The Financial Elite » New Jersey CFO

Sic transit America?

A Growing List Of One Term Presidents, A State of Distress, A Time To Repent, AIG and all that....., “the Greenspan doctrine”, Back to the basics, Collateral Damage, Coming Social Unrest, Commercial Real Estate Bust, Consumption Ran the Old Economy, Coup d'etat in America, Death of the Dollar, Deflation-Inflation-Stagflation, Devaluation, Dismal Science-Ignorant Scientists?, Even the Terminator Can't Help California, Federal Reserve-Discussion, Figures don't lie but Liars can figure, Integrity and Responsibility, Is The Market Rally Real?, It Is Nice To Be Part of the Elite!, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, Monetary Policy - Discussion, Our phony middle class, Patience is a virtue...Delusion is a vice, Political Chaos, Politicians, Prostitutes and Pimps All Rhyme, Small Business-Bedrock of America, Sub-Prime anytime, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Global Economy, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The New American Socialism, The Sorry State Of American Manufacturing, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, US Trade Imbalance, USA Is the New Japan, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World No Responses »

Jan 162010

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

Europe Explores Ways to Keep Banks in Check

The Financial Elite No Responses »

Dec 272009

London, of all places, is leading the battle against exaggerated banker bonuses. And leaders from all over the world are discussing how they can put an end to the banking practices that caused the global economic crisis. They are also considering ways for banks to compensate for the damage they caused.

SPIEGEL Interview with Banker Steven Green: The New World Order ‘Is Already Underway’

Obama’s Big Sellout

A Growing List Of One Term Presidents, A State of Distress, A Time To Repent, AIG and all that....., Analysis & Commentary, Bilderbergers 1 USA 0, Coming Social Unrest, Consumption Ran the Old Economy, Deflation-Inflation-Stagflation, Devaluation, Insolvency, Is Goldman Sachs Evil?, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, Political Chaos, Small Business-Bedrock of America, Small Cap Stocks, Smaller Can Be Better, Socialism, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, The Judeo-Christian Political Coalition, The New American Socialism, Time For A New Third Party, Unemployment Catastrophe, USA Is the New Japan, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still! No Responses »

Dec 132009

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

What’s taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we’ve been seeing on TV this fall who Obama really is?

Whatever the president’s real motives are, the extensive series of loophole-rich financial “reforms” that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street’s political power by institutionalizing the taxpayer’s role as a welfare provider for the financial-services industry. At one point in the debate, Obama’s top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.

How did we get here? It started just moments after the election — and almost nobody noticed.

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The Apparatchiks

A Growing List Of One Term Presidents, A Picture Is Worth A Thousand Words, A State of Distress, AIG and all that....., Back to the basics, Bilderbergers 1 USA 0, Jacksonian Democracy, Libertarianism - the Debate, Monetary Policy - Discussion, No Bank Is Indispensable, Obama's Hypocrisy, Our phony middle class, Politicians, Socialism, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The Economics of Schumpeter, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, THEY ARE ALL THE SAME, Time For A New Third Party, Unemployment Catastrophe, Unindicted Co-Conspiritors, Wage Deflation, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still! No Responses »

Nov 212009

The Big Government Boss isn’t going away

A Growing List Of One Term Presidents, A Shareholder-Not Just a "Stakeholder", A State of Distress, AIG and all that....., Analysis & Commentary, “the Greenspan doctrine”, Coming Social Unrest, Commercial Real Estate Bust, Deflation-Inflation-Stagflation, Is Goldman Sachs Evil?, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, No Bank Is Indispensable, Obama's Hypocrisy, Our phony middle class, Political Chaos, Regulatory Failures, Small Business-Bedrock of America, Smaller Can Be Better, Socialism, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, The New American Socialism, Unemployment Catastrophe, Unindicted Co-Conspiritors, Wage Deflation, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still! No Responses »

Nov 212009

“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times

Morality vs. Material Interests

Analysis & Commentary, Bilderbergers 1 USA 0, The Arrogance of Power, The Financial Elite, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The New American Socialism, Time For A New Third Party, Truth In Charity, Unindicted Co-Conspiritors, We Are All Guilty, Who owns Congress-Still! No Responses »

Nov 142009

Myths of Our Times

By Paul Craig Roberts

Humanity has endeavored for millennia to control evil with morality. In the American “superpower,” this effort has collapsed and failed. Continue

One of the federal government’s most opaque methods for bailing out the banking system allowed a handful of giant institutions to save up to $25 billion on their borrowing costs, a Congressional panel estimated on Friday.

Seven companies received about 82 percent of those benefits, the panel estimated. General Electric Capital was able to reduce its borrowing costs by about $1.9 billion, while Goldman Sachs saved an estimated $606 million. The other big beneficiaries were Citigroup, Bank of America, JPMorgan Chase, Morgan Stanley and Wells Fargo & Company.

