Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Why Private Equity Wants To Buy Banksbecause there's not much else to buy, according to this Financial Times story:On Wall Street: Banks no longer so lucrative Financial Times By Henny Sender Published: July 3 2009 19:52 | Last updated: July 3 2009 19:52 The planned merger of two Japanese banks is the latest unhappy chapter in the 10-year saga of foreign private equity capital's adventure in Tokyo finance. The two banks, Shinsei and Aozora fell into the hands of Ripplewood and Chris Flowers and Cerberus Capital Management respectively at what appeared to be close to the end of the country's lost decade. The two purchases came after the Ministry of Finance was unable to find any domestic buyers for the two ailing institutions. Ten years on, the two are still not healthy. Both got into trouble like many of their US peers by straying into investments that promised high yields with seemingly low risk, whether junk bonds that proved worthless for Shinsei or a piece of GMAC in the case of Aozora. It has been easy for both banks to stray from the banking business in Japan in recent years because they lacked a broad base of cheap funding from deposits and they never became the go-to source of loans for corporate Japan. Now private equity is an eager if frustrated buyer of troubled banks in the US and one of the few sources of fresh equity for a sector that desperately needs capital. US authorities are as paranoid as their Japanese peers of these would be owners' intentions and intend to impose onerous requirements, (which may or may not prove very burdensome) on private equity. At the same time, regulators also intend to impose all sorts of constraint on the banks and limit the degree of leverage all banks are allowed, which will likely lead to lower profitability. Read the rest of the article Labels: bailout, banking industry, financial crisis, private equity Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). If You Liked CDOs, You'll Love CLOs...From the Financial Times:Night of zombie company looms as debt burden remains large By Anousha Sakoui Financial Times Published: July 2 2009 20:50 | Last updated: July 2 2009 20:50 Third time lucky is a phrase often quoted by bankers who believe it takes several debt restructurings to get a company's balance sheet right. The phrase is even more relevant today amid growing concerns that debt restructurings are leaving companies saddled with too much debt, even at the end of the process. Part of the blame has been laid at the feet of capital-constrained banks which have been reluctant to write down the debt because it could create losses that would further weaken their balance sheets. Debt and bankruptcy specialists warn that trend risks creating a new breed of zombie companies--those which survive simply to repay their debts but cannot move forward because their debts remain so large. An even greater problem is posed by collateralised loan obligations--complex funds that pooled loans and at the height of the credit bubble were buying up to 60 per cent of leveraged loans. Read the rest of the article Labels: bailout, banking system, bankruptcy, collateralized loan obligations, derivatives, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Roubini on Details in the Payrolls DataU.S. Job Report Suggests that Green Shoots are Mostly Yellow WeedsNouriel Roubini's Global Economonitor Nouriel Roubini | Jul 2, 2009 The June employment report suggests that the alleged 'green shoots' are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions. It's clear that even if the recession were to be over anytime soon--and it's not going to be over before the end of the year--job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over. The details of the unemployment report are even worse than the headline. Not only are there large job losses right now, but as a way of sharing the pain, firms are inducing workers to reduce hours and hourly wages. Therefore, when we're looking at the effect of the labor market on labor income, we should consider that the total value of labor income is the product of jobs, hours, and average hourly wages--and that all three elements are falling right now. So the effect on labor income is much more significant than job losses alone. Read the rest of the post Labels: bailout, economic indicators, financial crisis, Nouriel Roubini, US employment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Goodbye, Green ShootsThe FT's John Authers (video clip) on market reaction to today's US payrolls data, which were far worse than expected.Labels: bailout, economic indicators, employment, financial crisis, John Authers, US employment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Delasantellis on Realtors' Latest Lobby EffortFrom his Asia Times column:Cheating still beats real work By Julian Delasantellis Asia Times July 2d, 2009 A colleague recently relayed a story about her experience as an observer at a faculty/student disciplinary hearing for a pre-law undergraduate charged with cheating. Apparently, this young man had come around to the belief that, when it came to engaging in conduct that could get him expelled, in for a dime-in for a dollar. Just in the space of a single term, his teachers had found him copying from a test, rifling through the course's graduate assistant notebook looking for a test, and, word for word, punctuation mark by punctuation mark, lifting without attribution a large section of a Wikipedia entry on "jurisprudence" for a research paper. "How do you answer these charges?" asked the earnest student prosecutor, who, both my colleague and I agreed, can be expected to be next seen on TV in Kevlar helmet, flak jacket, frameless glasses and FBI windbreaker when the government takes down another religious compound in 2017 or so. Read the rest of the article Labels: appraisal management companies, bailout, financial crisis, Julian delasantellis, mortgage meltdown, National Association of Realtors Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). California to Issue IOUs at Discount?The creator of the fine website Across the Curve had the following to say about the situation on California tonight: "I guess it is fair to state that California is bankrupt. If one issues scrip money rather than paying bills in cash that would signal a serious problem. It is a sad sign of the vale of tears through which we have passed these last two years that the fiscal demise of our largest state receives remarkably little notice. In another time and place it would have been a seismic event of major import."This piece from Breaking Views notes that banks may ask for a discount on state IOUs: Labels: bailout, banking industry, California, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Banker: "This Is a Phenomenal Environment"One more from today's FT:Radical shift in the banking power base By Patrick Jenkins and Jane Croft Financial Times Published: June 30 2009 18:50 | Last updated: June 30 2009 18:50 It is barely nine months since the collapse of Lehman Brothers ushered in one of the worst financial crises since the Great Depression. But for the strongest banks, the second quarter of 2009, which closed on Tuesday, has confirmed the upbeat trends of the first quarter. While banks such as Citigroup, Merrill Lynch, Royal Bank of Scotland and UBS continue to find life difficult, thriving rivals--JPMorgan, Goldman Sachs, Morgan Stanley, Barclays, Deutsche Bank and Credit Suisse--are talking privately of a record second quarter. They have benefited from lively markets for commodity and foreign exchange trading, at profit margins that are between two and eight times higher than before the height of the financial crisis last autumn. At the same time, companies have been rushing to issue new debt and equity. More fundamentally and sustainably there have been clear shifts in market share between the banks--in everything from UK mortgages to US Treasury bill issuance--as aggressive groups have taken advantage of opportunities left by weakened rivals. BanksOne investment banker says: "There used to be 15 banks competing. Now there are six. This is a phenomenal environment. I’ve never seen anything like this in 20 years in the business." Read the rest of the article Labels: bailout, banking industry, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Behind Banks' Credit Card MovesAnother FT article goes deeper into the increasing danger credit cards are putting banks into, and what they're doing about it. Some scary stuff here.Record credit card losses force banks into action By Saskia Scholtes in New York Financial Times Published: July 1 2009 03:00 | Last updated: July 1 2009 03:00 Losses on US credit cards hit a record 10.44 per cent in June, squeezing profit margins for credit card securitisations to a 10-year low, according to Fitch Ratings. Profits from off-balance sheet vehicles backed by credit loans in June fell below the 5 per cent threshold for the first time since November 1998, said Fitch. Credit card securitisations have built-in triggers that force early repayment when profits fall below zero. Such triggers are designed to protect investors from prolonged exposure to bad credit card loans. Rising losses on credit cards have in recent months pushed US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investors. Banks have also raised interest rates on credit cards to counter rising borrower defaults, late payments and boost profitability, underlining how the deteriorating health of US consumers is opening new fronts in the financial crisis. Read the rest of the article Labels: bailout, banking system, Credit card industry, financial crisis, securitization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Citi Raises Rates on CardholdersThis is before new regulations come into effect that prevent them from doing this very thing come into effect in a few months. From The Financial Times:Citi raises card rates on millions By Francesco Guerrera Saskia Scholtes Tom Braithwaite Financial Times Published: June 30 2009 23:59 | Last updated: June 30 2009 23:59 Citigroup has sharply increased interest rates on up to 15m US credit card accounts just months before curbs on such rises come into effect, in a move that could fuel political anger at the treatment of consumers by bailed-out banks. People close to the situation said that Citi, which is about to cede a 34 per cent stake to the US government as part of its latest rescue, had upped rates on between 13m and 15m credit cards it co-brands with retailers such as Sears. Citi's rate increases emerged on the day the government proposed legislation to create a new regulator with sweeping powers on consumer protection and a week after the bank was attacked by some politicians for raising employees’ salaries. Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent--or nearly 3 percentage points--between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research. Read the rest of the article Labels: bailout, Citibank, Credit card industry, financial crisis, financial regulation Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More Speculation on Demise of the PPIPFrom Wall Street Pit:Financial Crisis: The Two Sides of the Balance Sheet Wall Street Pit By James Kwak|Jun 30, 2009 Noam Scheiber at The New Republic has the inside scoop (hat tip Ezra Klein) on why Treasury is letting the Public-Private Investment Program die a quiet death (although at this point the legacy securities component may still go ahead). In short, the argument is that the point of PPIP was to help banks raise capital by cleaning up their balance sheets; since they have been able to raise capital themselves, there is no need for PPIP. According to one person Scheiber spoke to: "If you had asked–I don't want to speak for the secretary–what's problem number one? I think he'd say capital. Problem two? Capital. Problem three? Capital." This represents the latest swing of the pendulum between the two sides of the balance sheet. As anyone still reading about the financial crisis is probably aware, a balance sheet has two sides. On the left there are assets; on the right there are liabilities and equity; equity = assets minus liabilities. (There are different definitions of capital, depending on what subset of equity you use.) The goal has always been to provide confidence that there is enough capital to withstand the impact of market and economic turmoil--in particular, its impact on the toxic assets that litter banks’ balance sheets. However, there are two alternative approaches to doing this. One is to add more equity to the right side by issuing new stock (preferred or common). (This would add cash to the left side to keep them in balance.) The other is to reduce the uncertainty of the left (asset) side by helping banks sell toxic assets; even if the banks have to sell them for a little less cash than their current balance sheet value, this would have the salutary effect of reducing vulnerability, since cash does not lose value (at least not in an accounting sense). Alternatively, you could achieve the same effect by insuring the value of the assets while leaving them on bank balance sheets, because then the risk transfers to the insurer. Read the rest of the post Labels: bailout, banking system, Federal Reserve, financial crisis, PPiP Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Eurozone Moves into Deflation for First TimeFrom The Financial Times:Eurozone inflation turns negative By Ralph Atkins in Frankfurt Financial Times Published: June 30 2009 11:03 | Last updated: June 30 2009 18:16 Eurozone annual inflation has turned negative for the first time since records began, creating a headache for the European Central Bank as it seeks to draw a line under emergency measures to tackle continental Europe's recession. Consumer prices in the 16-country eurozone were 0.1 per cent lower in June than the same month a year before, according to Eurostat, the European Union's statistical office. It was the first time eurozone annual inflation had fallen below zero since comparable records began in 1991. The fall in prices reflects sharply lower energy costs and the effects of the region's worst economic downturn since the second world war. Annual inflation is hugely undershooting the ECB's target of "below but close" to 2 per cent. Read the rest of the article Labels: bailout, European Union, financial crisis, GDP Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Optimism...They keep saying the UK should emerge faster and stronger than other economies (and that may still turn out to be the case, give horrible performances elsewhere) from the recession--or whatever it is--but the carnage continues to get worse:Economy suffers steepest fall in 50 years The Independent By Russell Lynch, Press Association Tuesday, 30 June 2009 The UK economy recorded its sharpest decline in more than 50 years during the first quarter of 2009, figures showed today. And revisions to figures revealed the current recession began earlier than first thought, with a 0.1 per cent decline seen between April and June last year compared with previous estimates of zero growth. Output fell 2.4 per cent in the first three months of the year - the fastest rate since 1958, the Office for National Statistics (ONS) said. The economy also showed an annual decline of 4.9 per cent - the biggest fall since ONS records began in 1948. The first-quarter decline of 2.4 per cent is much worse than the 1.9 per cent first estimated and comes after bigger-than-expected falls in construction and the UK's key services sector. The plummet in activity between January and March was almost equal to the 2.5 per cent fall suffered during the whole of the recession in the 1990s, Investec's David Page said. He warned: "The economy is now likely to undergo a peak to trough adjustment in excess of 5 per cent, nearly as big as the overall 5.9 per cent collapse seen from 1979-1981." The scale of the decline could put pressure on Chancellor Alistair Darling's forecasts for the public finances this year. Read the rest of the article Labels: bailout, economic indicators, financial crisis, GDP, United Kingdom Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WSJ: Why Cleaning Banks' Books Is So HardIt was almost impossible to get this without being a subscriber, so I'm reproducing it in full (here's the link to the article, which has accompanying charts:JUNE 30, 2009 Wall Street Journal Wary Banks Hobble Toxic-Asset Plan By DAVID ENRICH, LIZ RAPPAPORT and JENNY STRASBURG The government's plan to enable banks to dump troubled assets is facing troubles of its own. Markets initially rallied when Treasury Secretary Timothy Geithner announced in March a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks. But that initiative--called the Public-Private Investment Program, or PPIP--has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits. The program's problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets. That in turn could hinder efforts to revive the nation's economy. A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend. U.S. officials and investors are playing down expectations for the plan--originally billed as a $1 trillion endeavor. Some federal officials say the banking environment has improved since the program was unveiled. They assert that because a dozen or so big banks recently succeeded in raising capital, they are under less pressure to sell bad assets. Early this month, the Federal Deposit Insurance Corp. essentially shelved one arm of PPIP--the government-financed buying of bad bank loans. Mr. Geithner recently said the other part--to facilitate the buying from banks of troubled securities, many backed by real-estate loans--could be scaled back because investors are "reluctant to participate." This week, the government is expected to name investment firms to manage this securities-buying portion. "The fits and starts on all this stuff has added to the uncertainty that makes [investors] stay on the sidelines," says Trabo Reed, the deputy banking superintendent in Alabama, where many small and midsize banks are looking for cash infusions from investors. Lee Sachs, counselor to the Treasury secretary, says the department remains committed to the program and has received more than 100 applications from would-be investment managers. "One of the goals of the PPIP program has been to help create liquidity in frozen markets," he says. "Some banks will sell assets. Even those that do not will benefit from the greater ability to value the assets they hold." The slimmed-down program will focus not on bad loans, but on toxic securities, which are a problem for a relatively small fraction of the nation's banks. That is bad news for hundreds of smaller banks burdened with growing piles of defaulted loans. These banks are less able to tap capital markets than their larger rivals, so they have been eager for U.S. help unloading loans as a way to bolster their capital cushions. Many of them can face big problems if just one or two large loans go bad. Seventy banks, most of them community institutions, have failed since the start of last year. Analysts are bracing for hundreds of lenders to collapse in the next few years. Because these lenders often play key roles supporting their local economies, taken together, they are important to the financial system and to a U.S. economic recovery, says Kenneth Segal, senior vice president at Howe Barnes Hoefer & Arnett Inc., an advisory firm for small and midsize lenders. During the last banking crisis, nearly two decades ago, the government established the Resolution Trust Corp. to sell off the bad loans and securities of banks that had failed. Many experts credit the RTC with helping defuse that crisis. This time around, efforts to rid banks of soured assets have sputtered repeatedly. In late 2007, federal officials helped cobble together a plan for a bank-financed fund to buy securities held by bank investment funds, but the effort was aborted. In 2008, the Bush administration established a $700 billion program to buy banks' soured assets. Partly because of the complexity of valuing those assets, the U.S. abandoned that plan, instead opting to directly pump taxpayer money into banks. Scott Romanoff, a Goldman Sachs Group Inc. managing director, has referred to the current effort, PPIP, as "the greatest program that never occurred," because it "created confidence in the markets so banks can raise equity capital." In recent weeks, markets have lost some vigor amid renewed concerns about the economy. That could make it more difficult for big banks to raise additional capital. Banks also could face further losses as bad assets decline more in value. On March 23, when Mr. Geithner unveiled PPIP, the Dow Jones Industrial Average surged nearly 500 points, or 7%, its biggest gain since October, on hopes that the program would nurse the banking industry back to health. Many bank executives were skeptical about whether the program could succeed. Even before it was announced, some had grumbled that federal officials weren't consulting them, and instead were crafting the initiative with input from would-be investors. Some banking executives say they warned that they would be loath to sell at the kind of prices investors were likely to demand. Executives at Citigroup Inc. shared those concerns, according to people familiar with the matter. While the New York bank was sitting on at least $300 billion of risky loans and securities, selling them at discounted prices would require painful hits to its already thin capital ratios, these people say. Some Citigroup executives had a different idea: