Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Growing CA Student Protests Over Tuition HikesStudent protests against the decision to hike student fees by 32% have spread from UCLA across the University of California system.The Indybay citizen media site has some of the most up-to-date info on the protests: 11/20 7am: At least 40 students have occupied Wheeler Hall on the UC Berkeley campus and are asking supporters to come out to the hall to show support. UC Police have surrounded the building as a "crime scene". Labels: California, protests, Student protests, Tuition, UCLA Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). UCLA Students Protest 32 Percent Tuition HikeStudents at UCLA have taken to the streets and occupied buildings in protest of an announced tuition hike of 32 percent. At least 14 protesters have been arrested so far.Several students report being tased by police, according to the Daily Bruin. Labels: California, protests, Tuition, UCLA Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WTO Says Brazil Can Saction US Over CottonThe World Trade Organization has ruled that Brazil may impose trade sanctions against a variety of U.S. exports in a 9-year old complaint about U.S. government subsidies for cotton farmers.From the wires: The formal move at the WTO's dispute settlement body (DSB) brought Brazil one step closer to retaliating against the United States, the world's biggest cotton exporter, in the highly sensitive 9-year-old row. Labels: Brazil, Cotton, Subsidies, trade policy, WTO Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Better Way to Regulate Financial MarketsFrom sometime D&S author Thomas Palley, in the Financial Times's Economists' Forum series:A better way to regulate financial markets: Asset based reserve requirements By Thomas Palley | November 10, 2009 There is widespread recognition that the financial crisis which triggered the Great Recession was significantly due to financial excess, particularly in real estate lending. Now, policymakers are looking to reform the financial system in hope of avoiding future crises. But like the drunk who looks for his lost keys under the lamppost because that is where the light is, policymakers remain fixated on capital standards because that is what is already in place. There is a better way to regulate financial markets through asset based reserve requirements which would extend margin requirements to a wide array of assets held by financial institutions. ABRRs are easy to implement, use the tried and tested approach of reserve requirements, are compatible with existing regulation (including capital standards), and would fill a hole regarding adequacy of financial policy instruments. The toleration of periodic bouts of financial excess over the past two decades reflects profound intellectual failure among central bankers and economists who believed inflation targeting was a complete and sufficient policy framework. It also reflects lack of policy instruments for directly targeting financial market excess. With central banks relying on the single instrument of short-term interest rates, this supported the argument using interest rates to target asset prices would inflict large collateral damage on the rest of the economy. ABRRs offer a simple solution to this problem by providing a new set of policy instruments that can target financial market excess, leaving interest rate policy free to manage the overall macroeconomic situation. ABRRs require financial firms to hold reserves against different classes of assets, with the regulatory authority setting adjustable reserve requirements on the basis of its concerns with each asset class. One concern may be an asset class is too risky; another may be an asset class is expanding too fast and producing inflated asset prices. By obliging financial firms to hold reserves, the system requires they retain some of their funds as non-interest-bearing deposits with the central bank. The implicit cost of forgone interest must be charged against investing in a particular asset category, reducing its return. Financial firms will therefore reduce holdings of assets with higher reserve requirements, and shift funds into other relatively more profitable asset categories. The effectiveness of this approach requires system-wide application. If applied only to banks, ABRR would simply encourage lending to shift outside the banking sector. To succeed, reserve requirements must be set by asset type, not by who holds the asset. A system of ABRRs that covers all financial firms can increase the efficacy of monetary policy. Most importantly, it enables central banks to target sector imbalances without recourse to the blunderbuss of interest rate increases. For example, if a monetary authority was concerned about a house price bubble generating excessive risk exposure, it could impose reserve requirements on new mortgages. This would force mortgage lenders to hold some cash to support their new loans, raising the cost of such loans and cooling the market. A similar logic holds for stock market bubbles. If a monetary authority wanted to prevent stock market inflation from generating excessive consumption, it could impose reserve requirements on equity holdings. This would force financial firms to hold some cash to back their equity holdings, lowering