The savings came in the form of federal guarantees on more than $300 billion of bonds issued by banks and other financial institutions, and they were merely one component of a $4.3 trillion safety net of guarantees orchestrated last year by the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation.

In one of the first systematic efforts to analyze the maze of guarantees and hidden subsidies, the Congressional panel that oversees the Treasury’s $700 billion rescue program said the guarantees had provided a cheap but risky tactic for fighting the financial crisis last year.

The good news for taxpayers, the panel said, is that the government has actually turned a profit thus far on the guarantees. The government has collected $9 billion in fees for guaranteeing bonds issued by the big financial institutions and a total of $17 billion in fees for all its emergency guarantees. Thus far, it has lost only about $2 million.

At the height of the financial crisis late last year, the government provided guarantees to financial institutions, from money-market funds to expanded deposit-insurance for banks and $300 billion in troubled assets held by Citigroup. By providing guarantees instead of direct loans, the Treasury could avoid spending money upfront.

But Elizabeth Warren, director of the oversight panel, warned that the guarantees also exposed taxpayers to potentially huge costs and had created new risks by encouraging financial institutions to count on future bailouts and take bigger risks.

“The guarantees, when they work, provide big market stability at very low cost,” Ms. Warren said. “But they come with a very high risk to the taxpayer and a powerful distortion of market pricing and moral hazard.”

The panel’s most striking finding was about the size of the effective subsidy that G.E. Capital and Wall Street giants like Goldman reaped in the form of below-market borrowing costs.

The panel estimated that the federal guarantees lowered those firms’ borrowing costs by about 39 percent. Using two different approaches to measure the value of the subsidy, the panel said the savings ranged from $12.8 billion to $25 billion.

The oversight panel said it found “no significant flaws” in how Treasury officials and banking regulators designed the guarantees. But Ms. Warren warned that they were a “dangerous tool,” adding that “next time we may not be so lucky.”

Big Breaks for Companies in Bailout’s Fine Print – New York Times

Did “Smart Guys” Destroy Wall Street?

It Is Nice To Be Part of the Elite!, IT'S ALL ABOUT POWER AND MONEY, Risk Management Strategies, The Consequences of Greed, The Danger of Volume Trading, The End of American Capitalism As We Know It? - Discuss, The Financial Elite, The Importance of Strategic Planning, The Inherent Disorder of Empires, THEY ARE ALL THE SAME, Time For A New Third Party, Unindicted Co-Conspiritors, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, What Is An Investment Asset?, Who owns Congress-Still! No Responses »

Oct 312009

I think Calvin Trillin–or at least his bar-room companion–is really on to something here:

“The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.” …

I reflected on my own college class, of roughly the same era. The top student had been appointed a federal appeals court judge — earning, by Wall Street standards, tip money. A lot of the people with similarly impressive academic records became professors. I could picture the future titans of Wall Street dozing in the back rows of some gut course like Geology 101, popularly known as Rocks for Jocks. …

“Two things happened. One is that the amount of money that could be made on Wall Street with hedge fund and private equity operations became just mind-blowing. At the same time, college was getting so expensive that people from reasonably prosperous families were graduating with huge debts. So even the smart guys went to Wall Street, maybe telling themselves that in a few years they’d have so much money they could then become professors or legal-services lawyers or whatever they’d wanted to be in the first place. That’s when you started reading stories about the percentage of the graduating class of Harvard College who planned to go into the financial industry or go to business school so they could then go into the financial industry. That’s when you started reading about these geniuses from M.I.T. and Caltech who instead of going to graduate school in physics went to Wall Street to calculate arbitrage odds.”

I’d put it just slightly differently (and I realize Trillin is only about three-quarters serious): The key change on Wall Street was more sociological than intellectual. That is, it wasn’t so much that the smart guys went to Wall Street–though the intellectual caliber of the financial sector certainly increased with all those quants running around. The relevant change was that a lot of “outsiders” suddenly came to Wall Street, which had previously been dominated by insiders.

Was Wall Street Safer in the Hands of Stodgy WASPs? Noam Scheiber

Thinking through central bank independence

Federal Reserve-Discussion, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, The New American Socialism No Responses »

Oct 252009

I have a column in Financial Express today on the rationale for independence of the central bank, and how this is operationalised in democracies.

The rationale for central bank independence

The starting point of modern thinking on monetary policy is the issue of central bank independence. Watching the world across the centuries, a pattern has been found that non-independent central banks distort monetary policy to support the incumbent political party. When elections are approaching, rates tend to be dropped. This makes households feel a bit happier and more inclined to vote for the incumbent. This threatens the fairness of elections. And after elections, it tends to kick off higher inflation. Non-independent central banks are thus associated with election-induced fluctuations. Instead of monetary policy being a force for stability, it becomes (to some extent) a source of shocks for the economy, and of unfairness in elections.