Maybe they could turn a profit by bidding on their own toxic assets at discounted prices, using government financing, according to the people familiar with the talks. Other big banks also talked about setting up distressed-asset units to snap up troubled loans and securities, including from their parent companies, with taxpayer financing. FDIC Chairman Sheila Bair later publicly shot down the idea. Citigroup declined to comment. Meanwhile, many small-town bankers hoped the program would help them unload the bad assets--generally loans to finance commercial real-estate projects--that were hurting their balance sheets. Some potential buyers had surfaced before PPIP was announced, but they were offering such low prices that few banks could afford to sell the loans without severely denting their capital cushions. The hope was that PPIP would help narrow the gap between buyers and sellers. Investors would be able to bid more because the government would offer buyers little-money-down financing, along with some downside protection. "We have illiquid assets," says Patrick Patrick, chief executive of Towne Bancorp of Mesa, Ariz. "It would be helpful to have a vehicle where you could sell them at market and be able to restructure our balance sheet." Like many small banks, Towne Bancorp has been hurt by a handful of loans to finance real-estate projects that went belly up. In the first quarter, the bank said two souring commercial real-estate loans caused its portfolio of loans at least 90 days past due to swell by 52%. Such loans represent more than 22% of Towne Bancorp's $143 million in assets. The company has been trying for months to sell 19 pieces of real estate--including undeveloped land and a warehouse--that it seized when loans went into default. When PPIP was announced, big-name investors were intent on figuring out how to profit from it. Raymond Dalio of giant hedge-fund firm Bridgewater Associates, which oversees $72 billion in assets, initially expressed interest in participating. But within days, he was blasting it, saying buyers and sellers would have difficulty agreeing on pricing and fund managers that profited would be exposed to criticism from politicians. The way PPIP is set up "makes us not want to participate and it makes us question the breadth of interest that we will see in the program," he wrote to clients. Lawyers for hedge funds and private-equity investors warned clients about the risks of doing business with the government. The industry was unnerved by the restrictions placed on banks participating in another federal bailout program, the Troubled Asset Relief Program. Fund managers were also bothered by President Barack Obama's criticism of the hedge funds holding Chrysler LLC debt who had refused the government's buyout offers. In conference calls with bankers and investors, FDIC officials emphasized that PPIP was critically important to cleanse banks of their bad assets. "I think you know the stakes are very high with this," Ms. Bair, the FDIC chairman, said during a March 26 call, according to a transcript. "We need this program to work." Ms. Bair and her deputies encountered skepticism. In an April 9 conference call with the FDIC, Mark Wolf of TRI Investments LLC, described his Carlsbad, Calif., firm as a potential PPIP bidder. "Unless you've got a process that either forces banks to sell or does a better job of encouraging them to sell, we're just going to see banks sitting back and dribbling these things out through an eyedropper over the course of time," he said. Some bankers were hesitant. "If these loans are bought at a discount, we create a hole in capital," Lou Akers, executive vice president of Adams National Bank in Washington, told FDIC officials on the March 26 call. He suggested that regulators consider changing the way they calculate banks' capital in order to cushion the blow. Government officials were noncommittal, a transcript of the call indicates. FDIC officials emphasized on the conference calls that PPIP was intended to benefit all banks, not just industry giants. But smaller banks began to worry they'd be locked out. To participate in PPIP, local lenders were told, they would have to pool their loans with other banks. The process, which the FDIC said it would facilitate, was designed to simplify the bidding process for government officials and prospective investors. The agency didn't want thousands of banks put their loan portfolios on the block separately. But the FDIC planned to require participating banks to kick in a minimum amount of assets, and some small-town bankers worried they wouldn't have enough to qualify. Too high a minimum "will virtually eliminate all community banks from being able to participate in this program," wrote Julian L. Fruhling, president of Legacy Bank in Scottsdale, Ariz., in a letter to the FDIC. Still, some investment firms that were hoping to help manage the government's program were optimistic. Laurence Fink, chief executive of BlackRock Inc., said in mid-April during a trip to Japan that if his firm is selected as a manager, it was ready to raise $5 billion to $7 billion to buy securities through PPIP. He said he hoped to raise money from individual investors in Japan and the U.S., and that potential returns could be as high as 20%. The FDIC and other regulatory agencies were planning to use their "stress tests" of the nation's top 19 banks to push them to sell assets via PPIP, according to people familiar with the matter. But in the weeks before the stress-test results were announced in May, market sentiment began to improve. A number of banks succeeded in raising capital by selling new shares to the public. Once the stress tests were wrapped up in May, even more banks sold shares--a total of roughly $65 billion within a month. The capital-raising removed regulators' leverage to encourage participation in PPIP, according to government officials. Around the same time, BlackRock reduced its goal for the size of its potential PPIP investment fund to about $1 billion, say people familiar with the matter. Earlier this month, the FDIC formally postponed the loan-buying portion of PPIP, called the Legacy Loan Program. "Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system," Ms. Bair said. Next month, the FDIC intends to use PPIP for a far narrower purpose: to auction loans the agency has seized from failed banks. Eventually, it hopes to resuscitate the loan-buying program so that smaller banks can benefit from it. But that could be tricky. The U.S. initially justified PPIP by invoking its "systemic risk" powers, which enable regulators to step in when the financial system is at risk. Regulators have debated whether such a justification would remain if the program were geared toward smaller banks. FDIC officials doubt they will muster the necessary consensus among regulators to invoke the special powers and keep the loan program alive, according to a person familiar with the matter. Many banking experts contend that the financial system won't fully stabilize until banks get rid of their bad assets. Mr. Segal, the bank adviser, complains that federal officials have cited recent capital raising by big banks as evidence that "the system is OK." That may be true "for the top 15 or 20 banks," he says. "But for everybody else, there really needs to be more attention paid." Labels: bailout, banking system, financial crisis, PPiP, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 2 On Subprime/Mortgage MessFirst, a link to Doug Henwood's latest (June 25th) radio program, which features an excellent interview with Alyssa Katz on the history of mortgage lending in the U.S. from the '30s on. Second, this piece about a recent study which casts interesting light on the role of the Community Reinvestment Act on subprime lending (courtesy of Economist's View):Most Subprime Lenders Weren't Covered by CRA The Big Picture By Barry Ritholtz - June 27th, 2009, 9:00AM The CRA brouhaha last year led the Orange County Register to run an analysis of "more than 12 million subprime mortgages worth nearly $2 trillion" in late 2008. What did their data based analysis discover? "Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the lenders covered by the law that did make subprime loans came late to that market--after smaller, unregulated players showed there was money to be made." Among their research conclusions: Nearly $3 of every $4 in subprime loans made from 2004 through 2007 came from lenders who were exempt from the law. State-regulated mortgage companies such as Irvine-based New Century Financial made just over half of all subprime loans. These companies, which CRA does not cover, controlled more than 60 percent of the market before 2006, when banks jumped in. Another 22 percent came from federally regulated lenders like Countrywide Home Loans and Long Beach Mortgage. These lenders weren't subject to the CRA law, though some were owned by banks that could choose to include them in their CRA reports. Among lenders that were subject to the law, many ignored subprime while others couldn't get enough. Read the rest of the piece Labels: Alyssa Katz, bailout, Barry Ritholtz, Community Reinvestment Act, Doug Henwood, financial crisis, subprime lending, The Big Picture Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Two Views of the CrisisA brief, clear comparison from Simon Johnson on the Baseline Scenario blog:There are two views of the global financial crisis and—more importantly—of what comes next. The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond. The second is quite unofficial—no government official has yet been found anywhere near this position. Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold. Go to the original blog for links, including the slides he mentions. Labels: bailout, banking crisis, banking regulation, Baseline Scenario, deregulation, finance sector, financial crisis, financial regulation, fiscal stimulus, larry Summers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Back to the Trough for Happy PigletsA comment from Morningstaronline.co.uk; hat-tip to Bob F.:And it's back to the trough Friday 12 June 2009 | Comment | Morningstaronline.co.uk It wasn't that long ago that the banks precipitated a crisis that shook the world's economy to its roots and is still causing the loss of thousands of jobs every month at undercapitalised and credit-starved manufacturing companies. A cycle of share gambling and outrageous risk-taking came to crisis when the banks even stopped trusting each other and refused to lend to other banks for fear that they had been lying about their exposure to unsafe debt. This came about in part because of an unrestrained drive for multimillion-pound bonuses and other payouts by the dealers and high-level market manipulators employed by the banks to generate profits for them from speculation. At the time and, indeed, ever since, the apologists in the capitalist media were carrying on about the emergence of a "new, moral capitalism" minus the short-sellers and speculation that had brought such discredit on their system. There was even a ban on short selling instituted to prevent the ludicrous amount of damage done to capital markets by the practice. But, as anyone with a clear perspective on capitalism could have forecast, such high-sounding sentiments meant little and their implementation couldn't last. The short-selling ban was dropped as hastily as it had been instituted the moment that the immediate glare of publicity had died down a little. Short selling once more became "a necessary tool of the markets" the moment that the City speculators felt that they could get away with it. And once again, the speculators are emerging, jostling for position to get their snouts back into the trough after a short enforced layoff, during which they have been reduced to picking over the corpses of their fellows who have been forced out of business, in the hopes of gleaning a quick buck. One wonders what the 5,000-plus Barclays staff who have been made redundant over the last two years will make of the fact that the bank is selling off its Barclays Global Investors division to US specialist speculator BlackRock and, in the process, making around 380 upper-echelon Barclays employees into millionaires, chief among them being Barclays investment banking boss Bob Diamond. Mr Diamond, he of the £20 million a year salary, is set to pocket £22 million from his share of the action. The redundant staff will certainly not be overjoyed. And neither should the remaining employees, since at least one analyst has pointed out that the deal may be of benefit to those 380 top employees, but the bank is giving up a key revenue stream, which will not be entirely offset by the 19.9 per cent holding in BlackRock it acquired as part of the deal. The shareholders certainly aren't impressed, if the markets are anything to go by. Barclays shares dropped by 3 per cent immediately the deal was announced. But you can bet that those 380 new-made millionaires will be over the moon. As will private equity house CVC, which is in line to receive a £106 million payout of depositors' money for, believe it or not, doing nothing except losing out on buying part of the company. So it's back to the trough for the happy piglets. A deal goes through that doesn't help the company, doesn't help the mass of the shareholders, doesn't help the public and, in fact, only helps 380 speculators and a private equity firm. And Barclays isn't even saying what it will do with the £5.3 billion that it will collect, except that it will put it towards boosting capital resources. In other words, it will just sling it in the vaults, which is, one supposes, logical since Barclays, in common with all the other banks, isn't becoming notable for rebuilding loans to industry. You couldn't make it up. Read the original comment. Labels: bailout, Barclay's Bank, financial crisis, private equity, short-selling, UK Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Goodbye, GM (Michael Moore)Another statement on GM's bankruptcy (from MichaelMoore.com):I write this on the morning of the end of the once-mighty General Motors. By high noon, the President of the United States will have made it official: General Motors, as we know it, has been totaled. As I sit here in GM's birthplace, Flint, Michigan, I am surrounded by friends and family who are filled with anxiety about what will happen to them and to the town. Forty percent of the homes and businesses in the city have been abandoned. Imagine what it would be like if you lived in a city where almost every other house is empty. What would be your state of mind? It is with sad irony that the company which invented "planned obsolescence" -- the decision to build cars that would fall apart after a few years so that the customer would then have to buy a new one -- has now made itself obsolete. It refused to build automobiles that the public wanted, cars that got great gas mileage, were as safe as they could be, and were exceedingly comfortable to drive. Oh -- and that wouldn't start falling apart after two years. GM stubbornly fought environmental and safety regulations. Its executives arrogantly ignored the "inferior" Japanese and German cars, cars which would become the gold standard for automobile buyers. And it was hell-bent on punishing its unionized workforce, lopping off thousands of workers for no good reason other than to "improve" the short-term bottom line of the corporation. Beginning in the 1980s, when GM was posting record profits, it moved countless jobs to Mexico and elsewhere, thus destroying the lives of tens of thousands of hard-working Americans. The glaring stupidity of this policy was that, when they eliminated the income of so many middle class families, who did they think was going to be able to afford to buy their cars? History will record this blunder in the same way it now writes about the French building the Maginot Line or how the Romans cluelessly poisoned their own water system with lethal lead in its pipes. So here we are at the deathbed of General Motors. The company's body not yet cold, and I find myself filled with -- dare I say it -- joy. It is not the joy of revenge against a corporation that ruined my hometown and brought misery, divorce, alcoholism, homelessness, physical and mental debilitation, and drug addiction to the people I grew up with. Nor do I, obviously, claim any joy in knowing that 21,000 more GM workers will be told that they, too, are without a job. But you and I and the rest of America now own a car company! I know, I know -- who on earth wants to run a car company? Who among us wants $50 billion of our tax dollars thrown down the rat hole of still trying to save GM? Let's be clear about this: The only way to save GM is to kill GM. Saving our precious industrial infrastructure, though, is another matter and must be a top priority. If we allow the shutting down and tearing down of our auto plants, we will sorely wish we still had them when we realize that those factories could have built the alternative energy systems we now desperately need. And when we realize that the best way to transport ourselves is on light rail and bullet trains and cleaner buses, how will we do this if we've allowed our industrial capacity and its skilled workforce to disappear? Thus, as GM is "reorganized" by the federal government and the bankruptcy court, here is the plan I am asking President Obama to implement for the good of the workers, the GM communities, and the nation as a whole. Twenty years ago when I made "Roger & Me," I tried to warn people about what was ahead for General Motors. Had the power structure and the punditocracy listened, maybe much of this could have been avoided. Based on my track record, I request an honest and sincere consideration of the following suggestions: 1. Just as President Roosevelt did after the attack on Pearl Harbor, the President must tell the nation that we are at war and we must immediately convert our auto factories to factories that build mass transit vehicles and alternative energy devices. Within months in Flint in 1942, GM halted all car production and immediately used the assembly lines to build planes, tanks and machine guns. The conversion took no time at all. Everyone pitched in. The fascists were defeated. We are now in a different kind of war -- a war that we have conducted against the ecosystem and has been conducted by our very own corporate leaders. This current war has two fronts. One is headquartered in Detroit. The products built in the factories of GM, Ford and Chrysler are some of the greatest weapons of mass destruction responsible for global warming and the melting of our polar icecaps. The things we call "cars" may have been fun to drive, but they are like a million daggers into the heart of Mother Nature. To continue to build them would only lead to the ruin of our species and much of the planet. The other front in this war is being waged by the oil companies against you and me. They are committed to fleecing us whenever they can, and they have been reckless stewards of the finite amount of oil that is located under the surface of the earth. They know they are sucking it bone dry. And like the lumber tycoons of the early 20th century who didn't give a damn about future generations as they tore down every forest they could get their hands on, these oil barons are not telling the public what they know to be true -- that there are only a few more decades of useable oil on this planet. And as the end days of oil approach us, get ready for some very desperate people willing to kill and be killed just to get their hands on a gallon can of gasoline. President Obama, now that he has taken control of GM, needs to convert the factories to new and needed uses immediately. 2. Don't put another $30 billion into the coffers of GM to build cars. Instead, use that money to keep the current workforce -- and most of those who have been laid off -- employed so that they can build the new modes of 21st century transportation. Let them start the conversion work now. 3. Announce that we will have bullet trains criss-crossing this country in the next five years. Japan is celebrating the 45th anniversary of its first bullet train this year. Now they have dozens of them. Average speed: 165 mph. Average time a train is late: under 30 seconds. They have had these high speed trains for nearly five decades -- and we don't even have one! The fact that the technology already exists for us to go from New York to L.A. in 17 hours by train, and that we haven't used it, is criminal. Let's hire the unemployed to build the new high speed lines all over the country. Chicago to Detroit in less than two hours. Miami to DC in under 7 hours. Denver to Dallas in five and a half. This can be done and done now. 4. Initiate a program to put light rail mass transit lines in all our large and medium-sized cities. Build those trains in the GM factories. And hire local people everywhere to install and run this system. 5. For people in rural areas not served by the train lines, have the GM plants produce energy efficient clean buses. 6. For the time being, have some factories build hybrid or all-electric cars (and batteries). It will take a few years for people to get used to the new ways to transport ourselves, so if we're going to have automobiles, let's have kinder, gentler ones. We can be building these next month (do not believe anyone who tells you it will take years to retool the factories -- that simply isn't true). 