insurance have been trending down, despite unprecedented layoffs in the auto sector. Home sales have started to climb from the lows set earlier this year. Consumer confidence has jumped faster than at any time in the past 30 years. In addition, the ISM Manufacturing index is now in a zone consistent with economic growth, and construction has increased two months in a row.

Bank Lending Will Lag the Recovery – Brian Wesbury & Robert Stein, Forbes

Add comment June 4th, 2009

Beggars Are We All…..

http://jessescrossroadscafe.blogspot.com/

Bernanke’s wager is on a virtual free lunch by printing money.

“Fed chair Ben Bernanke has long argued that central banks can bring down long-term borrowing rates by purchasing bonds “at essentially no cost”. His frequent writings rarely ask whether foreigner investors – from a different cultural universe – will tolerate such conduct. Mr Bernanke is betting that under a floating currency regime there is no risk of repeating the disaster of October 1931, when the Fed had to raise rates twice to stem foreign gold withdrawals, with catastrophic consequences.”

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Add comment May 25th, 2009

Is The Federal Reserve Overreaching?

A good article at Forbes:     http://www.forbes.com/2009/05/19/federal-reserve-ron-paul-fdic-sec-opinions-columnists-bernanke.html

Add comment May 20th, 2009

“Those who hope for a swift return to normalcy are deluded”

We appear to be less than halfway through writedowns, and the fundraising and recapitalizations to date are falling short of the equity hits. Wolf thinks the ability to raise funds privately is nada.

The gloomy calculus does not include the implosion of the shadow banking system, a bigger source of credit than the banking system. Unless private securitization can be restored (ahem, no progress on the needed reforms), even more capital in the banking system is needed.

Under Chairman Bernanke, the central banking system has opened a range of extraordinary funding facilities that are providing additional credit to banks, large financial institutions, and primary brokers, as well as guaranteeing commercial paper. All of this activity is happening in secret, with the Federal Reserve disbursing money and credit to the large financial institutions that have put our credit markets and economy at risk. The Federal Reserve has resisted FOIA requests, and will not make public even the terms of payment for the contractors it is using to run these extraordinary programs.

At the very least, Congress and the public should have knowledge about which banks are receiving taxpayer money, what they are doing with the money, and the credit risk taxpayers are taking on through the Federal Reserve. The Senate language encourages such transparency, allowing for audits and public disclosure of secret loans and financial assistance from the Federal Reserve to these large institutions.

From the Financial Times:

The International Monetary Fund’s latest Global Financial Stability Report provides a cogent and sobering analysis of the state of the financial system. The staff have raised their estimates of the writedowns to close to $4,400bn. …

To put this in context, the writedowns estimated by the IMF are equal to 37 years of official development assistance at its 2008 level…

The IMF estimates the additional equity requirements of the banks as well. It starts from total reported writedowns up to the end of 2008, which come to $510bn in the US, $154bn in the eurozone and $110bn in the UK. The capital raised to the end of 2008 is, again, $391bn in the US, $243bn in the eurozone and $110bn in the UK. But the IMF estimates additional writedowns in 2009 and 2010 at $550bn in the US, $750bn in the eurozone and $200bn in the UK. Against this, it estimates net retained earnings at $300bn in the US, $600bn in the eurozone and $175bn in the UK.

The IMF points out that the ratio of total common equity to total assets – a measure investors burned by more sophisticated risk-adjusted ratios increasingly trust – was 3.7 per cent in the US at the end of 2008, but 2.5 per cent in the eurozone and 2.1 per cent in the UK. The IMF concludes that the extra equity needed to reduce leverage to 17 to 1 (or common equity to 6 per cent of total assets) would be $500bn in the US, $725bn in the eurozone and $250bn in the UK. For a 25 to 1 leverage, the required infusion would be $275bn in the US, $375bn in the eurozone and $125bn in the UK.

In current dire circumstances, the chances of raising such sums from markets are zero. Part of the reason is that they could still prove to be too little…..

Yet these are not the only sums required. Governments have so far provided up to $8,900bn in financing for banks, via lending facilities, asset purchase schemes and guarantees. But this is less than a third of their financing needs. On the assumption that deposits grow in line with nominal GDP, the IMF estimates that the “refinancing gap” of the banks – the rollover of short-term wholesale funding, plus maturing long-term debt – will rise from $20,700bn in late 2008 to $25,600bn in late 2011, or a little over 60 per cent of their total assets (see chart below). This looks like a recipe for huge shrinkage in balance sheets. Moreover, even these sums ignore the disappearance of securitised lending via the so-called “shadow banking system”, which was particularly important in the US.

The IMF also provides new estimates of the ultimate fiscal costs of rescue efforts (see chart below). At the high end are the US and the UK, at 13 per cent and 9 per cent of GDP, respectively. Elsewhere, costs are far lower. These, happily, are affordable sums. Indeed, compared with the recession’s impact on public debt, they look quite manageable…

A better reason for refusing to bail out banks is its dire effect on incentives. The alternative must then be bankruptcy. Jeremy Bulow of Stanford University and Paul Klemperer of Oxford University have advanced a scheme that would do this neatly. Valuable banking functions of each institution would be split off into a new “bridge” bank, leaving liabilities (apart from deposits) in the old bank. Creditors left behind would be given equity in the new bank. Governments could “top up” some creditors beyond this level, without making all creditors whole, as now.

Respectable opinion assumes that it would be best to provide full bail-outs of creditors in systemically important institutions. The rationale for this is that it is the only way to eliminate further panic. The objection is not the fiscal cost. It is that a limited number of large, complex and “too-big-to-fail” institutions would then emerge. Their creditors would naturally believe they were lending to governments. This would be a recipe for yet bigger catastrophes in future years.

Yet imposing large losses on creditors is indeed risky. It would probably have to be done simultaneously everywhere. Only after it was obvious that surviving banks were sound would anybody be willing to lend to them without guarantees.

Even worse than this choice between grim alternatives is the fact that the path to recovery is likely to be slow, whichever is chosen. As the latest World Economic Outlook notes in an important chapter, recessions that follow financial crises are unusually severe. So, too, are globally synchronised recessions. But now we are living through a globally synchronised recession that coincides with a huge financial crisis that emanates from the core countries of the world economy, particularly the US. This is a recipe for a long recession and a weak recovery. Whatever is done about the financial system, “deleveraging” is the order of the day (see chart). The UK’s position in this looks dire. But that of the US looks quite bad, too, even compared with that of Japan in the 1990s.

For better or worse, the authorities have decided to bail out their financial systems with taxpayer money. Almost all the affected countries should be able to afford to do this, at least on the IMF’s numbers. So now, having made the fundamental decision to prevent bankruptcy, they must return their financial systems to health as swiftly as they possibly can.

Even so, that will prove to be a necessary, not a sufficient, condition for a return to robust economic health. The overhang of debt makes deleveraging inevitable. But it has hardly begun. Those who hope for a swift return to what they thought normal two years ago are deluded.

Add comment April 29th, 2009