Major countries have chosen a remarkable solution: politicians relinquish control over the central bank. This is a truly rare feature in public administration. In almost all other elements of government, democracies work by holding politicians accountable in elections, and giving politicians the reins in public administration. In this one area, the world has done something unusual.

This requires accountability mechanisms

Two issues follow hard on the heels of independence. First, independence goes with a narrowing of the functions of the central bank. There is no economic case for having independence from politicians for functions such as running the payments system, regulating or supervising financial markets or banks, running a bond exchange and depository, manning a system of capital controls, etc. The rationale for independence is limited to one specific problem: that of setting the short-term interest rate of the economy. Hence, giving RBI independence requires narrowing down its functions to the core where economic logic suggests independence. All other functions need to be placed in conventional agencies, with control in the hands of accountable politicians.

The second issue is that of accountability. The standard route of accountability through elections is being eschewed in this unique problem. But a central bank cannot be handed over to a set of unelected officials with no accountability. This would induce abuse of power, where the agency will focus on its own interests at the expense of the country.

The solution involves transparency, predictability and inflation targeting. The agency must be fully transparent about everything that it does. It must use rules rather than discretion, so as to limit the extent to which discretionary power is wielded by unelected officials. They must write down a monetary policy rule, discuss this in public, and live by it. The third element of accountability is inflation targeting. Independent central banks must have a quantitative monitorable target. Setting an inflation target for the medium term binds the agency to achieving a goal, as opposed to arbitrary exercise of power without accountability.

Commen sense and monetary economics come together

All this reasoning is rooted in the basic hygeine of good public administration. Once we accept the starting premise — that central bank independence is desirable — then careful thinking about public administration leads us to the remaining conclusions: narrow the functions placed in an independent central bank to only those where independence is required (i.e. setting the short-term interest rate), have full transparency, have a monetary policy rule, and require inflation targeting.

In historical sequence, the above reasoning led the way in monetary policy reform. It was a bit later that the best monetary economists started closing their models by putting in an inflation targeting central bank. They found it works very well. So in this strategy for monetary policy reform, we have a happy consensus between the common sense of good administrators and the state of the art of monetary economics. The central banks of the bulk of OECD GDP are now de facto or de jureDe jure inflation targeting is particularly important in countries with weak institutions, where the behaviour of an agency that is not tied down by law can be more erratic. inflation targeting, and the emerging markets with high standards of governance have also made the switch.

Indian monetary policy reform

The Indian monetary policy debate is about the key ideas of the successor to the RBI Act of 1934, which was drafted by the British in the 1920s. The authors of this act never envisioned the conditions of 2009, either in terms of the Indian economy, or our knowledge of monetary economics. In this debate, RBI staff are interested parties and have to recuse themselves.

Operationalising inflation targeting involves addressing many practical problems. A focus on these practical problems is premature. All these practical problems can be solved – as has been done myriad times in other countries – once the principle is accepted. The existence of these practical problems does not invalidate the basic strategy.

One periodically encounters criticism of low inflation as the prime goal of monetary policy. However, anyone who proposes that inflation targeting is not the answer has to come up with an alternative accountability mechanism, for no democracy can have an independent central bank without accountability. In addition, advocates of novel schemes have to explain why India should be a guinea pig for something not found in good countries.

At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.

Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?

Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.

In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?

By Simon Johnson

A Short Question For Senior Officials Of The New York Fed Baseline Scenario

An Inside Look at How Goldman Sachs Lobbies the Senate, by Matt Taibbi: …Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned…, but it turns out that there’s no way to talk about Bear and Lehman without going into the weeds of naked short-selling…

It’s the conspicuousness … that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn’t a better example of “regulatory capture” … than this issue.

In that vein, starting tomorrow, the SEC is holding a public “round table” on the naked short-selling issue. What’s interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.

In particular, there are very few panelists — in fact only one, from what I understand — who are in favor of a simple reform called “pre-borrowing.” Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.

It’s been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement…

The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.

In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts… Goldman Sachs in particular has been making its presence felt.

Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss’s office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.

Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman’s fact sheet.

Now, the mere fact that two different congressional aides were so disgusted by Goldman’s performance that they both called me on the same day — and I don’t have a relationship with either of these people — tells you how nauseated they were.