7. Transform some of the empty GM factories to facilities that build windmills, solar panels and other means of alternate forms of energy. We need tens of millions of solar panels right now. And there is an eager and skilled workforce who can build them. 8. Provide tax incentives for those who travel by hybrid car or bus or train. Also, credits for those who convert their home to alternative energy. 9. To help pay for this, impose a two-dollar tax on every gallon of gasoline. This will get people to switch to more energy saving cars or to use the new rail lines and rail cars the former autoworkers have built for them. Well, that's a start. Please, please, please don't save GM so that a smaller version of it will simply do nothing more than build Chevys or Cadillacs. This is not a long-term solution. Don't throw bad money into a company whose tailpipe is malfunctioning, causing a strange odor to fill the car. 100 years ago this year, the founders of General Motors convinced the world to give up their horses and saddles and buggy whips to try a new form of transportation. Now it is time for us to say goodbye to the internal combustion engine. It seemed to serve us well for so long. We enjoyed the car hops at the A&W. We made out in the front -- and the back -- seat. We watched movies on large outdoor screens, went to the races at NASCAR tracks across the country, and saw the Pacific Ocean for the first time through the window down Hwy. 1. And now it's over. It's a new day and a new century. The President -- and the UAW -- must seize this moment and create a big batch of lemonade from this very sour and sad lemon. Yesterday, the last surviving person from the Titanic disaster passed away. She escaped certain death that night and went on to live another 97 years. So can we survive our own Titanic in all the Flint Michigans of this country. 60% of GM is ours. I think we can do a better job. Yours, Michael Moore MMFlint@aol.com MichaelMoore.com Labels: bailout, bankruptcy, General Motors, Michael Moore, UAW Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Congress's Afterthought, Wall Street's Trillion DollarsFrom Saturday's Washington Post. One premise of the article is that this law is enough to make the Fed's actions legal—are we sure this is the case? And the off-the-balance-sheet obligations dwarf the $1 trillion anyhow.Fed's Bailout Authority Sat Unused Since 1991 By Binyamin Appelbaum and Neil Irwin Washington Post Staff Writers Saturday, May 30, 2009 On the day before Thanksgiving in 1991, the U.S. Senate voted to vastly expand the emergency powers of the Federal Reserve. Almost no one noticed. The critical language was contained in a single, somewhat inscrutable sentence, and the only public explanation was offered during a final debate that began with a reminder that senators had airplanes to catch. Yet, in removing a long-standing prohibition on loans that supported financial speculation, the provision effectively allowed the Fed for the first time to lend money to Wall Street during a crisis. That authority, which sat unused for more than 16 years, now provides the legal basis for the Fed's unprecedented efforts to rescue the financial system. Since March 2008, the central bank's board of governors has invoked its emergency powers at least 19 times: to contain the wreckage of Bear Stearns and ease the fall of American International Group, to preserve Goldman Sachs and Morgan Stanley, to limit losses at Bank of America and Citigroup, to lend more than $1 trillion. The repeated use of the once-dusty law has surprised and alarmed a wide range of people, including economists and members of Congress. It has even raised worries among presidents of the regional banks that make up the Federal Reserve system. Many critics are concerned that an institution not accountable to voters is risking vast amounts of public money and choosing which companies get help. Others are concerned that the Fed's new role will interfere with its basic responsibility for regulating economic growth. There is also a question about the roots of the crisis: Did investment banks take greater risks in the past two decades because they knew the Fed could rescue them? The 1991 legislation, authored by Sen. Christopher J. Dodd (D-Conn.), was requested by Goldman Sachs and other Wall Street firms in the wake of the 1987 market crisis, and it would save some of them a generation later. Fed Chairman Ben S. Bernanke and other leaders of the central bank have argued that the emergency authority has allowed it to rescue the financial system and that without it, the economy would be in far worse shape. And they argue that they are using the power as Congress intended. "This provision was designed as a last resort to make sure credit flows when times are tough and credit isn't being extended," said Scott Alvarez, the Fed's general counsel. "That's exactly what it's being used for today." Read the rest of the article. Labels: bailout, Christopher Dodd, financial crisis, Goldman Sachs, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street Digs InGood online piece from Newsweek from a while ago (April 10th). The subtitle is confusing, though: clearly Obama is getting the message (from Wall St.)!Wall Street Digs In The old system refuses to change. Is Obama getting the message? Michael Hirsh | Newsweek Web Exclusive Not long ago, a group of skeptical Democratic senators met at the White House with President Obama, his chief economic adviser, Larry Summers, and Treasury Secretary Tim Geithner. The six senators—most of them centrists, joined by one left-leaning independent, Vermont's Bernie Sanders—said that while they supported Obama, they were worried. The financial reform policies the president was pursuing were not going far enough, they told him, and the people Obama was choosing as his regulators were not going to change things fundamentally enough. His appointed officials and nominees were products of the very system that brought us all this economic grief; they would tinker with the system but in the end leave Wall Street, and its practices, mostly intact, the senators suggested politely. In addition to Sanders, the senators at the meeting were Maria Cantwell, Byron Dorgan, Dianne Feinstein, Carl Levin and Jim Webb. That March 23 gathering, the details of which have gone largely unreported until now, was just a minor flare-up in a larger battle for the future—one that may already be lost. With the financial markets seeming to stabilize in recent weeks, major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression. At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it's very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month. The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash. Geithner's financial regulation plan, announced April 2, does address some of these concerns. The Treasury chief wants all standardized over-the-counter trading of derivatives to go through an industry clearinghouse, which will give the government more oversight. Geithner said he wants to require "systemically important" firms to reserve more capital. He also wants to rein in "customized" derivatives contracts—those agreed to privately between firms. Whereas once these trades went totally unregulated, Geithner would require that they be "reported to trade repositories and be subject to robust standards" for documenting and collateralizing, among other new rules. But it's unlikely this will do much to change Wall Street. Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges. The response favored by the administration, the Federal Reserve and even many in Congress is to create a new all-knowing "systemic risk regulator" with as-yet-undetermined powers. Is such a person sitting at 30,000 feet really going to be able to keep up with all this onrushing complexity, especially as over-the-counter trading resumes in quiet places around the world? It is a triumph of hope over experience to think so. Meanwhile, up in Manhattan, the New York Fed has been conducting meetings on future regulation with a group of major Street insiders and their traditional regulators. At the most recent meeting, on April 1, they agreed on creating central clearinghouses for trading and "trade-information warehouses" that will track market data far better than before. But they have resisted anything more dramatic, like requiring all trading to occur on publicly recognized exchanges. Geithner has also put his stock in clearinghouses; he says he only wants to "encourage greater use of exchange-traded instruments." That has placed Geithner at odds with another Democratic senator, Tom Harkin of Iowa, chair of the agriculture committee, who wants all futures contracts traded on exchange. "The senator feels that what he's offering in his bill does include more integrity and transparency than the current Geithner plan," a Harkin spokesman told me. Officials at the firms who took part in the New York Fed meeting and at the Fed maintain that there is little difference between clearinghouses and formal exchanges; both are regulated and both are industry-run, they say. But that misses a major point, says Michael Greenberger, a former top official at the Commodity Futures Trading Commission who has been a critic of the administration's reform efforts. Exchange trading gives the government authority over fraud and manipulation and emergency powers to stop trading, he says, and it creates the kind of public transparency that isn't possible in a privately run clearinghouse. The White House and Treasury Department did not immediately respond to my requests for comment on these issues or on the March 23 meeting (beyond confirming that it took place). But it's noteworthy that more than a month and a half passed before Obama agreed to the meeting, which was prompted by a letter that Dorgan sent in early February. The senators were invited after one of the group, Sanders, put a hold on the nomination of Gary Gensler, Obama's nominee to be head of the Commodity Futures Trading Commission. In an interview, Sanders said he opposes the nomination because Gensler has spent much of his career in Washington working for Wall Street's interests. Gensler, in testimony, has said he has learned from his past mistakes. "At this moment in our history, we need an independent leader who will help create a new culture in the financial marketplace," Sanders said. Instead, the old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show. Among the outsiders is Nassim Nicholas Taleb, the trader and professor who wrote "The Black Swan: The Impact of the Highly Improbable." Taleb wrote in the Financial Times this week that a fundamental new approach is needed. Not only should firms be prevented from growing too big to fail, "complex derivatives need to be banned because nobody understands them and few are rational enough to know it," he said. Yet even as we are still picking up the debris, we seem to be ready to embrace that world once again. Read the original article. Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Timothy Geithner, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Big Corps Using Bailout Bucks For LobbyingIt's the best game in town. Get taxpayer bailout billions and spend some of the spare cash on lobbyists to press Congressional Reps and Senators into giving more money and ending onerous conditions like limiting executive compensation.There oughta be a law... --df From the Washington Post: Major recipients of federal bailout money spent more than $10 million to lobby lawmakers in the first three months of 2009, including arguing against pay limits for corporate executives, according to newly filed disclosure records. Labels: bailout, Citigroup, Daniel Fireside, financial crisis bailout, General Motors, JP Morgan Chase, lobbyists, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fox *Outraged* by Frat-Boy Tea HumorOk, so I am not sure we have ever linked to Fox News, and this is a little juvenile, but hey, Doug Henwood posted it at lbo-talk. My three favorite bits: (1) The author sniggers about "teabagging," but then expresses fake scorn for "frat house humor." Meanwhile, I know about teabagging from a highly reputable source: John Waters' fabulous movie Pecker (a must see--Edward Furlong, Christina Ricci, Mary Kay Place, Lili Taylor, Mink Stole, Patricia Hearst, etc.). (2)This quote: "I think what that reveals is how worried they are that this might actually be something serious. You make fun of things you're afraid of, I'd say." (3) The spectacle of Anderson Cooper talking about teabagging with a straight face.Incidentally, I saw some of the teabagger folks on the Blue Line in Boston on Wednesday (I was on my way back to East Boston; they were, I'm guessing, coming back from Fanieuil Hall or the U.S.S. Constitution or something). They looked like nice folks. Anyhow, here's the whole article; or you can read it below. (N.B.: the link below, Click here to join a discussion on teabagging, was actually part of the FoxNews.com story. If you click on it, you will go to their site, which you might not want to. The comments in the "forum" on teabagging are actually pretty amusing, though.) Cable Anchors, Guests Use Tea Parties as Platform for Frat House Humor --CS Labels: Anderson Cooper, bailout, Chris Sturr, financial crisis, Fox News, taxes Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More on AIG Bailout and Goldman's EarningsSent in by our long-lost collective member Faisal Chaudhry:Fresh on the heels of the euphoria in the financial press about Goldman Sachs reported first quarter earnings of $1.66 billion, a recent entry on our blog (Questions About Goldman's Great Quarter) asked how much of the current profit is a result of Goldman's getting full payment for its previous financial bets from AIG. While the answer is not clear yet (and likely will remain so), the Monday edition of Bloomberg's "On the Economy" radio program with Tom Keene and Pim Fox (access the audio here) provided a fascinating look into what Wall Street's take on the matter is. The passage from nonplussed nonchalance to equivocating chagrinned concession that Gary Townsend of Hill Townsend Capital undertakes in the space of two plus minutes is priceless for what it reveals about how these questions are regarded, parsed, and set aside by the lords of finance. (Jump to the 11m 6 sec mark .) With a barely subdued glow, Townsend's monotone first points to Goldman's go getter attitude in proposing to use the newfound confidence it has earned in the eyes of the market by rolling up its sleeves and raising $5 billion in equity through sales of its shares in order to "unpartner" itself from its pesky and "unhappy" TARP-induced relationship with the government. He next lodges his "personal" opinion that the companies "who were not particularly interested in accepting the TARP" funds should not be faced now with any restrictions whatsoever on when they can repay the bailout money and "get out" of said pesky relationship. When faced with the obvious next question from Fox about whether Goldman's first quarter would have been as good as they were had it not taken the TARP money it supposedly "never wanted" in the first place, Townsend's swagger starts fading as he lunges towards evasion by highlighting the "additional expense" from the preferred dividend that Goldman has had to pay out to the government already and that has "presumably, worsened the [first] quarter [earnings]" now being reported already. As if it wasn't curious enough to be apparently unable to parse the type of catastrophic cost Goldman's bottom line might have suffered had the "unwanted" bailout money never been poured into its coffers in the first place, things only get worse when Fox asks Townsend what role the credit default swaps paid out during the quarter to Goldman by AIG (via the "unwanted" moneys the government foisted upon that company) played in the $1.6 billion first quarter. You can hear Townsend start folding under the weight of his own inconsistencies (at the 12m30sec mark) after he is left little choice but to concede that the answer to the "very interesting question" he first suggests awaits more data must certainly be in the affirmative. As he grudgingly concedes "what seems to have happened is that the Government is fulfilling the obligation to Goldman and others on the other side of the CDS's" . Alas, he must let drop that "indeed, the government has provided that value [of the AIG bailout] to Goldman." He is sure, however, to ask rhetorically before closing "[but] isn't that rather obvious?". It would seem that a mere two minutes earlier, of course, it was not, at least, to Townsend's mind. As for Wall Street's collective mind, we won't hold our breath. --FC Labels: AIG, bailout, Bloomberg, Faisal Chaudhry, Goldman Sachs, TARP program, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On Events in ThailandThe Financial Times has a tolerable opinion leader (never mind the idiotic title) today on the dividing lines in big, pivotal Thailand:Thailand's slide into mob rule Published: April 14 2009 19:45 | Last updated: April 14 2009 19:45 Ever since the autumn 2006 coup that deposed populist prime minister Thaksin Shinawatra, Thailand has given every impression of having succumbed to mob rule, an impression only somewhat relieved by putting a young Eton- and Oxford-educated premier, Abhisit Vejjajiva, at the front of the house. Events like last weekend's cancellation of an Asean summit, with leaders such as China's Wen Jiabao evacuated as "red shirts" protesters loyal to Mr Thaksin overran the coastal venue of Pattaya, are beginning to paint Thailand in the colours of a banana republic. Before that, of course, Thailand ran through a brace of Thaksin proxy leaders, toppled by "yellow shirts" royalists who brought the country and the economy to a standstill under the indulgent eyes of the police and the army. At the root of this now chronic instability is the complete inability of Thailand's ruling class to come to terms with the political implications of Mr Thaksin's constituency. Read the rest of the piece And LBO talk has this link to reports on the demos themselves Labels: Abhisit Vejjajiva, bailout, Class, financial crisis, Financial Times, King Bhumibol, LBO Talk, Thailand, Thaksin Shinawatra Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China Reduces US Dollar Reserves In FebruaryIt's hard to tell how significant or durable an occurence this is, but it certainly deserves close attention. From Brad Setser's fine blog, Follow the Money:China Reduced Its Dollar Holdings in FebruaryPosted on Wednesday, April 15th, 2009 by bsetser It is a good thing the US trade deficit has come down, because foreign demand for US financial assets--actually foreign demand for US assets other than short-term Treasury bills--has dried up. Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia's central bank) bought close to $14 billion. Private investors--seemingly Japanese private investors--also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn't buy much of anything. And Americans also didn’t buy many foreign assets.