the return on equities and discouraging such investments. ABRRs also act as automatic stabilisers. When asset values rise or when the financial sector creates new assets, ABRRs generate an automatic monetary restraint by requiring the financial sector come up with additional reserves. Conversely, when asset values fall or financial assets are extinguished, ABRRs generate an automatic monetary easing by releasing reserves previously held against assets. In all of this, ABRRs remain consistent with the existing system of monetary control as exercised through central bank provision of liquidity at a given interest rate. At the microeconomic level, ABRRs can be used to allocate funds to public purposes such as inner city revitalisation or environmental protection. By setting low (or no) reserve requirements on such investments, monetary authorities could channel funds into priority areas, much as government subsidized credit and guarantee programs and government-sponsored secondary markets have expanded education and home ownership opportunities and promoted regional development. Conversely, ABRRs can be used to discourage asset allocations that are deemed socially counterproductive. Finally, ABRRs have other significant policy benefits that are especially valuable now. First, ABRRs increase the demand for reserves which will prove helpful as central banks seek to exit the current period of quantitative easing to avoid future inflation. By gradually raising asset reserve ratios, central banks can implement a form of reverse quantitative easing that smoothly transitions the system to a new more stable regime. Second, by increasing the demand for reserves ABRRs will increase seigniorage revenue for governments at a time of fiscal squeeze. To the extent required reserves constitute a tax on financial institutions, that tax is economically efficient given the costs of financial crises. It will also shrink a system that many believe is bloated. Thomas Palley is Schwartz economic growth fellow at the New America Foundation Labels: ABRRs, asset-based reserve requirements, financial crisis, financial regulation, Thomas Palley Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Worst Is Yet to Come (Nouriel Roubini)From RGE Monitor and yesterday's NY Daily News, Nouriel Roubini tells the unemployed to "hunker down":The Worst is yet to Come: Unemployed Americans Should Hunker Down for More Job Losses Nouriel Roubini | Nov 15, 2009 Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%. While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession. Also, remember: The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession. So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back. There's really just one hope for our leaders to turn things around: a bold prescription that increases the fiscal stimulus with another round of labor-intensive, shovel-ready infrastructure projects, helps fiscally strapped state and local governments and provides a temporary tax credit to the private sector to hire more workers. Helping the unemployed just by extending unemployment benefits is necessary not sufficient; it leads to persistent unemployment rather than job creation. The long-term picture for workers and families is even worse than current job loss numbers alone would suggest. Now as a way of sharing the pain, many firms are telling their workers to cut hours, take furloughs and accept lower wages. Specifically, that fall in hours worked is equivalent to another 3 million full time jobs lost on top of the 7.5 million jobs formally lost. This is very bad news but we must face facts. Many of the lost jobs are gone forever, including construction jobs, finance jobs and manufacturing jobs. Recent studies suggest that a quarter of U.S. jobs are fully out-sourceable over time to other countries. Other measures tell the same ugly story: The average length of unemployment is at an all time high; the ratio of job applicants to vacancies is 6 to 1; initial claims are down but continued claims are very high and now millions of unemployed are resorting to the exceptional extended unemployment benefits programs and are staying in them longer. Based on my best judgment, it is most likely that the unemployment rate will peak close to 11% and will remain at a very high level for two years or more. The weakness in labor markets and the sharp fall in labor income ensure a weak recovery of private consumption and an anemic recovery of the economy, and increases the risk of a double dip recession. As a result of these terribly weak labor markets, we can expect weak recovery of consumption and economic growth; larger budget deficits; greater delinquencies in residential and commercial real estate and greater fall in home and commercial real estate prices; greater losses for banks and financial institutions on residential and commercial real estate mortgages, and in credit cards, auto loans and student loans and thus a greater rate of failures of banks; and greater protectionist pressures. The damage will be extensive and severe unless bold policy action is undertaken now. Roubini is professor of Economics at the Stern School of Business at New York University and Chairman of Roubini Global Economics. Labels: Nouriel Roubini, real unemployment