I would later hear that Senate aides between themselves had discussed Goldman’s lobbying efforts and concluded that it was one of the most shameless performances they’d ever seen from any group of lobbyists, and that the “fact sheet” … was, to quote one person familiar with the situation, “disgraceful” and “hilarious.” …

The Truth About Jobs That No One Wants To Tell You

A Growing List Of One Term Presidents, A State of Distress, A Time To Repent, Coming Social Unrest, The Disappearing Car Makers, The excellent adventures of Ben Bernanke, The Financial Elite, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The New American Socialism, The Sorry State Of American Manufacturing, The Suffering Poor, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe No Responses »

Oct 032009

Unemployment will almost certainly in double-digits next year — and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics’ household survey, you can bet there’s another either too discouraged to look for work or working part time who’d rather have a full-time job or else taking home less pay than before (I’m in the last category, now that the University of California has instituted pay cuts). And there’s yet another person who’s more fearful that he or she will be next to lose a job.

In other words, ten percent unemployment really means twenty percent underemployment or anxious employment. All of which translates directly into late payments on mortgages, credit cards, auto and student loans, and loss of health insurance. It also means sleeplessness for tens of millions of Americans. And, of course, fewer purchases (more on this in a moment).

Unemployment of this magnitude and duration also translates into ugly politics, because fear and anxiety are fertile grounds for demagogues weilding the politics of resentment against immigrants, blacks, the poor, government leaders, business leaders, Jews, and other easy targets. It’s already started. Next year is a mid-term election. Be prepared for worse.

So why is unemployment and underemployment so high, and why is it likely to remain high for some time? Because, as noted, people who are worried about their jobs or have no jobs, and who are also trying to get out from under a pile of debt, are not going do a lot of shopping. And businesses that don’t have customers aren’t going do a lot of new investing. And foreign nations also suffering high unemployment aren’t going to buy a lot of our goods and services.

And without customers, companies won’t hire. They’ll cut payrolls instead.

Which brings us to the obvious question: Who’s going to buy the stuff we make or the services we provide, and therefore bring jobs back? There’s only one buyer left: The government.

Let me say this as clearly and forcefully as I can: The federal government should be spending even more than it already is on roads and bridges and schools and parks and everything else we need. It should make up for cutbacks at the state level, and then some. This is the only way to put Americans back to work. We did it during the Depression. It was called the WPA.

Yes, I know. Our government is already deep in debt. But let me tell you something: When one out of six Americans is unemployed or underemployed, this is no time to worry about the debt.

When I was a small boy my father told me that I and my kids and my grand-kids would be paying down the debt created by Franklin D. Roosevelt during the Depression and World War II. I didn’t even know what a debt was, but it kept me up at night.

My father was right about a lot of things, but he was wrong about this. America paid down FDR’s debt in the 1950s, when Americans went back to work, when the economy was growing again, and when our incomes grew, too. We paid taxes, and in a few years that FDR debt had shrunk to almost nothing.

You see? The most important thing right now is getting the jobs back, and getting the economy growing again.

People who now obsess about government debt have it backwards. The problem isn’t the debt. The problem is just the opposite. It’s that at a time like this, when consumers and businesses and exports can’t do it, government has to spend more to get Americans back to work and recharge the economy. Then – after people are working and the economy is growing – we can pay down that debt.

But if government doesn’t spend more right now and get Americans back to work, we could be out of work for years. And the debt will be with us even longer. And politics could get much uglier.

The Truth About Jobs That No One Wants To Tell You by Robert Reich

Fed Rejects Geithner Request for Study of Governance, Structure

Monetary Policy - Discussion, The Arrogance of Power, The Democrats Blew It Again, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The New American Socialism, Time For A New Third Party, Unindicted Co-Conspiritors No Responses »

Sep 232009

Sept. 21 (Bloomberg) — The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.

The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”

Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence after the Treasury released the proposal, two of the people said. The Obama plan said the Treasury would consider recommendations from the review and “propose any changes to the Fed’s governance and structure.”

“It is not obvious at all why that is a Treasury responsibility or even appropriate why the Treasury would undertake that kind of study,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey, and a former Atlanta Fed research director. “The Fed was created by Congress and it is not part of the executive branch.”

U.S. lawmakers have also called for a review of the Fed’s power and structure, saying Fed Chairman Ben S. Bernanke overstepped his authority as he bailed out creditors of Bear Stearns Cos. and American International Group Inc. while battling a crisis that led to $1.62 trillion in writedowns and losses at financial firms.

No Work Done

While the report requested by the Treasury hasn’t been formally scrapped, no work has been done on the project, which was due Oct. 1, the people said. Treasury spokesman Andrew Williams declined to comment, as did Fed spokeswoman Michelle Smith.

The central bank is performing its own reviews of possible operational changes following the financial crisis. Fed Governor Elizabeth Duke is leading an internal study of the roles of the directors that serve on each of the boards at regional Fed banks.