* After Keith Bradsher's New York Times article, though, all eyes are on China. In February, China bought Treasuries. $4.64b by my count. It bought $5.61b of bills, while reducing its long-term Treasury holdings by $0.96 billion. But China also reduced its US bank deposits by $17.24 billion. Consequently, by my count, China's total US holdings fell by $13 billion. Short-term claims fell by $11.3b, and long-term claims fell by $2b. The data on China’s short-term claims can be found here. Is this the beginning of the end? Has China decided to stop buying US assets? Read the rest of the post Labels: bailout, Brad Setser, China, dollar, financial crisis, Monetary Policy, trade deficit, Treasury bonds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Consumer Prices Fall Despite Stimulus, PPIPIt's energy and food prices to a big extent, which is good, but even the whiff of deflation is precisely what scares the bejeezus out of policymakers. Coupled with an industrial production drop (about which, more below), and yesterday's retail sales figures, the spectre can not be dismissed out of hand. From Bloomberg:U.S. Economy: Consumer Prices, Industrial Production Decline By Shobhana Chandra and Courtney Schlisserman April 15 (Bloomberg) Consumer prices posted their first annual decline since 1955 and unused American manufacturing capacity reached a record, alleviating concern that Federal Reserve actions will cause inflation to soar. The consumer price index fell 0.4 percent in March from a year before, and 0.1 percent from the previous month, the Labor Department said in Washington. Output at factories, mines and utilities dropped 1.5 percent last month, when the share of industrial capacity in use slid to 69.3 percent, the Fed said. Today's figures signal deflation, or prolonged price declines, is the bigger danger, and underscores Fed Chairman Ben S. Bernanke’s call for inflation to remain "quite low for some time." The Fed's record injections of cash into the economy have spurred warnings from some economists, including central bank historian Allan Meltzer, that consumer prices will surge. "The more slack there is in the system, the longer it will take for inflation to become a concern," said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc. in New York. "Production data look terrible. Things do not look good and this means the dramatic pace of layoffs we've been seeing in manufacturing for the last several months is likely to continue." A Fed survey today also showed that manufacturing in the New York area contracted in April less than forecast, an indication some businesses have adjusted to the economy's lower level of demand, analysts said. The Fed Bank of New York's general economic index rose to minus 14.7 from minus 38.2 the prior month, when the so-called Empire State index reached its lowest level since data began in 2001. Dollar Rallies Stocks and Treasuries were little changed, while the dollar rallied against the euro on demand for the U.S. currency as a haven amid concerns about the global economic outlook. The Standard & Poor's 500 Stock Index was at 838.52 at 11:12 a.m. in New York, benchmark 10-year note yields were at 2.77 percent and the dollar rose 0.6 percent to $1.3182 per euro. Foreign demand for Treasuries spurred a net inflow of long-term international capital into the U.S. in February, government figures showed. The Treasury said net purchases of long-term equities, notes and bonds totaled $22 billion, compared with selling of $36.8 billion in January. Net foreign purchases of Treasury notes and bonds were 21.6 billion in February compared with purchases of $10.7 million a month earlier. Forecast to Rise Consumer prices were projected to rise 0.1 percent, according to the median estimate of 75 economists surveyed. Forecasts ranged from a drop of 0.3 percent to a gain of 0.5 percent. Companies from General Motors Corp. to Macy's Inc. are using incentives and promotions to draw customers as Americans contend with the biggest job losses in the post World War II era and shrinking wealth. "We're in a very deep global recession that's going to hold prices down," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts, who accurately forecast the drop in CPI. "Deflation is still something that's a risk, though I don't think we'll get into a deflationary spiral." Declining food and fuel costs brought overall prices lower. Energy costs dropped 3 percent, led by decreases in fuel oil and gasoline. Food expenses dropped 0.1 percent on lower costs for dairy and meat products. Inflation, Deflation Some economists argue disinflation could lead to outright deflation, which erodes profits, makes debts harder to repay and delays purchases by consumers and companies. Others caution that in the longer term, the unprecedented fiscal stimulus and the Fed's policy of buying more assets and pumping money into the financial system will reignite inflation. The cost of new cars rose 0.6 percent in March, the Labor report showed, even as automakers boosted discounts. Incentive spending by automakers jumped 30 percent in March from a year earlier to a record average $3,169, according to research firm Edmunds.com, helping to boost sales. The decline in industrial production was led by decreases in consumer goods, including furniture and electronics, and by business equipment such as computers and communications gear. "Businesses look like they are still quite uncertain about the outlook for the economy," said Zach Pandl, an economist at Nomura Securities International in New York. "These production cuts are still necessary because inventories are still bloated." Intel Corp.'s Chief Executive Officer Paul Otellini yesterday said his company still faces a "fragile global economic environment." Sales of personal-computer processors likely bottomed out in the first quarter after manufacturers worked through their stockpiles of parts, Otellini said. While the worst of the slump is "probably now behind us," the world's biggest chipmaker isn't ready to predict growth this quarter, he said. Labels: bailout, CPI, deflation, financial crisis, industrial production, monetary pilicy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Poor Retail Sales Counters Optimism on BanksFrom Reuters:Retail sales show recession far from bottom Tue Apr 14, 2009 1:42pm EDT By Lucia Mutikani WASHINGTON (Reuters) Sales at U.S. retailers unexpectedly fell 1.1 percent in March after rising for two straight months, government data showed on Tuesday, dimming hopes the 16-month-old recession was close to hitting bottom. A separate report showed prices received by U.S. producers fell a surprising 1.2 percent last month, underscoring the economy's weakness and lack of pricing power. Despite the weak March sales data, economists said consumer spending likely rebounded in the first quarter, which could mean gross domestic product fell less steeply than the 6.3 percent annual rate recorded in the last three months of 2008. Federal Reserve Chairman Ben Bernanke, meanwhile, said figures released in the last few weeks on housing and consumer spending suggest signs of improvement. "Recently we have seen tentative signs that the sharp decline in economic activity may be slowing. A leveling out of economic activity is the first step toward recovery," Bernanke said in remarks prepared for delivery later on Tuesday. Read the rest of the article Labels: bailout, Ben Bernanke, financial crisis, retail Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). China To TIGHTEN CreditThey did this in the run-up to the crash, too. And were blamed for it then. Article contains a distressing picture of China's real estate market from one of Chiona's chief economists, which would pour some cold water on hopes that China's stimulus program can create, rather quickly, demand on the scale required to put a serious dent in trade and currency imbalances. From The Financial Times:Beijing to tighten controls on credit By Kathrin Hille and Jamil Anderlini in Beijing Published: April 12 2009 16:43 China's central bank on Sunday warned it planned to "strictly control" credit to some sectors of the economy after the country recorded a record surge in bank loans and money supply in March. The central bank's statement, made after a routine quarterly monetary policy meeting, followed the release on Saturday of the money supply data. The data appeared to confirm that Beijing's stimulus measures are revitalising the domestic economy but raised credit risk and inflation concerns. Read the rest of the article Labels: bailout, China, financial crisis, Monetary Policy, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 'Bailout Funds' to 'Allow' Main Street to InvestYesterday's New York Times had this article about the Obama administration's proposal to have mutual-fund-style "bailout funds" that ordinary mom-and-pop investors can buy into:U.S. May Enlist Small Investors in Bank Bailout The fantastic Mike Prokosch responded with this letter to the Times (who knows whether they'll print it): To the editor: Labels: bailout, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Taxpayers On the Hook For Up To $10.9 TrillionAlthough the final bill will probably be less, Reuters has pulled together all the current and potential (i.e. authorized but not enacted) bailout liabilities so far. The amounts for most items are the total that the taxpayers would be on the hook for if the loans completely failed, which is unlikely. But hey, that's what they used to say about Bear Stearns collapsing.Original link is here. April 7 (Reuters) - The U.S. government has launched an Labels: bailout, financial crisis bailout, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Elizabeth Warren on TARP on YouTubeLabels: bailout, Elizabeth Warren, financial crisis, PPiP, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Insolvent Banks and Imaginary Firesale?An interesting article on an interesting academic paper, and at least one blog post expressing reservations about the paper's conclusions. First, the article (I like "crap assets" as an alternative to "toxic assets": far preferable to the ridiculous "legacy assets"):Geithner Wrong, Crap Assets Correctly Priced, Say Harvard And Princeton Profs Next, the interesting paragraphs from the academic paper (which appears to be online only in pdf form--I had to do some reformatting/retyping; this might be the first place where a good chunk of it appears in searchable html form, though I could be wrong): Policymakers are rapidly moving towards using TARP money to purchase toxic assets—primarily tranches of collateralized debt obligations (CDOs)—from banks, with the aim of supporting secondary markets and increasing bank lending. The key premise of current policies is that the prices for these assets have become artificially depressed by banks and other investors trying to unload their holdings in an illiquid market, such that they no longer reflect their true hold-to-maturity value. By purchasing or insuring a large quantity of bank assets, the government can restore liquidity to credit markets and solvency to the banking sector. Read the full paper. Finally, a sharply dissenting view from the blog Economics of Contempt; his point is that the paper's analysis is not of mortgage-backed securities, yet it claims to draw conclusions about them: The introduction states:On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products. The government's view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals. ... The main objective of this paper is to determine whether …fire sales are required to explain prices currently observed in credit markets. Read the full blog post (though I've given you most of it). The criticism seems sound, but what's interesting is the very suggestion that the "firesale" scenario is imaginary. If they are right (even if the blogger is right that their evidence doesn't support their conclusion), then the bailout represents a huge transfer of wealth from ordinary folks (I hate the term "taxpayers") to shareholders and bondholders. If anyone has a better grip on this than I do, please leave enlightening comments. Labels: bailout, financial crisis, PPiP, TALF, TARP program, Timothy Geithner, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama Econ Team's Flawed Cosmology (AHuff)From HuffPo:The Obama Economic Team's Flawed Cosmology: Still Believing the Universe Revolves Around the Banks Arianna Huffington | Posted April 6, 2009 | 10:10 PM (EST) A series of recent meetings with members of Barack Obama's economic team (including running into Larry Summers on my way to an appointment in the West Wing, leading to a spirited back-and-forth that made me feel like I was back at Cambridge, debating the smartest kid in the class), left me with a pair of indelible impressions: 1) These are all good people, many of them brilliant, working incredibly hard with the best of intentions to solve the country's financial crisis. 2) They are operating on the basis of an outdated cosmology that places banks at the center of the economic universe. Talking about our financial crisis with them is like beaming back to the 2nd century and discussing astronomy with Ptolemy. Just as Ptolemy was convinced we live in a geocentric universe -- and made the math work to "prove" his flawed theories -- Obama's senior economic team is convinced we live in a bank-centric universe, and keeps offering its versions of "epicycles" and "eccentric circles" to rationalize their approach to the bailout. And because, like Ptolemy, they are really smart, they are really good at rationalizing. It's easy to get lost debating the complexity of each new iteration of each new bailout, but the devil here is not in the details -- but in the obsolete cosmology. If you believe the universe is revolving around the earth -- when, in fact, it isn't -- all the good intentions in the world, and all the endless nights spent coming up with plans like Tim Geithner's Public-Private Investment Program will be for naught. The successive bailout plans have been frustrating to many observers (yours truly included), but when you realize how fully the economic team is mired in a bank-centric universe, all the moves suddenly make perfect sense. Here is one example. Everybody agrees on the paramount importance of freeing up credit for individuals and businesses. In a bank-centric universe, the solution was a bailout plan giving hundreds of billions to banks. It failed because, instead of using the money to make loans, the banks "are keeping it in the bank because their balance sheets had gotten so bad," as the president himself acknowledged on Jay Leno. As a result, the administration, again according to the president, had to "set up a securitized market for student loans and auto loans outside of the banking system" in order to "get credit flowing again." But think of all the time we wasted while the first scheme predictably failed. And how much better off we'd now be if we had provided credit directly through credit unions or small healthy community banks or, as happened during the Depression, through a new entity like the Reconstruction Finance Corporation. Luckily, there is a plethora of economic Galileos out there who recognize that the old bank-centric cosmology is just plain wrong. But while Joseph Stiglitz, Simon Johnson, Jeffrey Sachs, Nassim Taleb, Niall Ferguson, Paul Krugman, etc. are not being imprisoned for life for their heretical views -- they are also not being listened to. Which is really surprising for an administration that has prided itself on a "team of rivals" approach. Read the rest of the article. Labels: Arianna Huffington, bailout, banking crisis, Barack Obama, financial crisis, Galileo, Lawrence Summers, Ptolemy, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Elizabeth Warren: Sack Bank ExecsElizabeth Warren, who has been on top of this crisis since way back, is also calling for shareholders' equity to be wiped out. Too bad she's only the TARP watchdog and not in charge entirely. I like especially where she says she doesn't want to be too hard on Geithner, but essentially calls his approach "preposterous." We wish she'd say what she really thinks!US watchdog calls for bank executives to be sacked James Doran | Sunday 5 April 2009 Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse. Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees. Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said. She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous." The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out." Labels: bailout, Elizabeth Warren, financial crisis, TARP program, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). State-Owned Bank in ND Doing Just FineFrom Mother Jones. The comment section is worth reading; some debate about whether this is the only state-owned bank in the United States. (Doesn't the FDIC own many banks at any given time?) I weighed in, even though I am not so big on commenting on articles, just to contradict some guy who claimed that hedge funds never fail (he was arguing, preposterously, that over-regulation caused the banking crisis).How the Nation's Only State-Owned Bank Became the Envy of Wall Street By Josh Harkinson | Fri March 27, 2009 6:33 PM PST The Bank of North Dakota is the only state-owned bank in America—what Republicans might call an idiosyncratic bastion of socialism. It also earned a record profit last year even as its private-sector corollaries lost billions. To be sure, it owes some of its unusual success to North Dakota's well-insulated economy, which is heavy on agricultural staples and light on housing speculation. But that hasn't stopped out-of-state politicos from beating a path to chilly Bismarck in search of advice. Could opening state-owned banks across America get us out of the financial crisis? It certainly might help, says Ellen Brown, author of the book, Web of Debt, who writes that the Bank of North Dakota, with its $4 billion under management, has avoided the credit freeze by "creating its own credit, leading the nation in establishing state economic sovereignty." Mother Jones spoke with the Bank of North Dakota's president, Eric Hardmeyer. Mother Jones: How was the bank formed? Eric Hardmeyer: It was created 90 years ago, in 1919, as a populist movement swept the northern plains. Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets, the money markets maybe in Minneapolis, New York, deciding who got credit and how to market their goods. So it swept the northern plains. In North Dakota the movement was called the Nonpartisan League, and they actually took control of the legislature and created what was called an industrial program, which created both the Bank of North Dakota as a financing arm and a state-owned mill and elevator to market and buy the grain from the farmer. And we're both in existence today doing exactly what we were created for 90 years ago. Only we've morphed a little bit and found other niches and ways to promote the state of North Dakota. MJ: What makes your bank unique today? EH: Our funding model, our deposit model is really what is unique as the engine that drives that bank. And that is we are the depository for all state tax collections and fees. And so we have a captive deposit base, we pay a competitive rate to the state treasurer. And I would bet that that would be one of the most difficult things to wrestle away from the private sector—those opportunities to bid on public funds. But that's only one portion of it. We take those funds and then, really what separates us is that we plow those deposits back into the state of North Dakota in the form of loans. We invest back into the state in economic development type of activities. We grow our state through that mechanism. MJ: Clearly other banks also invest their deposits. Is the difference that you are investing a larger portion of that money into the state's own economy? EH: Yeah, absolutely. But we have specifically designed programs to spur certain elements of the economy. Whether it's agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education—we do a lot of student loan financing. So that's our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history. MJ: Are there areas that you invest in that other banks avoid? EH: We made the first federally-insured student loan in the country back in 1967. So that's been a big part of what we do. It's become almost a mission-critical thing. I don't know if you have been following the student loan industry lately, but it's been very, very interesting as many have decided to leave. We will not though. MJ: So you are able to invest in certain areas because they provide a public good. EH: Yeah, or a direction, whether it's energy or primary sector type of businesses. We have specific loan programs that are designed at very low interest rates to encourage activity along certain lines. Here's another thing: We're gearing up for a significant flood in one of the communities here in North Dakota called Fargo. We've experienced one of those in another community about 12 years ago which prior to Katrina was the largest single evacuation of any community in the United States. And so the Bank of North Dakota, once the flood had receded and there were business needs, we developed a disaster loan program to assist businesses. So we can move quite quickly to aid with different types of scenarios. Whether it's encouraging different economies to grow or dealing with a disaster. MJ: What do private banks think of you? EH: The interesting thing about the bank is we understand that we walk a fine line between competing and partnering with the private sector. We were designed and set up to partner with them and not compete with them. So most of the lending that we do is participatory in nature. It's originated by a local bank and we come in and participate in the loan and use some of our programs to share risk, buy down the interest rate. We even provide guarantees similar to SBA to encourage certain activity for entrepreneurial startups. Aside from that, we also act as a bankers' bank or a wholesale bank. So we provide services to banks, whether it's check clearing, liquidity, or bond accounting safekeeping. There's probably 20 other bankers' banks across the country. So we act in that capacity as kind of a little mini-fed actually. And so we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it's beyond their legal lending limit or they just want to share risk, we'll do that. We're a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy. MJ: So what's the advantage of a publicly owned "bankers' bank" instead of a privately owned one? EH: Our model is we use our deposit base to help [other banks] with funding their loans, even providing fed funds lines with our excess liquidity—we buy and sell fed funds and act as a clearinghouse for check clearing activity. That would be the benefit or different model. We're a depository bank and can bring that to bear. MJ: If other states had a bank like yours, do you think they would have been more insulated from the credit crisis? EH: It all gets down the management and management philosophy. We're a fairly conservative lot up here in the upper Midwest and we didn't do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don't understand it, we're not going to jump into it. And so we've avoided all those pitfalls. That's not to say that we're completely immune to everything, certainly we've bought some mortgage-backed securities and we're working through some of those issues, but nothing that would cause us to be concerned. Read the rest of the interview. Labels: bailout, bank nationalization, financial crisis, North Dakota Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WE20--The People's G20A press release; hat-tip to Abby S.WE20 - THE PEOPLE'S G20 we20, the people's answer to the G20 group of nations, today announces the launch of its website at we20.org, enabling individual people and groups anywhere in the world to host their own G20 summits and formulate plans for economic recovery. In the run-up to the London G20 summit - and amid fears of street violence as protestors vent their feelings on the global economy - we20 offers a refreshing alternative: large-scale community involvement in planning the world's economic revival. People visiting we20.org can organise their own meetings, in