rate, recession, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Sustainability and Horsesh*tHere are two items related to climate change that read well next to each other.One is from a magazine called Tin House—an article by Curtis White skewering the idea of sustainability. A taste: For environmental, business, and political organizations alike, the term that has come to stand for the hope of the natural world is "sustainable." Sustainable agriculture. Sustainable cities. Sustainable development. Sustainable economies. But you would be mistaken if you assumed that the point of sustainability was to change our ways. It's not, really. The great unspoken assumption of the sustainability movement is the idea that although the economic, political, and social systems that have produced our current environmental calamity are bad, they do not need to be entirely replaced. In fact, the point of sustainability often seems to be to preserve—not overthrow—the economic and social status quo.Read the full article (and admire Tin House's design). The other is from the current issue of The New Yorker—Elizabeth Kolbert gives the Freakonomics guys a well-deserved skewering. Their new book, SuperFreakonomics, sounds even stupider than their first one. Kolbert (I can't help pronouncing her last name with a silent "T" as with Stephen Colbert) starts her review with an historical anecdote about how for a while there it looked like horseshit from all the horses used to transport people and goods all around New York City would eventually take over the city: The problem just kept piling up until, in the eighteen-nineties, it seemed virtually insurmountable. One commentator predicted that by 1930 horse manure would reach the level of Manhattan's third-story windows. New York's troubles were not New York's alone; in 1894, the Times of London forecast that by the middle of the following century every street in the city would be buried under nine feet of manure. It was understood that flies were a transmission vector for disease, and a public-health crisis seemed imminent. When the world's first international urban-planning conference was held, in 1898, it was dominated by discussion of the manure situation. Unable to agree upon any solutions—or to imagine cities without horses—the delegates broke up the meeting, which had been scheduled to last a week and a half, after just three days.This anecdote, it turns out, is a curtain-raiser to the Steves' (Steven D. Levitt and Stephen J. Dubner, that is) "argument" that we shouldn't fret about climate change, since someone is sure to come up with some kind of technological fix so that we can keep consuming, growing, and using fossil fuels. Their preferred idea is to cool the earth by shooting tons of sulphur dioxide into the atmosphere using an 18-mile-long hose (hence the title of Kolbert's review, "Hosed"—if only that could be taken as referring doubly to their idea and the Steve's careers or reputations). And here are two of the skewering bits, one sober, the other light-hearted: [W]hat's most troubling about "SuperFreakonomics" isn't the authors' many blunders; it's the whole spirit of the enterprise. Though climate change is a grave problem, Levitt and Dubner treat it mainly as an opportunity to show how clever they are. Leaving aside the question of whether geoengineering, as it is known in scientific circles, is even possible—have you ever tried sending an eighteen-mile-long hose into the stratosphere?—their analysis is terrifyingly cavalier. A world whose atmosphere is loaded with carbon dioxide, on the one hand, and sulfur dioxide, on the other, would be a fundamentally different place from the earth as we know it. Among the many likely consequences of shooting SO2 above the clouds would be new regional weather patterns (after major volcanic eruptions, Asia and Africa have a nasty tendency to experience drought), ozone depletion, and increased acid rain. Meanwhile, as long as the concentration of atmospheric CO2 continued to rise, more and more sulfur dioxide would have to be pumped into the air to counteract it. The amount of direct sunlight reaching the earth would fall, even as the oceans became increasingly acidic.She's probably right, but let's hope she's not about the Steves in particular. Maybe the scorn getting heaped on them for this particular pile they've produced (e.g. here) will hose their reputations permanently. Read Kolbert's review; read White's article. Labels: climate change, Curtis White, Elizabeth Kolbert, Freakonomics, horseshit, sulphur dioxide, sustainability Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Maybe We Were a Tad Premature...in our choice of the next bailout candidate. And this one surely needs watching in the longer-term. It's the Pension Benefit Guaranty Corp (PBGC). From Calculated Risk:Pension Benefit Guaranty Corporation Deficit Increases by CalculatedRisk on 11/14/2009 11:58:00 AM The Pension Benefit Guaranty Corporation (PBGC) is the federal agency that guarantees pensions for 44 million Americans. The PBGC deficit doubled over the last six months to $22 billion ... but this is only just the beginning as the agency's potential exposure to future losses increased sharply. From the Pension Benefit Guaranty Corporation (PBGC): PBGC Releases Annual Management Report for Fiscal Year 2009 The Pension Benefit Guaranty