“The institution is trying to keep a low profile,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington and the former director of Division of Monetary Affairs at the Fed Board. “To publish a report now invites comment on that report.”

‘Associated Costs’

The Senate passed 96-2 a nonbinding budget amendment in April supporting “an evaluation of the appropriate number and the associated costs” of the district banks. The measure was sponsored by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Alabama Senator Richard Shelby, the senior Republican on the panel.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has also called for more scrutiny of the central bank, saying last year he aims to probe how the 12 regional Fed presidents are appointed and their role in setting interest rates. The Fed banks are semi-private entities, each overseen by a nine-member board of directors.

Legislation in both houses of Congress would allow for audits by the Government Accountability Office of the central bank’s monetary policy and other operations. Bernanke opposes the measure, which was introduced in the House by Representative Ron Paul of Texas, a Republican. Frank has scheduled a committee hearing on the issue for Sept. 25.

Lessons Learned

Along with the study by Duke, the Fed is reviewing how to overhaul supervision based on lessons learned from the financial crisis.

The Treasury interest in a Fed structural review partially stems from the administration’s proposal to make the central bank the lead regulator for the largest, most inter-connected financial institutions.

Fed Governor Daniel Tarullo, an Obama appointee, is working on changes to the supervisory process that are preparing the central bank for a larger role in tracking risks across the financial system.

Tarullo is focusing on bank-to-bank comparisons and quantitative scenario testing of bank portfolios. The Fed is currently examining the vulnerability of banks with assets under $100 billion to falling commercial real estate values.

Congressional leaders have balked at the notion of giving the Fed more power and are leaning toward vesting authority over capital, liquidity and risk-management practices of big banks in a council of regulators.

Supervisory Council

“There will be a council,” Frank told Bloomberg Television Sept. 14.

The review led by Duke followed the resignation in May of Stephen Friedman as New York Fed chairman because of ties to Goldman Sachs Group Inc. Friedman is a director on Goldman Sachs’s board.

Goldman Sachs became a bank holding company in September 2008, a change that would have normally barred Friedman from continuing to serve in his New York Fed post. Officials gave him a waiver so he could remain in the job, which has mostly an advisory role.

Friedman, chairman of Stone Point Capital LLC, said at the time of his resignation that he had complied with all the Fed’s rules and his service on the board was “mischaracterized as improper.”

Some analysts said a Fed revision of the role of directors is overdue.

“Allowing local bankers to play a leading role in selecting reserve bank presidents is the most worrying aspect of the current system,” Lou Crandall, chief economist at Wrightson ICAP LLC, wrote to clients in July.

District bank presidents are nominated by committees made up of people whose institutions the nominees may have supervised.

“The conflicts of interest inherent in the current system are glaring,” Crandall said.

Fed Rejects Geithner Request for Study of Structure – Bloomberg

What did Hank know and when did he know it?

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Sep 222009

And then there was the rate cut the next morning. And anyone who was privileged enough to have gotten that information on Thursday afternoon was able to make a huge profit.

It was clear that someone knew about the Fed’s move ahead of time and was trading stocks based on that information.

I always wondered what Paulson did after the meeting — who he called, who he met. But until this week the information was unavailable. First, Treasury told me the phone records didn’t exist, but then just as quickly they directed me to a part of the Treasury’s Web site that had everything I needed.

Read: What Did Henry Paulson Know, and When? – John Crudele, New York Post

Watching the Fed…Again

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Sep 212009

Stocks’ Rise Hinges on Fed And Data
New York Times
… Investments Advisers LLC in Newark, New Jersey. He said people will closely watch the Fed’s take on what comes for the economy after the rebound. …

Is Fed chairman Ben Bernanke a follower of John Maynard Keynes or Milton Friedman?

The excellent adventures of Ben Bernanke, The Financial Elite No Responses »

Sep 092009

…the total price of the Fed’s monetarist program is a mystery beyond human reckoning. Paul, whose bill to audit the Fed has stalled despite co-sponsorship from more than half of the House, declared, “We don’t know for sure how much the Fed has spent—I’ve heard it could be six trillion dollars. But we have no knowledge of what the Fed’s doing. All these dealings are very secret.” Earlier this year a Bloomberg estimate pegged the number at around $13 trillion—an amount roughly 1,300 times the age of the universe. (We may soon find out the exact number. On August 25, a Manhattan court ordered the Federal Reserve to open its books.)

Bernanke Goes with Milton Friedman Over Keynes – Penn Bullock, Reason

“the short period of American triumphalism, where we dominated the global scene. That period is over”.

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Sep 042009

Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’
By Michael McKee

Sept. 4 (Bloomberg) — The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said.

“It’s not clear that the U.S. is recovering in a sustainable way,” Stiglitz, a Columbia University professor, told reporters yesterday in New York.