their own communities, to draw up action plans - local, national or international - to fix economies. We20 plans are voted on at we20.org and the top we20 plans have the chance of appearing on the official G20 London Summit website. Lord Malloch-Brown, the UK's Foreign Office G20 Minister, has given his encouragement and advice to we20 meetings through a YouTube video. we20's twitter, Facebook and LinkedIn Communities are growing fast, plans have already been submitted to we20.org from the UK and Sweden, and we20 meetings are pledged in USA, Australia, Sweden, Belgium, Germany, Sudan, Thailand, Nigeria and the UK, representing communities in the media industry, local government, students and healthcare workers. As the we20 movement grows, it's expected that thousands of we20 meetings will take place around the world through 2009, with a goal of the first thousand to take place by the end of April 09. The website at we20.org acts as a facilitator and hub for these meetings. Visitors to the site can find an existing meeting or set one up to discuss and agree on a local, national or global challenge, or to read and vote on plans from other we20 meetings. Each we20 user gets 20 votes to award to the best recovery plans. The organisers of we20 hope to help favourite we20 plans become future realities as we20 develops. The we20 concept was hatched on January 6 this year by a group of volunteers in London who want to help people through the recession. The site was then developed entirely by voluntary contributions to become the start of a resource which its organisers hope will grow to be a public engagement platform alongside the G20. As a body, we20 is independent and neutral. The plans proposed on the site belong to the groups which propose them. Paul Massey, an internet lawyer from London and one of the volunteers organising we20 in his spare time, says: "The we20 initiative is a neat idea to help people organise their own G20 meetings of up to 20 people. There is speculation about what the London G20 Summit will achieve but we've already seen we20 meetings produce some great action plans to fix the economy. we20 sees the G20 Summit as a rallying call for everyone to work together to pull ourselves out of this economic mess." He continues: "There's no restriction on the challenges addressed and the plans formulated by people's we20 meetings. They may be directed towards, local, national or global issues, from the IMF, World Bank or climate change to local economic issues such as redundancies, plans for local shops, sports teams or growers' initiatives. we20 is driven by volunteers and word of mouth, and we are constantly amazed by the support we are receiving from across the board." Part of the inspiration for we20 arose from Barack Obama's use of the internet, demonstrating how ordinary people can make change happen by connecting on the internet and then meeting face to face. Massey concludes: "After the G20 Summit, we20 will assess its impact in consultation with members, continue to encourage the implementation of we20 plans and work towards future goals including the Copenhagen Climate Change Summit. we20 hopes to strengthen the policies produced by the G20, ensure transparency and encourage good governance. Whatever comes out of the London G20 Summit, we20 looks set to stay as a force of community empowerment for the longer term." Labels: bailout, Barack Obama, financial crisis, G20, G20 summit, WE20 Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Trust Your Guts (Greider)Joe Nocera likes Geithner's new plan. William Greider, not so much. Here is an excerpt from his recent article in The Nation. Hat-tip to LF.Some points I recommend people consider: Read the full article. Labels: bailout, financial crisis, Joe Nocera, The Fed, William Greider Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Successful bank rescue still far away (Martin Wolf)Interesting piece by Martin Wolf of the Financial Times.By Martin Wolf | March 24 2009 19:24 I am becoming ever more worried. I never expected much from the Europeans or the Japanese. But I did expect the US, under a popular new president, to be more decisive than it has been. Instead, the Congress is indulging in a populist frenzy; and the administration is hoping for the best. If anybody doubts the dangers, they need only read the latest analysis from the International Monetary Fund. It expects world output to shrink by between 0.5 per cent and 1 per cent this year and the economies of the advanced countries to shrink by between 3 and 3.5 per cent. This is unquestionably the worst global economic crisis since the 1930s. One must judge plans for stimulating demand and rescuing banking systems against this grim background. Inevitably, the focus is on the US, epicentre of the crisis and the world's largest economy. But here explosive hostility to the financial sector has emerged. Congress is discussing penal retrospective taxation of bonuses not just for the sinking insurance giant, AIG, but for all recipients of government money under the troubled assets relief programme (Tarp) and Andrew Cuomo, New York State attorney-general, seeks to name recipients of bonuses at assisted companies. This, of course, is an invitation to a lynching. Yet it is clear why this is happening: the crisis has broken the American social contract: people were free to succeed and to fail, unassisted. Now, in the name of systemic risk, bail-outs have poured staggering sums into the failed institutions that brought the economy down. The congressional response is a disaster. If enacted these ideas would lead to an exodus of qualified employees from US banks, undermine willingness to expand credit, destroy confidence in deals struck with the government and threaten the rule of law. I presume legislators expect the president to save them from their folly. That such ideas can even be entertained is a clear sign of the rage that exists. This is also the background for the "public/private partnership investment programme" announced on Monday by the US Treasury secretary, Tim Geithner. In the Treasury's words, "using $75bn to $100bn in Tarp capital and capital from private investors, the public/private investment programme will generate $500bn in purchasing power to buy legacy assets—with the potential to expand to $1 trillion over time". Under the scheme, the government provides virtually all the finance and bears almost all the risk, but it uses the private sector to price the assets. In return, private investors obtain rewards—perhaps generous rewards—based on their performance, via equity participation, alongside the Treasury. I think of this as the "vulture fund relief scheme". But will it work? That depends on what one means by "work". This is not a true market mechanism, because the government is subsidising the risk-bearing. Prices may not prove low enough to entice buyers or high enough to satisfy sellers. Yet the scheme may improve the dire state of banks' trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody—certainly not the Treasury—thinks this scheme will end the chronic under-capitalisation of US finance. Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down. Read the rest of the article. Labels: bailout, financial crisis, Martin Wolf, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hey Paul Krugman (A Song, A Plea)Catchy tune from YouTube. Hat-tip to Bryan S.Labels: bailout, financial crisis, Paul Krugman, Timothy Geithner, YouTube Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). U.S. Seeks Expanded Power to Seize FirmsFrom the Washington Post. The plot thickens. Sure sounds to me like they're thinking Geithner's plan won't work and they'll have to nationalize after all. The "we've got to move quickly" line (2nd-to-last paragraph) is getting a little old.U.S. Seeks Expanded Power to Seize Firms Goal Is to Limit Risk to Broader Economy By Binyamin Appelbaum and David Cho Washington Post Staff Writers Tuesday, March 24, 2009; A01 The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document. The government at present has the authority to seize only banks. Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document. The administration plans to send legislation to Capitol Hill this week. Sources cautioned that the details, including the Treasury's role, are still in flux. Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers. The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy. The government also would assume the authority to seize such firms if they totter toward failure. Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit. The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan. Geithner plans to lay out the administration's broader strategy for overhauling financial regulation at another hearing on Thursday. The authority to seize non-bank financial firms has emerged as a priority for the administration after the failure of investment house Lehman Brothers, which was not a traditional bank, and the troubled rescue of AIG. "We're very late in doing this, but we've got to move quickly to try and do this because, again, it's a necessary thing for any government to have a broader range of tools for dealing with these kinds of things, so you can protect the economy from the kind of risks posed by institutions that get to the point where they're systemic," Geithner said last night at a forum held by the Wall Street Journal. The powers would parallel the government's existing authority over banks, which are exercised by banking regulatory agencies in conjunction with the Federal Deposit Insurance Corp. Geithner has cited that structure as the model for the government's plans. Labels: bailout, banking system, financial crisis, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Down the dark path (Delasantellis on Geithner)Hat-tip to Larry P. for this; he says "it's by far the best thing I've read on this travesty."I am in absolutely no possession of any historical evidence that 16th-century English jailers employed modern stand-up comedians to bring a bit of levity to their inheritantly bleak workspaces, but what if they had? What if, as the clock ticked down in the Tower of London before the execution of Sir Thomas More ordered by King Henry VIII in July 1535, a comic, in the style of the late Rodney Dangerfield, was brought in to do stand-up? "Hey, everybody looks great here. Anybody here Papists? Don't worry, your secret's safe with me—I haven't even paid the withholding tax on my foodtaster yet. I just flew in from the Isle of Man, and boy, are my arms tired—you know what I mean? Hey, prison guards! I never knew why they called you guys Beefeaters until I saw your wives outside the gates!" Turning to the condemned man. "Hey, Tommy, I got good news for you. You're not going to be drawn and quartered tomorrow." "Pray tell sir, do not jest!" "I'm serious. Big H's gonna cut your head off instead!" That's a little bit like the situation with the newly revealed, final US Treasury Secretary Timothy Geithner toxic asset recovery bank program. It may work. It may not. Whatever happens with its effectiveness, one thing is certain. US taxpayers are definitely going to be getting the chop, maybe you could even say they're getting it in the chops, as a result of its implementation and administration. Read the rest of the article. Labels: bailout, financial crisis, Henry VIII, Julian delasantellis, Rodney Dangerfield, Sir Thomas More, Timothy Geithner, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Market Up Krugman DownThe Dow Jones Industrials soared nearly 500 points today (about 6%) on news of the Geithner plan to buy up toxic bank assets. The stocks of troubled banks did particularly well, Citibank up 17%, Bank of America 18%, JPMorgan Chase up 18%, and Wells Fargo up 17%.As usual, if Wall Street is happy about a bailout plan, taxpayers should be worried. From Krugman: Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy - specifically, the "cash for trash" plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson. Read the rest of the column here. In short, it won't work, it will enrich private investors at public expense, and it will close the door to other solutions that could work. Labels: bailout, Dow Jones Industrial Average, financial crisis bailout, Paul Krugman, Timothy Geithner, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama Plans To Avoid Repeat of CrisisFrom Bloomberg:Obama to Outline Regulation Changes to Avoid Repeat of Crisis By Hans Nichols March 22 (Bloomberg) The Obama administration will this week outline regulatory changes aimed at avoiding a repeat of the financial crisis that's crippled the banking system and pushed the U.S. into the deepest recession since 1982. The proposals will address the risks that remain in financial regulation, an administration official said, including the need for an agency to have the power to resolve a breakdown at a major financial institution. Federal Reserve Chairman Ben S. Bernanke two weeks ago called for regulators to be given the authority to seize such firms, in the way the Federal Deposit Insurance Corp. already has for deposit-taking institutions. Officials favor giving the Fed greater responsibility for managing risk across the financial system as was proposed almost a year ago by former Treasury secretary Henry Paulson, support for which is waning in Congress. President Barack Obama may also subject executive pay to greater scrutiny, the New York Times reported. An administration official denied that curbing compensation will be a major focus of the regulatory plan. "There’s still a need for a systemic-risk regulator," Representative Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said on March 20. "The argument for the Fed alone has lost a lot of political support. I think that’s now got to be re-looked at." Treasury Secretary Timothy Geithner will testify before Frank's committee on March 26 as Obama prepares to travel to London for a summit of the Group of 20 industrial and developing nations. G-20 Summit Obama has said that the meeting must deal with how to prevent further crises like the current financial meltdown that began almost two years ago with the collapse of the market for subprime mortgages. American banks have suffered more than $800 billion in writedowns and credit losses since then. The credit contraction that followed dragged first the U.S., and then Europe and Japan, into recession. A surge in unemployment and collapse in house prices has added to bad loans and further discouraged banks from lending. The crisis also pushed the U.S. government into pouring hundreds of billions of dollars into financial institutions, including Citigroup Inc., Bank of America Corp. and American International Group Inc. Like the White House, Congress is trying to overhaul U.S. financial regulations and agencies that lawmakers have faulted for lax oversight. Frank, who is playing a lead role in the redesign, has been pushing to expand the Fed's authority. Read the rest of the article Labels: bailout, banking regulation, Barack Obama, barney frank, financial crisis, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Proposed Plan To Deal With Toxic AssetsFrom The Wall Street Journal:MARCH 21, 2009 U.S. Sets Plan for Toxic Assets Wall Street Journal By DEBORAH SOLOMON WASHINGTON -- The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance. But the framework, designed to expand existing programs and create new ones, relies heavily on participation from private-sector investors. They've been the target of a virulent anti-Wall Street backlash from Washington in the wake of the American International Group Inc. bonus furor. As a result, many investors have expressed concern about doing business with the government in this climate--potentially casting a cloud over the program's prospects. The administration plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road. The plan, which has been eagerly awaited by jittery investors, includes creating an entity, backed by the Federal Deposit Insurance Corp., to purchase and hold loans. In addition, the Treasury Department intends to expand a Federal Reserve facility to include older, so-called "legacy" assets. Currently, the program, known as the Term Asset-Backed Securities Loan Facility, or TALF, was set up to buy newly issued securities backing all manner of consumer and small-business loans. But some of the most toxic assets are securities created in 2005 and 2006, which the TALF will now be able to absorb. Finally, the government is moving ahead with plans, sketched out by Treasury Secretary Timothy Geithner last month, to establish public-private investment funds to purchase mortgage-backed and other securities. These funds would be run by private investment managers but be financed with a combination of private money and capital from the government, which would share in any profit or loss. All told, the three efforts are designed to unglue markets that have seized up as investors have stood on the sidelines. One big problem is that many of these assets no longer trade, which means it's very hard to put a price on them. Banks are unwilling to sell at too low a price, and investors are unwilling to take the risk. Read the rest of the article Labels: bailout, financial crisis, TALF, Timothy Geithner, toxic assets, US Treasury Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). RBoS To Become UK's Enron?From The Observer:RBS faces probe over 'threats' to directors Peer's criminal inquiry warning on bank Toby Helm and Jamie Doward The Observer, Sunday 22 March 2009 The scandal engulfing the Royal Bank of Scotland reaches new heights today with serious allegations from a senior Labour politician that at least three of its former non-executive directors may have been intimidated and threatened with the sack for asking searching questions about its financial affairs. The Observer can reveal that a former government minister, Lord Foulkes of Cumnock, who has been extensively briefed by former bank insiders, has written to the Financial Services Authority, the City watchdog, asking it to pursue the claims which, if true, could trigger a criminal investigation. The intervention by Foulkes, who is also a member of the Scottish parliament and sits on the Commons security and intelligence committee, comes amid fears that the bank will be exposed as the UK's equivalent of Enron--the US trader that collapsed amid systemic fraud. Last night Foulkes said there was "widespread public anger among the public and Parliament that bankers in the midst of this financial crisis appear to be profiting and no action is being taken in relation to action which could constitute criminal offences". In relation to claims of intimidation, Foulkes said: "If it were to transpire that executives were pressured in such a way, then that is a most serious matter indeed that needs urgent action." Read the rest of the article Labels: bailout, financial crisis, Labour Party, Royal Bank of Scotland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The People's Agenda (NYC event)Linda Pinkow and I (Chris Sturr) have been out in Amherst, Mass. for the Forum on the Solidarity Economy, which has been great, and inspiring. It has been great to see lots of comrades and meet new ones. We will aim to blog about it more extensively early this week.Below is an announcement for an event to be held next week. One or the other of the hosts of this event, Mimi Rosenberg and Ken Nash (hosts of Building Bridges on WBAI) will be part of the panel we have put together for this year's Left Forum, along with one or the other of the D&S co-editors (me or Amy Gluckman), Jerry Friedman (UMass-Amherst economist and D&S author, with whom we had a great chat over coffee yesterday), and Cecilia Rio, of Towson University and the Center for Popular Economics. But here's that annoucement—looks like a great event: WBAI Radio and the New York Society for Ethical Culture present The People’s Agenda: Working For An Economy By The People, For The People! Produced by WBAI’s Building Bridges: Your Community and Labor Report Hosted by Mimi Rosenberg and Ken Nash Wednesday, April 1, 2009, 7:00 – 9:30 PM (doors open at 6:30pm) NY Society for Ethical Culture, 2 W. 64th St (at Central Park West) An examination of the present crisis of capitalism and peoples’ demands that the road to economic recovery lies in directly increasing their living standard and abandoning trickle down economics. In the words of Rev. Martin Luther King Jr. who gave his life fighting for the rights of the Memphis sanitation workers and for a poor people’s movement for economic rights, "A true revolution of values will soon look uneasily on the glaring contrast of poverty and wealth…and say: 'This is not just.'" The program (partial list): . Ajamu Sankofa, Private Health Insurance Must Go Coalition . Lillian Roberts, Ex. Dir. DC 37, American Federation of State County & Municipal Employees (AFSCME) . video message from U.S. Representative Dennis Kucinich . Dean Baker, Co-Director, Center for Economic and Policy Research; author of Plunder and Blunder: The Rise and Fall of the Bubble Economy . Stanley Aronowitz, Prof. of Sociology, & Urban Education, CUNY Graduate Center; author of Left Turn: Forging a New Political Future ; University Wide Officer, Professional Staff Congress, AFT . Representatives of the April 3 and 4 marches on Wall Street Coalitions . presenters from housing and community service coalitions Suggested donation $10, (no one will be turned away) To Benefit for WBAI and the NY Society for Ethical Culture Further information: buildingbridgesradio--at--gmail.com Labels: bailout, Center for Popular Economics, financial