Corporation (PBGC) ended fiscal year 2009 with an overall deficit of $22 billion, according to the agency's Annual Management Report submitted to Congress today. The result compares with the $11.2 billion deficit recorded at the previous fiscal year-end on September 30, 2008. ... The Annual Management Report classified 27 large pension plans with total underfunding of $1.64 billion as probable losses on the PBGC balance sheet. The report also shows that the agency's potential exposure to future pension losses from financially weak companies increased to about $168 billion from the $47 billion booked in fiscal year 2008. "Exposure to possible future terminations means that we could face much higher deficits in the future," said Acting Director Vincent K. Snowbarger. "We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program." (emphasis added) With companies moving away from defined benefit plans, there will be fewer companies paying for insurance in the future--and the "long-term solution" will probably involve some sort of bailout. Labels: Calculated Risk, financial crisis bailout, Pension Benefit Guarantee Corporation, pensions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Next Bailout CandidateAnd the winner is...The Federal Housing Administration (FHA)! Lest it be forgotten, as the article duly notes:The FHA and the government-sponsored housing agencies Fannie Mae and Freddie Mac currently provide about 90 per cent of all new mortgages in the US housing market. From The Financial Times: Defaults pose risks to US housing agency By Saskia Scholtes in New York Published: November 12 2009 21:12 | Last updated: November 12 2009 21:12 The Federal Housing Administration, the government agency that insured $360bn of US single-family mortgages last year, said on Thursday that its insurance reserves had fallen below its congressionally mandated threshold to their lowest level ever. Amid depressed house prices and mounting losses on insured mortgages, the FHA's capital reserve ratio, which measures reserves after accounting for projected losses, fell to 0.53 per cent in the 12 months to September 30--well below the 2 per cent cushion it is required by Congress to maintain. Last year its capital ratio stood at 3 per cent, and it was 6.4 per cent in 2007. Rising defaults on FHA loans have prompted fears that the agency will need a taxpayer bailout. Defaults on FHA-backed loans reached 8.24 per cent in September--up from 8.1 per cent in August and 6.1 per cent a year ago. Shaun Donovan, secretary for housing and urban development, whose office oversees the FHA, said the economy was worse than housing officials had expected. He projected that claims against the insurance fund would be higher than forecast and said action would be needed to shore up the agency's reserves. The FHA's total reserves were more than $31bn, or more than 4.5 per cent of the insurance it had written, the agency said. Mr Donovan said that in almost every economic situation examined in an actuarial study, the FHA still had enough reserves to cover projected claims on outstanding loans. Read the rest of the article Labels: Fannie Mae, Federal Housing Administration, financial crisis, financial crisis bailout, Freddie Mac, housing market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Yves Smith on Krugman on JobsFrom the fantastic Yves Smith at Naked Capitalism:Krugman on the Need for Jobs Policies Paul Krugman has a good op-ed tonight on how Germany has fared versus the US in the global financial crisis. Recall that there was much hectoring of Germany early on, for its failure to enact stimulus programs. German readers were puzzled, since Germany has a lot of social safety nets that serve as automatic counter-cyclical programs. As an aside I visited a few cities in Germany on the Rhine and Danube in June (unfortunately in heavy book writing mode, and so did not get to see as much as I would have liked) and it was remarkable how there were no evident signs of the downturn: no shuttered retail stores, no signs of deterioration in public services, stores and restaurants looked reasonably busy (although I had no idea of what norms there might be). Krugman holds Germany up as an example of the merits of employment oriented policies (which had been the norm in America prior to the shift to "markets know best" posture (and more aggressive anti-union policies) inaugurated by Reagan: Consider, for a moment, a tale of two countries. Both have suffered a severe recession and lost jobs as a result—but not on the same scale. In Country A, employment has fallen more than 5 percent, and the unemployment rate has more than doubled. In Country B, employment has fallen only half a percent, and unemployment is only slightly higher than it was before the crisis.Yves here. Krugman does Germany an injustice by failing to contest US prejudices about European (particularly German) labor practices. If German labor practices are so terrible, then how was Germany an export powerhouse, able to punch above its weight versus Japan and China, while the US, with our supposedly great advantage of more flexible (and therefore cheaper) labor, has run chronic and large current account deficits? And why is Germany a hotbed of successful entrepreneurial companies, its famed Mittelstand? If Germany was such