Economists and policy makers are expressing concern about the strength of a projected economic recovery, with Treasury Secretary Timothy Geithner saying two days ago that it’s too soon to remove government measures aimed at boosting growth.

Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn — an occurrence that economists call a “W-shaped’ recovery.

“There’s a significant chance of a W, but I don’t think it’s inevitable,” he said. The economy “could just bounce along the bottom.”

Stiglitz said it’s difficult to predict the economy’s trajectory because “we really are in a different world.” He said the crisis of the past year was made worse by lax regulation that allowed some financial firms to grow so large that the system couldn’t handle a failure of any of them.

Big Banks

“These institutions are not only too big to fail, they are too big to be managed,” he said.

Finance ministers and central bankers from the Group of 20 nations meet in London Sept. 4-5 to lay the groundwork for a summit in Pittsburgh later this month, where leaders will consider measures to overhaul supervision of the financial system…

With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.

Longer term, he said the Fed’s aggressive monetary policy will mean inflation becomes the greater threat. “With the magnitude of the deficits and the balance sheet of the Fed having been blown up, it’s understandable why there are anxieties about inflation,” he said.

While the Fed says it has the tools to deal with it, there are still concerns, Stiglitz said. Because monetary policy takes six to 18 months to have its full effect, the central bank will have to begin withdrawing monetary stimulus on the basis of forecasts.

The Fed’s record on its economic forecasts isn’t enough to reassure investors and, as a result, the U.S. currency may suffer, he said.

Dollar ‘Weakness’

“Whether or not they’re able to do it, the uncertainty today about whether they can do it can contribute to the weakness of the dollar,” Stiglitz said. “That’s one of the reasons there is increasing interest around the world in discussing alternatives to the dollar system.”

Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.

The current system creates instability, weakens global confidence, and is fundamentally unfair to developing countries that are in essence lending the U.S. trillions of dollars and bearing the risk, he said.

“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”

While some think it would hurt the U.S. to no longer be able to borrow cheaply in dollars, “that era is over,” he said. “We’re moving to a more multi-polar world.”

Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.

Our secret government

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Aug 292009

“When an unprecedented amount of taxpayer dollars were lent to financial institutions in unprecedented ways and the Federal Reserve refused to make public any of the details of its extraordinary lending, Bloomberg News asked the court why U.S. citizens don’t have the right to know”

-Matthew Winkler, the editor-in-chief of Bloomberg News.

I would have been surprised if it went the opposite way.

“Federal Reserve must make records about emergency lending to financial institutions public within five days because it failed to convince a judge the documents should be exempt from the Freedom of Information Act.

Manhattan Chief U.S. District Judge Loretta Preska rejected the central bank’s argument that the records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions. The collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” according to the lawsuit that led to yesterday’s ruling.

The Fed has refused to name the borrowers, the amounts of loans or the assets put up as collateral under 11 programs, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued Nov. 7 on behalf of its Bloomberg News unit.”

The only way this has been historically been allowed is when it imoacts National Security . . .

Source:
Fed Must Release Reports on Emergency Bank Loans, Judge Says
Mark Pittman and Karen Gullo
Bloomberg, Aug. 25 2009

http://www.bloombergs.com/apps/news?pid=20601087&sid=afi7TJiJFys0

More of the same at the Fed

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Aug 132009

Fed Interest Rate Path: More of the Same at the August Meeting

The Federal Open Market Committee (FOMC) decided at its August meeting to keep its rate targets and most of its credit easing programs unchanged “for an extended period”. The Fed will slow purchases of Treasuries and extend purchases until the end of October 2009 but did not expand the program.

Some analysts speculate the FOMC may later expand quantitative easing, particularly TALF purchases of private sector assets. An expansion of Treasury purchases is unlikely given recent economic improvement. Contrary to market expectations, many believe the Fed is unlikely to begin rate normalization until 2010 or 2011 due to a persistent output gap and stubbornly tight credit.

Permalink Analysis & Commentary, Nouriel Roubini, The Financial Elite No Responses »

Aug 092009

“My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of its economy,” he told delegates, adding that the recession would “continue to the end of the year”.

Telegraph – Nouriel Roubini Warns China Could Cause Commodity Price Slide

However:

Purchasing – Economist Says Price Hikes Likely in 2010 for Metals, Other Raw Materials

and finally: DOUBLE DIP!!!!!!!

he Wall Street Journal – Dr. Doom Sees Double-Dip Recession Risk, in Remarks Down Under

Corporate Security

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Aug 042009

In light of the recent allegations of trade secrets theft at Goldman Sachs, Ethan S. Burger and Kenneth Gray look at whether corporate security and policy are prepared to handle a “new generation of economic disruption”. Read Goldman Sachs’ Code and the Elephant in the Room.