crisis, Left Forum, WBAI Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Virtues of Public Anger, and Need for More Great piece by Glenn Greenwald at Salon.com; hat-tip to Ben C. Ben wrote me: "This article is pretty damn good. I predict that your proposed new title for D&S, 'Jump You Fuckers,' will be conventional wisdom by Sept/Oct." The virtues of public anger and the need for more Glenn Greenwald | Salon | Saturday March 21, 2009 09:08 EDT With lightning speed and lockstep unanimity, opinion-making elites jointly embraced and are now delivering the same message about the public rage triggered this week by the AIG bonus scandal: This scandal is insignificant. It's just a distraction. And, most important of all, public anger is unhelpful and must be contained or, failing that, ignored. This anti-anger consensus among our political elites is exactly wrong. The public rage we're finally seeing is long, long overdue, and appears to be the only force with both the ability and will to impose meaningful checks on continued kleptocratic pillaging and deep-seated corruption in virtually every branch of our establishment institutions. The worst possible thing that could happen now is for this collective rage to subside and for the public to return to its long-standing state of blissful ignorance over what the establishment is actually doing. It makes perfect sense that those who are satisfied with the prevailing order -- because it rewards them in numerous ways -- are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It's a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites -- the Experts -- to work in peace on our pressing problems, undisrupted and "undistracted" by the need to placate primitive public sentiments. While that framework is arguably reasonable where the establishment class is competent, honest, and restrained, what we have had -- and have -- is exactly the opposite: a political class and financial elite that is rotted to the core and running amok. We've had far too little public rage given the magnitude of this rot, not an excess of rage. What has been missing more than anything else is this: fear on the part of the political and financial class of the public which they have been systematically defrauding and destroying. * * * * * These endless lectures from sober, rational pundits about the relative quantitative insignificance of the AIG bonuses are condescending straw men. Nobody thinks that $165 million in bonuses for the people who destroyed AIG is what has caused the financial crisis. Nobody thinks that recouping those bonuses or having prevented them in the first place would solve or even mitigate systemic collapse. The amounts are miniscule in the context of the broader economic issues. Everyone is aware of that; nobody needs to have that pointed out. As Armando astutely observed, the attempt now to dismiss the anger over the AIG bonuses as the by-product of simple-minded ignorance and/or ideological rigidity (class warfare! crass populism!) is quite similar to how anti-war arguments were stigmatized before the attack on Iraq : ignore the screeching pacifists and let the sober Experts make the decisions, for they know best. The AIG scandal is significant and has resonated so powerfully because it is a microscope that enables the public to see what and who has wreaked the destruction that threatens their security and future and, most important of all, to realize that these practices haven't ended and the perpetrators haven't been punished. The opposite is true: those who caused the crisis continue to exert control over what happens and continue to have huge amounts of public money transferred in order to enrich them. Eliot Spitzer is absolutely right that, even at AIG, there are far larger scandals than the bonuses, such as the undiscounted compensation of AIG's counter-parties such as Goldman Sachs (and just by the way: it is indescribably symbolic that Spitzer has been punished and disgraced for his acts of consensual adult sex while the targets of his prescient Wall St. investigations, who basically destroyed the world economy, remain protected and empowered). But the bonus scandal is illustrative of why the crisis happened, who caused it to happen, and the ongoing political dominance of the perpetrators. It is, as Robert Reich put it, "a nightmarish metaphor for the Obama Administration's problems administering the bailout of Wall Street." The financial crisis has merely unmasked the corruption and rot in our establishment institutions that are staggering in magnitude and reach. Just as the Iraq War was not the by-product of wrongdoing by a few stray bad political and media actors but instead was reflective of our broken institutions generally, the financial crisis is a fundamental indictment on the way the country functions and of its ruling class. What would be unhealthy is if there weren't substantial amounts of public rage in the face of these revelations. Read the rest of the article. Labels: AIG, anger, bailout, financial crisis, Glenn Greenwald, populism, ruling class, Timothy Geithner, Wall Street, Wall Street bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Krugman: The Zombies Have WonGeithner's plan has been announced. Late on a Friday when nobody will notice, right? Never a good sign.Basically, it's heads the banks win, tails we lose. Actually, heads we lose too. From Paul Krugman's blog: The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting - a couple of weeks ago. The zombie ideas have won. And from Yves Smith: If the money committed to this program is less than the book value of the assets the banks want to unload (or the banks are worried about that possibility), the banks have an incentive to try to ditch their worst dreck first. Rest of Smith's analysis here. Labels: bailout, financial crisis bailout, Timothy Geithner, toxic assets, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bailout Firms Owe $220 Million In Unpaid TaxesFrom the Washington Post:
Full article here. Labels: bailout, financial crisis bailout, Henry Paulson, John Lewis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why Are AIG INVESTORS Getting Billions?Before he went down for, ahem, going down, Eliot Spitzer was the guy Wall Street feared most. He's worth listening to.From Salon.com The Real AIG Scandal Rest of article here. Labels: AIG, bailout, Bank of America, Barclay's Bank, Deutsche Bank, Eliot Sptizer, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, UBS, Wall Street bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fed Spends Another $1.2 Trillion On BailoutAnother trillion plus to lower mortgage rates? Is this really supposed to help anything?From the Washington Post: The Federal Reserve said today that it will deploy an additional $1.2 trillion to try to lower interest rates and stimulate the economy, an aggressive move aimed at containing the recession. Labels: bailout, bond market, Fannie Mae, Federal Reserve, financial crisis bailout, Freddie Mac, mortgage backed securities, Treasury bonds, US Treasury Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG, Labor, and the Sanctity of ContractsToday's main columnist in the New York Times business section, Andrew Ross Sorkin, echoes the comments Larry Summers made on TV this weekend with regard to the AIG bonuses and the sanctity of contracts. Sorkin quotes Obama: "[The issue of AIG bonuses] isn't just a matter of dollars and cents. It's about our fundamental values." Sorkin goes on:On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the "fundamental value" in question here is the sanctity of contracts. Sorkin frets about whether government "abrogating contracts left and right" would lead companies to break contracts willy nilly. But it's more about the government, and companies, breaking contracts left, but not right. As Ali Frick points out at Think Progress, companies already seize opportunities to break inconvenient contracts—with unions. And the government, egged on by the right-wing, encouraged them to do so: Yesterday on ABC's This Week, Larry Summers, head of President Obama's National Economic Council, called insurance giant AIG's plan to pay out $165 million in bonuses "outrageous" but insisted there was little the government could do about it. This despite the $170 billion in taxpayer funds that have been given to AIG. Summers cited the sanctity of contracts:SUMMERS: We are a country of law. There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system. Labels: AIG, auto industry, bailout, contracts, financial crisis, larry Summers, unions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Treasury Lacks Oversight Of Bailout BillionsCongressional investigators have discovered that some of the largest banks receiving U.S. taxpayer bailout funds have been lending billions of dollars overseas.Among the findings, Citigroup (recipient of $45 billion in bailout funds) lent $8 billion to investors in Dubai, and Bank of America (which got another $45 billion) lent $7 billion for a project in China. The investigators found that the Treasury had few controls for tracking the bailout money for the 20 largest banks, and no controls at all for the other 297 smaller banks. According to the Washington Post: The report also raises questions about Goldman Sachs's $2 billion repurchase of its own stock in December, which caused the share value to increase almost 20 percent. That would have been a significant financial benefit for senior executives, who usually own large amounts of company stock. Congressional investigators are looking at whether the deal was an inappropriate way to enrich those top employees despite a public clamor for strict limits on executive compensation. Full story here. Labels: bailout, Bank of America, Citibank, Dennis Kucinich, financial crisis bailout, Goldman Sachs, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). ADB: Asset Prices May Have Fallen $50 TrnFrom The Financial Times:Plunging assets cost $50,000bn By Raphael Minder in Hong Kong and Alan Beattie in Washington Financial Times Published: March 8 2009 18:43 | Last updated: March 8 2009 23:31 Falls in the value of financial assets worldwide might have reached more than $50,000bn, equivalent to a year’s global economic output, the Asian Development Bank will warn on Monday. Asia has been hit disproportionately hard, the bank will say, in a report that warns of many Asian stimulus plans lagging behind those of the leading global economies. Separately, the World Bank said on Sunday that developing countries faced a financing gap of between $270bn and $700bn a year as capital flows dried up, with only a quarter of vulnerable countries able to cushion the blow of the economic downturn. The ADB report estimates capital losses last year in Asia, excluding Japan, at $9,625bn, or 109 per cent of gross domestic product, compared with a global average of 80-85 per cent of GDP. For Latin America, the study estimates 2008 losses at $2,119bn, or 57 per cent of GDP. "Even as Asia and Latin America have diversified their investment and trading partners, the effect of the slowdown on exports, finance and investment is earthshaking," the report warns. The ADB’s estimates take into account falling stock market valuations and losses in the value of bonds supported by mortgages and other assets, though not financial derivatives. About a fifth of the losses in dollar terms arise from the depreciation of many currencies against the US dollar. The World Bank report said $2,500bn-$3,000bn in public and private debt in emerging markets needed to be rolled over in 2009, most of it denominated in foreign currencies. This would put pressure on developing country governments, many of which had inadequate reserves to help their banks and companies refinance, the bank said. Although the bank itself and other official institutions such as the International Monetary Fund have been increasing their lending, even at the lower end of the $270bn--$700bn range "existing resources of international financial institutions would appear inadequate to meet financing needs this year", it said. The ADB study, to be presented on Monday by Haruhiko Kuroda, president, was commissioned from Centennial Group, a consultancy company. Mr Kuroda says: "I am afraid things may get worse before they get better. However, I remain confident that Asia will be one of the first regions to emerge from it, and it will emerge stronger than ever before." Copyright The Financial Times Limited 2009 Labels: Asian Development Bank, bailout, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). TDCotE (viii): The Use and Abuse of TrustThe Dull Compulsion of the Economic (viii)A series of blog postings by D&S collective member Larry Peterson Links: (1) Scientists think sea level rise from global warming may be far greater than previously thought. (2) On the economics profession's adamant refusal to seriously engage with the crisis. (3) Yves Smith eviscerates former Fed governor Alan Blinder's arguments against nationalization of the banks. (4) How could the brutal job losses shape the future economy? Perhaps should be read in conjunction with this 2005 piece where manufacturing is concerned. (5) Nice piece on CDSs and AIG's collapse. Reminds one of the staggering sums involved. (6) Private Equity meltdown to turn into "the greatest transfer of ownership from equity owners to creditors in history?" (7) Will stimulus packages reverse green gains? (8) Another relatively recent (December) thought-provoking piece on the crisis, by David McNally (9) Michael Mandel on something of relevance to the last link, the striking developments in the relation of financial to nonfinancial profits in the economy over the last few years. (10) A bank run on a country: the UK. (11) Odds are very much against self employment as a means to escape the crisis. Commentary The Use and Abuse of Trust Last week I wrote a piece about the tendency of economists to speak of the crisis in overly psychological terms, or in a manner that suggests that the crisis is (still) primarily about the confidence of consumers, investors and employers. Accordingly, the implication seems to be that the economy is basically sound at best, once we--somehow--strip even historically high levels of abuse out of it, or that it needs perhaps a serious overhaul at worst, but that in all cases we cannot even think about the establishment of a fundamentally alternative economic system. This week I saw yet another Nobel-laureate economist weigh in along these lines. But Amartya Sen, in a piece in the New York Review of Books, seems to attempt to finesse this problematic out of existence altogether. Sen distinguishes himself by stating that looking at the present crisis as one peculiar to capitalism is misleading: capitalism and markets have always relied on independent legal, cultural and ideological supports, and, in this sense, to try to isolate "capitalism" out of the mix, especially in the context of today's hyper-complex societies, is bound to lead to confusion, particularly of an historical sort: Underlying this issue is a more basic question: whether capitalism is a term that is of particular use today. The idea of capitalism did in fact have an important role historically, but by now that usefulness may well be fairly exhausted. Sen then goes on to show how Adam Smith had a far more nuanced view of the role of the market mechanism even in the society of his time, in which markets played a far lesser role than they do today, and suggests that, precisely because of Smith's extraordinary institutional sensitivity, it behooves us to look to Smith in an attempt to rehabilitate our appreciation for the proper role of markets in society. But then he begins, to me, anyway, a very strange meditation. First he notes, once again, that capitalism did not emerge until new systems of law and so on, which solidified notions of private property, allowed for economic growth and capital accumulation. And he says, "Profit-oriented capitalism has always drawn upon support from other institutional values." But then he shifts gears: The moral and legal obligations and responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments. A subprime lender who misleads a borrower into taking unwise risks can now pass off the financial assets to third parties—-who are remote from the original transaction. Accountability has been badly undermined, and the need for supervision and regulation has become much stronger. Moreover, The insufficient regulation of financial activities has implications not only for illegitimate practices, but also for a tendency toward overspeculation that, as Adam Smith argued, tends to grip many human beings in their breathless search for profits. Smith called the promoters of excessive risk in search of profits "prodigals and projectors"--which is quite a good description of issuers of subprime mortgages over the past few years. So, even if you accept that the fundamental problematic surrounding the present crisis has more to do with some sort of unchanging psychology of investors (the tendency to get carried away with temptation of excess profits) than the real economic conditions under which investments are made (and which invariably appear in and influence relations between classes), there is a question here. Why was it that the institutional supports that allowed for the spectacular growth of postwar capitalism became so quickly and thoroughly undone from the 'seventies on? He says, as we have seen, that capitalism has always relied on institutional support from non-market entities and structures, but he fails to explain the extraordinary turn away from such entities and structures during the deregulatory period that followed and went more-or-less unchallenged until last year. So rather than explaining this development, he simply describes it: And yet the supervisory role of government in the United States in particular has been, over the same period, sharply curtailed, fed by an increasing belief in the self-regulatory nature of the market economy. Precisely as the need for state surveillance grew, the needed supervision shrank. There was, as a result, a disaster waiting to happen, which did eventually happen last year, and this has certainly contributed a great deal to the financial crisis that is plaguing the world today. But then he makes yet another transition: The present economic crisis is partly generated by a huge overestimation of the wisdom of market processes, and the crisis is now being exacerbated by anxiety and lack of trust in the financial market and in businesses in general--responses that have been evident in the market reactions to the sequence of stimulus plans, including the $787 billion plan signed into law in February by the new Obama administration. Here Sen touches upon something that has really been making the rounds in the financial press these days, namely, the role of trust in market interactions and in capitalist societies. Most commentators I have seen tend to focus, again, on the role of investors in this vein, in speaking of the present crisis. So, to explain things like the pronounced lack of willingness of banks to lend, or of investors to buy into government-sponsored bailout programs, writers focus on the idea that, having been burned so badly already, such people are naturally extremely reluctant to put more money down. But such a situation then leads, inexorably, to further contractions of economic activity. Investors know this. And governments are going to great lengths to make money available to combat this. But takers have been few. So the reason must be an essentially irrational lack of trust. Sen doesn't actually say this, but I sense in the progression of his argument that this is a key assumption. Sen, like Alan Blinder (see link 3 above), seems to believe that once we sober up, we can, with the aid of governments, sort the mess out and live happily ever after. And despite the huge damage done to the economy, we need more confidence in our leaders, and, presumably, in ourselves, to emerge from the mess. But the problem here is that Sen looks at trust in exactly the same way he does all the other psychological propensities that influence market behavior: as relatively unchanging constants in stable equations. But the type of trust engendered in the lead up to the crisis was a wholly peculiar one, which was influenced by all sorts of specific factors, many--perhaps to a peculiar degree--of which reflected intensified class dynamics. So, in the period before the crisis in the US, virtually no-one was prepared to imagine that the entire system could melt down with the speed it did. But many noted that the underlying dynamic, of hyper-consumption (as Stephen Roach has noted, US consumption still amounts to some 70% of the economy, down only a percentage point or two from the height of the bubble) aided by copious amounts of credit, but unaccompanied by rises in savings, or wages that came even close to tracking key outlays like those involving education, healthcare and pensions (not to mention lodging or home-finance, which is another story) that were rising out of sight, was dangerously unsustainable. But everyone trusted that, at the end of the day, someone else would take the fall if things fell apart. And this kind of thinking was encouraged by the incentive structures that proliferated from a governmental/business complex that was noteworthy for its venality and conspicuous corruption. And this, almost certainly, had much to do with the kind of degradation of social feeling that was a factor behind, and consequence of wider deregulatory dynamic. "Trust", under