a terrible place to do business, wouldn't they have hollowed out manufacturing just as the US has done? Might it be that there are unrecognized pluses of not being able to fire workers at will, that the company and the employees recognize that they are in the same boat, and the company has more reason to invest in its employees (ignore the US nonsense "employees are our asset," another line from the corporate Ministry of Truth). A different example. A US colleague was sent to Paris to turn around a medical database business (spanning 11 timezones). She succeeded. Now American managers don't know how to turn around businesses without firing people, which was not an option for her. I submit that no one is willing to consider that the vaunted US labor market flexibility has produced lower skilled managers, one who resort to the simple expedient of expanding or contracting the workforce (which is actually pretty disruptive and results in the loss of skills and know-how) rather than learning how to manage a business with more foresight and in a more organic fashion because the business is defined to a large degree around its employees. Read the original post. Labels: fiscal stimulus, Germany, jobs, Paul Krugman, unemployment, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'Politicization' of the Fed (Dean Baker)There's an interesting article in today's New York Times about how Ben Bernanke has had to learn politicking, now that some in Congress are eager to provide more oversight of the Federal Reserve. The article discusses Ron Paul's bill that would allow the Government Accountability Office to audit the Fed:Mr. Paul's bill would require the Government Accountability Office, an arm of the Congress, to complete a wide-ranging assessment of the Fed's financial operations by the end of 2010. The audit would delve into bailouts of individual firms, short-term loans to banks, currency swaps with foreign central banks and the Fed's effort to prop up mortgage lending by purchasing $1.25 trillion in mortgage-related securities.Bernie Sanders is sponsoring the Senate version of Paul's bill. Meanwhile, a Washington Post editorial is claiming that Christopher Dodd's proposed banking regulation would "politicize" the Fed by impinging on its independence in setting monetary policy, to which Dean Baker, in his blog Beat the Press, had this amusing response: Washington Post: Taking Away the Banks' Control of the Fed is "Politicization"I'm sure those changes are all in the works (and some of them well underway), alas, but in case they aren't, we wish you wouldn't give them any ideas, Dean! Labels: banking regulation, Ben Bernanke, Bernie Sanders, Christopher Dodd, Dean Baker, Ron Paul Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Public Purpose of BankingMaybe Goldman Sachs should have used some of its bonus money to hire better P.R. folks—the company has really been taking a beating, and not just because it is "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," as Matt Taibbi put it in Rolling Stone. Really, the company's making it even worse than it has to be.First (back in October) there was the Goldman Sachs international adviser Brian Griffiths telling people that inequality was good for society as a whole "We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all," Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion at St. Paul's Cathedral in London. The panel's discussion topic was, "What is the place of morality in the marketplace?"This is true, apparently, because higher compensation encourages more charitable giving. "To whom much is given much is expected," Griffiths said, according to Bloomberg. "There is a sense that if you make money you are expected to give." Later that month, Goldman Sachs abandoned adorable kittens. No kidding. As reported on the website of New Deal 2.0 (where we notice that a number of D&S authors, and at least one ex-boyfriend of a current D&S co-editor, are among the "braintrusters"), The Villager newspaper in lower Manhattan reported that Goldman Sachs "neglected to pay the vet bills for homeless kittens found in its nearly-completed Battery Park City headquarters." The newspaper offered this apology on Goldman's behalf: Since Goldman Sachs has been a big part of the Lower Manhattan fabric for almost a century and a half, we'd like to take this opportunity to apologize to the rest of the country on behalf of our neighbor, a financial giant personifying much of what is wrong on Wall St.(This was a while back—I doubt any of the kittens are still homeless.) Now Goldman's CEO, Lloyd Blankfein, is mouthing off to the London Times about how bankers do "God's work." The whole article is terrific, but here's the quotable quote: Is it possible to make too much money?See what I mean? They need to hire better P.R. folks or at least forbid travel to London. This is all a lead-up to the following piece, by Marshall Auerback (also of New Deal 2.0), from Naked Capitalism. Auerback takes Blankfein as his jumping-off point for a discussion of Christopher Dodd's new banking regulation bill.
Read the original post. Labels: banking regulation, Brian Griffiths, Goldman Sachs, kittens, Lloyd Blankfein, Matt Taibbi, New Deal 2.0 Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
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