JP Morgan Chase Triumphant

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Jul 222009

Jamie Dimon has won big. JP Morgan Chase now stands alone, both in financial position and political clout – including special access to the White House and, as explained in today’s NYT, Rahm Emanuel’s likely attendance at his next board meeting tomorrow.

Dimon’s semiotics have been brilliant throughout the crisis – it wasn’t his fault, he was forced to take TARP money, and – in phrasing that will make the history books – bankers should not be “vilified”. But now he has a problem.

Larry Summers forcefully stated Friday that high recent profit levels for big banks (i.e., JPMorgan and Goldman) are based on the support they received and still receive from the government (listen to his answer to the second question, from about the 6:10 to 10:30 mark). At that level of generality, in a period of financial stabilization and consequent reduction in executive branch discretion, this statement does not threaten Dimon or anyone else.

And Summers’ statement on the dangers of “too big to fail” was “too vague to succeed”. Dimon saw this one coming and is very much aligned with Tim Geithner on the technocratic fixes that will supposedly take care of this – the mythical “resolution authority”, which will not actually achieve anything because it has no cross-border component, so the next time a major multinational bank (e.g., JP Morgan) fails, the choice again will be “collapse or bailout” (as Summers put it in the same Q&A Friday). Yes, I know the G20 is supposedly working on this; no, I don’t think they are making progress.

But Summers also drew a line in the sand on consumer protection.

Reformists within the administration really need a new consumer protection agency for financial products – there is little else they will be able to point to as an achievement on banking issues. Summers did not, for example, on Friday even mention the need for stronger regulation over derivatives; Dimon has likely already prevailed on this.

Consumer protection is easy for people to understand. If the banking lobby really defeats or defangs it this year – as it almost certainly can – won’t that make meaningful re-regulation of banking a big issue for the midterm elections in 2010 and beyond?

And does Dimon really want to publicly confront and defeat Larry Summers?

It must be tempting for Dimon to now press home his advantage, including at the White House. But as JP Morgan Chase stands alone at the top of our banking hierarchy, how far should he push his luck?

Summers has an unparalleled ability to move the consensus. And if he is now running from the left to become chair of the Fed – which was my impression on Friday – this will shift all candidates, including Ben Bernanke, towards being tougher on banks.

Why doesn’t Dimon instead seize on greater consumer protection as a way to rebuld legitimacy for finance – and to shape the new rules so as to create barriers to entry and growth for future rivals?

What would John Pierpont Morgan have done?

Jamie Dimon vs. Larry Summers – Simon Johnson, Baseline Scenario

A Colossal Lack of Judgment

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Jul 222009

Hank Paulson appeared before the House committee on (Lack of) Oversight and (Prevention of) Government Reform last week to defend his actions in the Bank of America/Merrill Lynch deal. For those of you who haven’t been following along, Bank of America CEO Ken Lewis has accused Ben Bernanke and Hank Paulson of pressuring him to complete the Merill acquisition even after discovering that the losses at Merrill were several orders of magnitude higher than what he thought when the deal was struck. Bernanke and Paulson allegedly told Lewis that he and the entire board would be replaced if he didn’t conceal the losses until the deal was approved by shareholders.

I didn’t think Hammerin’ Hank’s reputation could fall any further but after listening to his arrogant testimony this week, I think I have to revise that. Paulson cast himself as the hero in his testimony:

“Many more Americans would be without their homes, their jobs, their businesses, their savings and their way of life,” he said in written testimony prepared for a hearing Thursday.

While losses have been staggering, “that suffering would have been far more profound and disturbing” had the government not intervened, he will tell the House Oversight and Government Reform Committee.

“Our responses were not perfect … But, having had the benefit of some time to reflect, and to consider views expressed by others, I am confident that our responses were substantially correct and they saved this nation from great peril,” Paulson wrote.

Well, gee, thanks Hank. There is no way to know how things would have turned out if you hadn’t bailed out every firm that acted as a counterparty to your net worth (Goldman Sachs), but it’s nice to know it hasn’t affected your self esteem.

While Bernanke prudently fell back on the “I don’t recall” defense, Paulson, believe it or not, defended his threat to Lewis:

Paulson said he told Lewis that reneging on the promise to purchase Merrill would show “a colossal lack of judgment.” He then pointed out to Lewis that the Fed could remove management at the bank if it saw fit, he said.

“By referring to the Federal Reserve’s supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America’s regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment,” Paulson said.

Paulson said he believed his remarks to Lewis were “appropriate.”

Faced with being forced out with only a golden parachute to cushion his fall, Lewis decided that maybe those Merrill losses weren’t really so important that they needed to be disclosed to BAC shareholders prior to voting on the merger. Based on the performance of BAC’s stock price since then, shareholders might disagree, but hey that’s a small price to pay for saving the “system”, right?