such conditions, far from being the strangely lacking factor behind a partially inexplicable collapse of the financial system, should perhaps be viewed, in the highly skewed from it took on as a result of the severely distorted economic conditions that came to become prevalent in the final years of neoliberalism and deregulation, the Bush years, as a key occasioning cause of it. After such a denouement, it's hardly surprising that "trust" is noticibly lacking; but it's even more unsettling to think that the authorities (many of whom, as we all know too well, like Summers, Geithner et al, were instrumental in conditioning us in the new variant of "trust") want to revive it. Labels: Adam Smith, AIG, Alan Blinder, Amartya Sen, bailout, CDSs, climate change, David Hale, David McNally, financial crisis, Larry Peterson, Michael Mandel, the dull compulsion of the economic, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). London G20 Protest: Biggest Since Iraq War?From Sunday's (it's still Saturday EST) Observer:The voices in G20's chorus of protest A mass demonstration ahead of the London G20 summit is set to attract a huge mix of different interest groups as a new coalition, Put People First, takes shape. Ed Vulliamy and Richard Rogers report Ed Vulliamy and Richard Rogers The Observer, Sunday 8 March 2009 The G20 summit of industrialised nations in London next month will be marked by one of the biggest demonstrations since a million people marched against war in Iraq in 2003. On that Saturday, the issue was simple. This time the protest--although it draws on equally diverse social and political quarters--is a complex weave of movements and priorities united by one emotion: a disgust at the latest incarnation of capitalism that demands a different way of organising the economy of the planet. To say that the protests will invoke the causes of social justice, the environment and fair trade would be to put it too simply, so we have published brief statements by some of the prime movers about why they will be taking to the streets. Some preach the message of Jesus, while others urge outright revolution and much in between, forming perhaps the widest coalition of pressure groups ever assembled in Britain. And there will be the thousands of normal people angry at the way politicians and their friends in the banks, thinktanks and corridors of power are mismanaging our lives. Apart from the main demonstration on Saturday 28 March, a flurry of further protests is envisaged, including Financial Fools Day, a blockade of financial institutions to prevent people from getting to work on 1 April. While trade unions will be aware that the protest comes close to the 25th anniversary of the Eighties miners' strike, a group called G20 Meltdown will stage carnivalesque parades, one of which will "honour the 360th full circle anniversary of the Diggers" - Civil War revolutionaries. Read the rest of the article Labels: bailout, financial crisis, G20, labor, labor unrest Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). FDIC Bill Attempt To Bypass TARP battleFrom The Wall Street Journal:MARCH 7, 2009 FDIC Bill Dodges a New TARP Fight Wall Street Journal By DAMIAN PALETTA WASHINGTON A three-page bill designed to bolster the Federal Deposit Insurance Corp. could let the Obama administration sidestep a huge political problem: securing more financial firepower without opening a debate over the Troubled Asset Relief Program. The legislation, introduced late Thursday by Senate Banking Committee Chairman Christopher Dodd, would temporarily allow the FDIC to borrow $500 billion to replenish the fund it uses to guarantee bank deposits, if the Federal Reserve and Treasury Department concur. Those funds would be distinct from the contentious $700 billion financial-sector bailout, which lawmakers are loathe to expand. The FDIC can presently only borrow $30 billion from Treasury. The bill would permanently raise that level to $100 billion, which the FDIC could tap without prior approval from the Fed and Treasury. Mr. Dodd, a Connecticut Democrat, already has four Republican co-sponsors for the bill and it could quickly gain momentum, in part because of strong backing by community bankers. Read the rest of the article Labels: bailout, Christopher Dodd, FDIC, financial crisis, Sheila Bair, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). January Consumer Borrowing RisesFrom The International Herald Tribune:Borrowing in U.S. rises unexpectedly The Associated Press Friday, March 6, 2009 WASHINGTON: U.S. consumer borrowing rose unexpectedly in January after three months of declines, but the small increase did not shake economists' views that borrowing will remain weak this year as mass layoffs persist amid the recession. The Federal Reserve said Friday that borrowing increased at an annual rate of $1.76 billion in the first month of the year. Economists expected borrowing to decline at a rate of $5 billion. The small gain came mainly from the category that includes credit cards, which rose at a 1.2 percent rate in January after dropping 9.5 percent in December. The category that covers auto loans rose 0.6 percent after a smaller 0.1 percent rise in December. The increases were attributed to the stronger performance of retail sales which posted a 1 percent rise in January, the best showing in 14 months. While that increase was unexpected, analysts noted that it was still modest and followed a six-month decline. Consumer spending accounts for about 70 percent of U.S. economic activity, and borrowing fell at an annual rate of $7.48 billion in December after a $9.13 billion drop in November. The December figure was slightly larger than previously reported while the November number was smaller. But the economy, especially the labor market, appeared to darken last month. The government reported Friday that the unemployment rate surged to a 25-year high of 8.1 percent in February as employers slashed another 651,000 jobs. Since the recession began in December 2007, the economy has lost a net total of 4.4 million jobs, with more than half coming in the past four months. Americans, worried about the possibility that they could be laid off, have cut back on their spending and reduced borrowing. Many are trying to rebuild their savings to help cope with a recession that is already the longest in more than a quarter-century. Read the rest of the article Labels: bailout, consumer debt, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). UK Government Takes over Lloyd'sFrom The Guardian:Government takes over Lloyds Taxpayer will own up to 77% of banking group after disastrous merger with HBOS as pressure grows on board to resign guardian.co.uk, Saturday 7 March 2009 10.33 GM Jill Treanor , Nick Mathiason and agencies The government today confirmed it will take majority control of Lloyds Banking Group, with the taxpayer owning 65% of the voting shares in return for insuring 260bn pounds the group's toxic assets. After days of detailed negotiations the terms of the takeover were announced by the Treasury, with Lloyds making a commitment to lend at least 28bn pounds over the next few years. The government is to insure the bank's riskiest loans and in return the taxpayer will up its ownership of the bank from 43% to 65%--rising to 77% when non-voting shares are included. Alongside taking extra shares and obtaining the commitment to lend to businesses and individuals, the Treasury will upgrade £4bn of the non-voting shares it already holds. The government's fee for limiting Lloyds' losses from 260bn pounds of potentially bad assets totals £15.6bn. Under the insurance scheme, Lloyds will take the first hit of up to 25bn pounds on toxic assets before the taxpayer steps in. The new ordinary shares in the bank will be offered to existing private shareholders first, with the government committing to buy whatever is left. Stephen Timms, the chief secretary to the Treasury, told BBC Radio 4's Today programme: "I think in due course this new Lloyds...is going to be a strong and successful bank, and the arrangements that we have been able to facilitate I think will ensure that this is going to be the case." Asked about speculation that the taxpayer could lose up to £100bn on the deal, Timms replied: "Precedents would suggest that the loss would be a great deal less than that, but as I said we just don't know." Timms rejected suggestions that the prime minister had "destroyed a great bank" by pushing Lloyds to take over HBOS as it neared collapse. Eric Daniels, the group chief executive for Lloyds Banking Group, said: "Participating in the government's asset protection scheme substantially reduces the risk profile of the group's balance sheet. Read the rest of the article Labels: bailout, financial crisis, HBOS, Lloyd's TSB Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Feb. Unemployment tops 8%......and December's figure revised, making it the worst reading since 1949. From Reuters:U.S. February payrolls fall 651,000; jobless rate 8.1 percentFri Mar 6, 2009 8:48am EST WASHINGTON (Reuters) U.S. employers axed 651,000 jobs in February, pushing the unemployment rate to its highest in 25 years, as companies buckled under the strain of a recession that is showing no signs of ending, according to a government report. While that figure was near economists' expectations for a 648,000 drop in non-farm payrolls, January and December job losses were revised sharply higher. The Labor Department on Friday said the unemployment rate surged to 8.1 percent in February, the highest level since December 1983. That was above market forecasts for a rise to 7.9 from January's 7.6 percent. January's job cuts were revised to show a steep decline of 655,000, while December's payrolls losses were adjusted to 681,000, the deepest since October 1949. Since the start of the recession in December 2007, the economy has purged 4.4 million jobs, with more than half occurring in the last 4 months. Job losses in February were broad based, with only government, education and health services adding jobs. "Since the recession began, the rise in unemployment has been concentrated among people who lost jobs, as opposed to job leavers or people joining the labor force," said Bureau of Labor Statistics Commissioner Keith Hall The manufacturing sector shed 168,000 jobs in February, after eliminating 257,000 positions the prior month. Construction industries bled 104,000 jobs in February after losing 118,000 in January. The service-providing industry slashed 375,000 positions after shedding 276,000 in January. (Reporting by Lucia Mutikani; Editing by Neil Stempleman) Labels: bailout, financial crisis, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Sen Sanders: Fed Must Name BanksIn a Senate hearing on Tuesday, Sen. Bernie Sanders (Socialist-VT) asked Federal Reserve Chairman Ben Bernanke the following:"My question to you is, will you tell the American people to whom you lent $2.2 trillion of their dollars?" Bernanke's answer? "No." From Reuters:
Rest of the story here. Labels: bailout, Ben Bernanke, Bernie Sanders, financial crisis bailout, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Virtues of Concentration (Doug Henwood)From Doug Henwood of Left Business Observer, responding to this op-ed from Saturday's Times. Relevant to our two most recent posted articles: Fred Moseley's article arguing for permanent nationalization of the "too big to fail" banks (vs. breaking them up), and Maurice Dufour's article on the Canadian system. Hat-tip to Larry P.On op-ed piece in today's New York Times the latest source to point out that Canada's banking system is now the most solid and stable in the world. The reasons: Canada has a very concentrated financial system, which is dominated by just five nation-spanning banks, and one that is tightly regulated. Curiously, as the author, Theresa Tedesco, point out, the Canadian national banking model was inspired by the USA's own Alexander Hamilton, a centralizer and concentrator from way back. This confirms a couple of longstanding obsessions of mine. One is that concentrated financial systems are easier to regulate than dispersed ones. This proposition has been partly discredited by the "too big to fail" doctrine, which has prompted some people, even on the U.S. left, to argue that big institutions should be broken up. But the problem is that the U.S. authorities didn't supervise or regulate, not that Citi or Bank of America got too big. Tedesco recommends using the current crisis to engineer a large wave of mergers, leaving the U.S. with many fewer banks than the 8,305 we have now (by the FDIC's count). Of course, they'd have to be kept on tight leashes, but who but a nut would disagree with that now? And the other is that concentrated ownership structures, of banks as well as corporations (something that's true of Canada), are far more compatible with social democracy than dispersed ones. Concentration can lead to greater stability and a lessened role for competition. Canada has a national health insurance system that many Americans envy (along with many other social benefits), a lower poverty rate, and a far more egalitarian distribution. The same can be said of Sweden, which is also highly concentrated and has even better income and poverty stats than Canada. It's extremely disreputable to say these sorts of things on the American left, especially its populist branches. For populists, Hamilton is the spawn of the devil, and giant banks are instruments of Satan. But the populist vision is one where everyone owns a small business and credit is practically free. For those of us interested in creating a civilized welfare state in the U.S., and taming the war of each against all ethic that governs American economic life, chucking that populist nonsense and embracing a little concentration could be a good start. Of course, concentration itself won't take us in that direction. But fragmentation virtually guarantees that we won't even get a start. Labels: bailout, bank nationalization, Canada, Doug Henwood, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG Chalks Up Biggest Loss Ever, Gets $30BFrom Reuters:AIG enters record books with $61.7 billion loss Mon Mar 2, 2009 8:44am ESTNEW YORK (Reuters) American International Group Inc posted a $61.7 billion fourth-quarter loss -- the biggest quarterly loss in corporate history -- after reaching a revised rescue deal with the U.S. government that wards off for now the prospect of crippling credit rating downgrades. The massive quarterly loss, equal to $22.95 a share, was AIG's fifth in a row, bringing the total loss over that period to more than $100 billion. The U.S. Treasury and Federal Reserve said AIG had posed a systemic risk requiring government action to prevent its problems from damaging the entire financial system. AIG, the recipient of $150 billion in taxpayer aid last year, will get access to an additional $30 billion under the government's revised plan announced on Monday. It also got more lenient terms on existing financing and will be able to significantly pay down an outstanding credit facility in a swap that will give the government a preferred-share stake in two life insurance businesses. AIG also announced plans to spin off part of its property-casualty business, to be renamed AIU Holdings. The revamped rescue package is the third since last fall when the government stepped in to bail out AIG, once the world's biggest insurer by market value. The Treasury and the Fed said that AIG, which has counterparties around the globe, was so important to the U.S. economy and financial system that it had to be helped, and they held out the possibility more aid might be needed. "This will take time and possibly further government support if markets do not stabilize and improve," they said in a statement. (Reporting by Lilla Zuill; Additional reporting by Glenn Somerville in Washington, Editing by Ted Kerr) Labels: AIG, bailout, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). TDCotE (vii): Dumb AnimalsThe Dull Compulsion if the Economic (vii)A series of posts by D&S collective member Larry Peterson Links: (1) Peter Gowan's New Left Review ("probably [to me, definitely, LP] the most prestigious Marxist journal in the world"--John Lloyd of The Financial Times) piece on the role of the financial sector in the crisis. A challenging--though not unproblematic--analysis, and a must read. (2) Contrarian--from a mainstream point of view--trade economist Ha-Joon Chang on the current, and exaggerated (if not somewhat hysterical), fear of protectionism. (3) Michael Mandel questions recent productivity figures. Commentary Dumb Animals There's been a lot of talk lately about the role of economists in the recent crisis, i.e. whether or not the abject failure of most of them to foresee anything close to the turmoil we are experiencing now, even (long) after bubbles of historic proportions had burst, has somehow accelerated the crisis. For example, one of the most popular econ blogs contains this post today. Last week, I noticed that Nobelist George Akerlof and Robert Shiller (of Case-Shiller housing index fame) had just published a book, called Animal Spirits, in which the authors seem to claim that human psychology provides the key to understanding the most important economic phenomena, including, presumably, the main issues surrounding the present crisis. Of course, this hearkens back to Keynes, who, in an age that witnessed the popularization of Freudian psycho-analysis, emphasized the interplay of psychology and emerging ideas of the macro-economy in a unique synthesis. Like Keynes, their argument is that traditional ideas of economic agency--even today--neglect much of the uncertainty, and, hence, the essential role of sentiment, in the formulation of decisions which inevitably contribute to aggregated economic performance. So far, so good. Of course, human psychology plays a role in economic behavior. And the type of economic models which fail to respect this will be found severely wanting, especially in times of crisis. But Akerlof and Shiller then seem to take this rather banal point to absurd new heights. Here I quote from the review of their book I read, from the German business daily Handelsblatt (translations are my own): All economic crises, in the end, go back to psychological factors. "this view," the researchers admit, "contradicts standard economic thinking." So neither monetary policy nor expansion of the banking sector may be the actual cause of the crisis. The kernel of the crisis might rather be the mass-hysteria surrounding real estate that was dominant until 2007. Virtually all Americans seemed to have been convinced that house prices would continue to rise. A classic case of "animal spirits" according to Akerlof and Shiller. Now I obviously haven't read the book (it just came out, and I certainly wasn't asked to review it), and this review, I suspect, is definitely subpar, but I've seen enough talk in the financial press about the rehabilitation of Keynes and of animal spirits that I detect that even this lackluster piece fits into a well-worn, and extremely misleading pattern. And, given the fact that economists failed to see the crisis coming, for them to indulge in this sort of myopia is kind of inexcusable. Let me explain what I mean. This crisis is the result of the intersection of several manifestations of what I call "desperation finance," in which economic actors squeezed by the unprecedented uptake of billions of new workers in the global economy, but fortified with exceptionally cheap money due to partially political considerations (wealthy countries' politicians' political fear of huge unemployment levels that would be the result of anything less than a hyper-accomodative monetary policy), found economic signals confused to an extent never seen before. And this was only exacerbated by a kind of ideological and institutional vicariousness that was itself unique, particularly in a so-called "information age." So if psychology played a role, it wasn't due to some kind of pristine irrationality of isolated individuals, but, at least in part to a historically specific insecurity that, in turn, contributed to the development of both perverse and ever-desperate incentives, on a mass scale. So, as real wages stagnated in much of the developed world for a growing majority (especially as outsourcing of labor to the poor world intensified), and responsibility for pensions, health costs and education grew, returns on investments funding the latter needed to grow, and to make up for losses sustained in prior bubbles; and Wall Street was all too capable, in a time of slack regulation that was unprecedented, to seemingly devise the means to meet this need, with much of the returns, for a time, accruing to them. Meanwhile, in the poor world, especially China, social provisioning was being clawed back by states that had to maintain competitiveness (and so had to keep social costs--and budgets--down, even of they had huge foreign currency reserves), and so even poorly-paid workers were forced to save at exceedingly high levels. And retrenching workers in deflation-hobbled Japan and a Germany that had just undergone an expensive reunification also added to the pool of global savings (not to mention exports). So, where global funding was concerned, on both supply and demand ends, you have something a little more complicated than an unprovoked and otherwise inexplicable "mass-hysteria;" in fact, the bubbles are all too explicable, given, as we have noted, the crazy incentives and situations faced by so many, ever-desperate (in spite of undisputed, rising living standards for many in the poor