The charge that the failure of large financial institutions represents a systemic risk is one that suffers from a lack of evidence. Is the system really better off maintaining Citigroup on life support rather than letting it die a natural death? Is the system really better off by expanding the allegedly already too large to fail Bank of America? Is the system really better off when poorly managed companies are rescued at the expense of those who acted more prudently? Is the system really better off when losses are spread far and wide rather than concentrated with those who took the risks? What message does it send to prudent managers when their imprudent competitors are bailed out? Will they be so prudent next time?

The economic success of the US is not dependent on maintaining the status quo. Capitalism is a system which requires failure to advance. The failure of a few companies is not evidence that capitalism has failed but evidence that it is working. Failure sends a message to other market participants that the practices that caused the failure should be avoided. That message applies not only to private companies but to the government institutions that also failed us in this crisis. Attempting to return to the status quo rather than allowing private company failures and reforming failed government institutions does not advance us as a society. It mires us in mediocrity.

It is Paulson, Bernanke and Bush who showed a colossal lack of judgment. It is the management of Bear Stearns, AIG, Lehman, Merrill Lynch, Fannie Mae and Freddie Mac who showed a colossal lack of judgment. It is Alan Greenspan and all the member of the Federal Reserve who showed a colossal lack of judgment. It is most of Congress that showed a colossal lack of judgment. It is Tim Geithner and President Obama who continue to show a colossal lack of judgment. And it is the American taxpayer who will have to pay the tab for the colossal lack of judgment shown by all of them.

The long term consequences of government actions over the last two years will become evident to investors in the coming years, but for now, attention is focused on the immediate situation. And the immediate situation is still improving. The stock market rallied 7% last week as earnings season kicked off with some highly visible positive surprises. Goldman Sachs, JP Morgan, Bank of America and Citigroup all reported better than expected earnings (thanks in large part to the implicit guarantee of the government) and the remainder of the financial sector seems likely to follow suit in the coming weeks. Intel and IBM got the tech sector off to a good start. Next week will see a flood of companies reporting their second quarter results and while there will be a few disappointments such as Google last week, I believe the aggregate numbers will continue to be better than the market expects.

Paulson: A Colossal Lack of Judgment – Joseph Calhoun, Alhambra Inv.

Consumer woes mean US not free of peril yet

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Jul 212009

The reason that the savings gauge has leapt is not that Americans are saving more, but only that they are paying off their past, huge borrowings because of financial distress. Americans actually cut savings in the form of financial assets held by 0.5 per cent of their incomes in the first quarter, while cutting borrowing even more aggressively, by 5 per cent of income. This telling data leads to two important conclusions.

First, it suggests that immediate US recovery prospects may be even more frail than supposed, and than Mr Bernanke is liable to admit. With Americans now battling to pay down debt against a backdrop of still-plunging house prices and soaring unemployment, while shoring up spending power with cuts in their savings, the resurgence of consumer demand on which recovery hopes are pinned may well prove elusive. The position could grow worse still once the boost to US personal incomes from the Obama Administration’s fiscal giveaway also fades, as it soon will.

Second, and critically, it is clear that America has yet to begin to address the real roots of this crisis and embark on the long road to a more sustainable economic future. Until it does so, the future will remain a hostage to fortune.

The U.S. Is Not Yet Free of Economic Peril – Gary Duncan, Times of London

Nothing Changes

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Jul 192009

When was this written?

*******
Under the surface of the governmental regulation of the securities market, the same forces that produced the riotous speculative excesses of the “wild bull market” of 1929 still give evidences of their existence and influence. Though repressed for the present, it cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity.

Frequently we are told that this regulation has been throttling the country’s prosperity. Bitterly hostile was Wall Street to the enactment of the regulatory legislation. It now looks forward to the day when it shall, as it hopes, reassume the reins of its former power.

That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt. Indeed, if you now hearken to the oracles of The Street, you will hear now and then that the money-changers have been much maligned. You will be told that a whole group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they had nothing to do with the misfortunes that overtook the country in 1929-33; that they were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob blindly seeking victims.

These disingenuous protestations are, in the crisp legal phrase, “without merit.” The case against the money-changers does not rest upon hearsay or surmise. It is based upon a mass of evidence, given publicly and under oath before the Banking and Currency Committee of the United States Senate in 1933-1934, by The Street’s mightiest and best-informed men. . .

After five short years, we may now need to be reminded what Wall Street was like before Uncle Sam stationed a policeman at its corner, lest, in time to come, some attempt be made to abolish that post.

This week? No…

“Wall Street Under Oath”

Preface

Ferdinand Pecora

1939

H/T to Naked Capitalism

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