world, which have now, for many of them, now come to an end) people. And, it's not like an infusion of "animal spirits" will allow, finally, investors to see the hidden worth of assets that remain on banks' balance sheets; this too, seems to be implied in Akerlof and Shiller's thesis. More to the point, the level of consumer demand that can survive such a crisis will lag far behind the altogether exaggerated profits expectations generated during a bubble sustained on such foundations, "animal spirits" or no. Still, Akerlof and Shiller are far more anchored in reality than another Nobelist, Edward Prescott, who actually says the crisis is a result of workers' forgetting new technologies and working procedures, in a kind of zombie-like reversion to lower working hours. I cannot possibly do justice to how bizarre this idea is, so I'll quote Prescott directly, in a reposting courtesy of our good friend Brad DeLong: Economic theory implies that, given the nature of the shocks to technology [i.e., that we occasionally, suddenly, unpredictibly and collectively forget about technologies we knew about two years before] and people's willingness and ability to intertemporally and intratemporally substitute [i.e., that we occasionally, suddenly, unpredictibly and collectively decide that we want to spend fewer hours at work than we did two years before], the economy will display fluctuations like those the U.S. economy displays. Theory predicts fluctuations in output of 5 percent and more from trend, with most of the fluctuation accounted for by variations in employment and virtually all the rest by the stochastic technology parameter.... Theory predicts that deviations [from trend] will display high serial correlation. In other words, theory predicts what is observed.... The policy implication of this research is that costly efforts at stabilization are likely to be counterproductive. Economic fluctations are optimal responses to uncertainty in the rate of technological change ... . This kind of stuff is beneath contempt. But, to use the economic metaphor, the fact that it is taken seriously may act to reduce the level of debate, and to provide respectability to seeming alternatives put forward by people like Akerlof and Shiller (no, I'm not going to invoke the "Gresham's Law" metaphor). Labels: bailout, Edward Prescott, financial crisis, George Akerlof, Ha-Joon Chang, Keynes, Larry Peterson, Michael Mandel, New Left Review, Peter Gowan, Robert Shiller, the dull compulsion of the economic Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Merkel Rejects Bailout for Eastern EuropeFrom The Wall Street Journal:MARCH 1, 2009, 10:54 A.M. ET Merkel Rejects Calls for EU Bailout of Eastern Europe WALL STREET JOURNAL ONLINE Germany rejected appeals Sunday for a single multibillion-euro bailout of eastern Europe, even after Hungary begged EU leaders not to let a new "Iron Curtain" divide the continent into rich and poor. The swift, strong comments by German Chancellor Angela Merkel dampened hopes that leaders at Sunday's European Union summit could forge a unified stance to tackle the worsening economic crisis. As Europe's largest economy, Germany has been under rising pressure to take the lead in rescuing eastern EU members, but Ms. Merkel insisted that a one-size-fits-all bailout was unwise. "The situation is very different" in Europe's economies, Ms. Merkel said as she arrived for the summit. "We cannot compare Slovakia nor Slovenia with Hungary," she said. Hungarian Prime Minister Ferenc Gyurcsany, saying the credit crunch was hitting the eastern members hardest, had called for an EU fund of up to 190 billion euro ($241 billion) to help restore trust and solvency in those nations. "We should not allow that a new Iron Curtain should be set up and divide Europe," Mr. Gyurcsany told reporters. "In the beginning of the '90s we reunified Europe, now the challenge is whether we will be able to reunify Europe financially." Ms. Merkel said that Germany and the EU stand ready to help countries who need help on a case-by-case basis. "We have shown in particular with Hungary that we help countries in need. And we will do so further, particularly through the international institutions," she said. EU nations are all grappling with a worsening recession, compounded by a severe credit crunch that has left many EU countries looking ever more inward to protect jobs and companies from international competition. Those policies are now undermining the open market cornerstone on which the EU is founded. Ahead of the summit, the leaders of nine countries--Poland, Hungary, Slovakia, the Czech Republic, Bulgaria, Romania and the three Baltic states--forged a common stand to pressure richer members in the 27-nation bloc to back up vague pledges of support with action. But Polish Finance Minister Jacek Rostowski said eastern European members shouldn't be lumped together and treated as if they all faced the same, severe problems. He counted Poland among those countries that don't need funding from the EU or its individual members. "Our position is that we must differentiate between countries that are in difficulties and those that are not," Mr. Rostowski told Poland's TVN24 television station. "We are in favor of supporting countries in need, like Hungary," he said. "But there are a number of countries in central and eastern Europe that are not in need, such as Poland, the Czech Republic, and Slovakia. And there are countries in the euro zone that need help." Hungary, Poland and the Baltic countries of Estonia, Latvia and Lithuania also want the EU to fast-track their bids to join the euro-currency, which could offer them a stable financial anchor. Latvia's government has already collapsed amid the economic fallout. Other EU members, like Sweden, want to coordinate a Europe-wide bailout plan for car producers. Prime Minister Mirek Topolanek of the Czech Republic, which holds the EU presidency, has called on his counterparts to act together. A draft summit conclusion centered a commitment to "make the maximum possible use" of the EU's cherished free market "as the engine for recovery." "We do not want a Europe divided along a North-South or an East-West line, pursuing a beggar-thy-neighbour policy is unacceptable," Mr. Topolanek said. The crisis has sorely tested solidarity among EU nations. The Czech Republic has accused France of trying to protect its local car plants at the expense of foreign subsidiaries, while Germany rejected earlier calls to help bail out economies in Ireland, Greece and Portugal. Sunday's talks are meant to restore a unified purpose and help prepare for the April 2 Group of 20 nations summit in London. Once-booming east European economies have been hit hard by the economic downturn. As cheap credit dried up their export markets shrank, causing eastern currencies to sink and triggering more financial turmoil. Mr. Gyurcsany said eastern EU countries could need up to 300 billion euros, or 30% of the region's gross domestic production this year. He warned that failure to offer bigger bailouts "could lead to massive contractions" in their economies and lead to "large-scale defaults" that would affect Europe as a whole. It could also trigger political unrest and immigration pressures as jobless rates soar, he said. The Associated Press and Dow Jones Newswires contributed to this article. Write to the Online Journal's editors at newseditors@wsj.com Labels: Angela Merkel, bailout, Eastern Europe, European Union, financial crisis, Germany Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG Follows CitiAIG is expected to report horrific losses on Monday. Just in from Reuters:Exclusive: AIG near deal on new terms of bailout Sun Mar 1, 2009 8:41am EST Reuters By Paritosh Bansal NEW YORK (Reuters) American International Group Inc is close to a deal with the U.S. government that would ease the terms of its bailout, provide a further equity commitment and help it pay down debt, a person familiar with the matter said on Saturday. The revision would be the latest sign of how federal regulators are having to tweak bailout packages for financial institutions deemed too big to fail as the economy and markets worsen. The board of the troubled insurer is due to meet on Sunday to vote on the deal, which could be announced when AIG reports its quarterly results on Monday, the source said. That would be just days after the government agreed to boost its equity stake in Citigroup Inc to as much as 36 percent in a bid to bolster another financial giant that taxpayers had already poured billions of dollars into. The revised AIG agreement is expected to include an additional equity commitment of about $30 billion, more lenient terms on an existing preferred investment, and a lower interest rate on a $60 billion government credit line, the source said. The new equity commitment would give AIG the ability to issue preferred stock to the government at a later date, the source said. The London Interbank Offered Rate floor on the interest rate AIG pays on the government's credit line is expected to be removed under the new terms, which would save the insurer about $1 billion a year, the source said. The company currently pays 3 percentage points above Libor. AIG will also give the U.S. Federal Reserve ownership interests in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, the source said. The insurer had been trying to sell Alico and a part of AIA in a bid to raise money to pay back the government. AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said. Last year, AIG said it plans to sell all assets except its U.S. property and casualty business, foreign general insurance and an ownership interest in some foreign life operations, to pay back the government. While the company has announced some sales, it has been difficult for it to find buyers and get a good price for assets amid the financial crisis. Credit for deals remains difficult to arrange due to the crisis and many would-be buyers are struggling with their own problems. Both the Federal Reserve, and AIG, once the world's largest insurer by market value, declined to comment. Read the rest of the article Labels: AIG, bailout, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bleak Picture in Asia, More Gloomy ThoughtsOn Asia, from the Financial Times.. A tidbit:"The figures are further proof that Asia's economy fell off a cliff in the closing months of 2008 and raise the likelihood that the bad news will continue to flow as the region's export-dependent nations are forced to cut jobs and manufacturing capacity because of weak western consumer demand. The collapse in Asian exports over the fourth quarter was "nothing short of breath-taking", said Frederic Neumann, Asia chief economist at HSBC. "Economic models and experience suggest that financial turmoil tends to transmit far more gradually into the real economy than has occurred this time around. In fact, the severity and rapidity of the fall in output exceeds anything we have ever seen before." Ambrose Evans-Pritchard has this to say about the global situation in general, and this on a possible reversal in Germany's view of the EU project. Labels: Ambrose Evans-Pritchard, Asia Times, bailout, European Union, financial crisis, Germany Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Nordic Economies TankingEven the virtuous Nordics (including Finland)are feeling the full effect of the crisis. From LSE Macroeconomic News, courtesy of Across the Curve. Remember that especially Swedish banks are heavily exposed in Eastern Europe, with loans there up to the value of some 30% of GDP.WRAPUP_1Financial_crisis_slams_Nordic_economies_in_Q4 Macroeconomic News Saturday, 28th February, 2009 By Niklas Pollard STOCKHOLM, Feb 27 (Reuters) The global financial crisis slammed into the Nordic region with full force in the fourth quarter, with the Swedish and Danish economies contracting at record paces while Finland joined its neighbours in recession. Hit by a dramatic fall in demand for its many heavyweight exporters, Sweden's gross domestic product (GDP) shrank 4.9 percent in the fourth quarter from a year earlier and 2.4 percent from the preceding three months, the statistics office said on Friday. The outcome for the Nordic region's biggest economy was the worst GDP reading since Swedish statistics office SCB began publishing seasonally adjusted quarterly data in 1993. It compared with median forecasts of a 2.0 percent decline year-on-year and a 1.6 percent fall on a quarterly basis, as seen in a Reuters poll of economists. 'It was a very, very weak figure. It was, in fact, weak across the board,' RBS analyst Peter Kaplan said.' 'I think that the Riksbank is going to cut all the way to 0.10 percent -- in practice, zero rates. All the Riksbank's models are going to shout 'cut to zero', although the weak crown adds a little uncertainty.' The Swedish central bank has already slashed rates by a total of almost 4 percentage points from September to the current level of 1.00 percent in a running battle to ward of an economic downturn. Sweden's industrial sector, which includes top-flight manufacturers such as world number two truckmaker Volvo and carmakers Saab and Volvo, has so far been hardest hit, resulting in the loss of thousands of jobs. Read the rest of the article Labels: bailout, financial crisis, Nordic region Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Essential Reading from Yesterday's FTIn case you missed it, due to Friday night carousing, or whatever...--Whistleblower contacted US regulators (should they even be called this anymore?) on fraudster Sir Allen Stanford five years ago. --Banking editor Peter Thal Larson writes that the UK plan for Royal Bank of Scotland amounts to nationalization in all but name, "maintaining the fiction that the ailing bank is anything other than fully state-owned." This certainly has relevance in light of US policy with regard to Citi. --The excellent Gillian Tett on how CDOs may be worth even less than the pitiful estimates bandied about these days. And, in a point too rarely rarely made in the financial press, "as the zeroes relating to writedowns multiply, a peculiar--and bitter-- irony continues to hang over these numbers. Notwithstanding the fact that bankers used to promote CDOs as a tool to create more "complete" capital markets, very few of those instruments ever traded in a real market sense before the crisis--and fewer still have changed hands since then." Labels: bailout, CDOs, financial crisis, Financial Times, Gillian Tett, Peter Thal Larsen, Royal Bank of Scotland, Sir Allen Stanford Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Report from Eastern Econ. Assoc. MeetingsI (D&S co-editor Chris Sturr) am in New York City for the annual meetings of the Eastern Economics Association, the sweet kid sister to the Allied Social Sciences Association (which would make the latter the bullying older brother, if we're going to go with the metaphor), from which I blogged a couple of times back in early January (here and here, and here's D&S collective member Arpita Banerjee's ASSA report).It's hard to say what makes the EEA meetings so much nicer than the ASSA. Part of it is that they are much smaller (I don't have the numbers, but the program is much thinner, as are the crowds, and the book exhibit, where we spend most of our time, is about 1/10th the size), and maybe there is a critical mass of left or left-ish or at least not left-averse economists on the east coast. All in all, there is a more relaxed and less corporate feel to the EEA. Our comrades at the Union for Radical Political Economics (with whom we share an exhibit table) are sponsoring seven panels this year, which is a pretty high number for a relatively small conference. Back at the ASSA, one of the plenary sessions that drew big crowds was (as I reported in my earlier post) the spectacle of Marty Feldstein rediscovering fiscal policy after years (a career?) of denying that it was necessary. Meanwhile, at the EEA this year, this year's Nobel Prize winner, Paul Krugman was a big draw, as was another leftish Nobel Prize winner, Joseph Stiglitz, who gave the presidential address (since he's the current president of the EEA). I missed Krugman's talk, but I made it to see Stiglitz, and I'm really glad I did. (Stiglitz was introduced, by the way, by Steve Pressman, secretary of the EEA, who co-authored an article in our July/August 2007 issue on debt poverty in the United States--more evidence of the EEA's left-friendliness.) Stigliz's topic was the current economic crisis ("What else is there to talk about?" he asked), and he set himself two questions: (1) "What shall we do about our failed banks?" and (2) "What role did the economics profession--or rather *some* members of the profession--play in the crisis?" His assessment of the inadequacies of the responses to the crisis so far (including the stimulus, efforts to address the foreclosure crisis, and the bank bailout) was great, though his "Plan B" was a bit rushed and hard to follow. His critique of the mainstream economic views that contributed to the crisis was also a bit rushed, but gratifyingly scathing. One big reservation I had about the talk was that he was nearly as timid on the issue of bank nationalization as he was in the interview he did with Amy Goodman (which we blogged about a couple of days ago). I have pretty extensive notes from the talk, and there were some great bits (e.g., he quipped, a propos of the way the "experts" denied the crisis for so long, seeing recovery around the corner, until we had turned corner after corner: "The light that was at the end of the tunnel turned out to be a train coming right at us."). I would like to write up more on his talk, but in my hotel room on a Friday night in NYC with the nightlife beckoning, this post is starting to feel like a grotesque combination of a diary entry and a term paper, so I will aim to say more tomorrow with more EEA updates. Labels: ASSA, bailout, EEA, financial crisis, Joseph Stiglitz, Martin Feldstein Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama's ($1.7 Trn Deficit) First BudgetFrom The Financial Times:Obama forecasts $1,750bn deficit By Andrew Ward and Edward Luce in Washington Published: February 26 2009 11:24 | Last updated: February 27 2009 09:56 Financial Times President Barack Obama on Thursday unveiled the most expansive blueprint for federal government involvement in the US economy in more than a generation in a ten-year budget outline that showed this year’s deficit quadrupling to $1,750bn. The document, which lays out ambitious plans to create universal health insurance and adopt an economy-wide carbon permit trading system by 2012, was heavily panned by Republicans. The budget would see George W. Bush’s tax cuts for the wealthiest expire by 2011 and introduce new tax increases on families earning $250,000 or more to pay for healthcare expansion. In a sign of intense partisan battles to come, Mitch McConnell, the Republican leader in the Senate, where the US president needs supermajorities of at least 60 votes to push bills through, said: “Unfortunately, at this juncture, while the American people are tightening their belts, Washington seems to be taking its belt off." The budget also allowed for about $750bn for "financial stabilisation efforts", on top of the $700bn already granted to Wall Street. The potential aid was shown as a net cost of $250bn because the government would anticipate recouping some of the money. Peter Orszag, White House budget director, said there were "no plans" to seek more aid for banks but the measure indicated it was a strong possibility. The 134-page document outlines a legacy inherited from Mr Bush of what it calls "mismanagement and missed opportunities and of deep, structural problems ignored for too long". Read the rest of the article Labels: bailout, Barack Obama, budget, financia crisis, fiscal policy, fiscal stimulus, taxes Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). US and UK Increase Stakes in BanksFrom Reuters, again:Governments tighten grip on banksFri Feb 27, 2009 11:55am EST Reuters By Steven C. JohnsonNEW YORK (Reuters) Governments on both sides of the Atlantic moved to tighten their grip over banks on Friday to stem a financial crisis that has pushed the U.S. economy into its deepest contraction in more than a quarter century. U.S. stocks sank to a 12-year low after Washington struck a deal in which it could end up with more than a third of crisis-hit Citigroup. The World Bank and other development banks launched a $32 billion lending plan to help east European banks and businesses survive a deepening recession. Citigroup (C.N) shares tumbled some 30 percent after the U.S. Treasury struck a deal to convert $25 billion of its preferred stock to common shares, which could give it a stake of up to 36 percent in the bank by diluting existing investors. While the government will not add to the $45 billion it has already invested in what was once the world's largest bank, the stock conversion will shore up the most conservative gauge of the bank's health. The U.S. government is struggling to shore up its banks as part of its approach to restoring growth. Data showed the U.S. economy shrank a staggering 6.2 percent in the last three months of 2008, its biggest slide since the first quarter of 1982, as exports fell and consumers cut spending. "The fear is the government having a big stake in the company will create obstacles for Citigroup to be competitive, and there remain questions about the viability of the financial system," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York. "The (gross domestic product) number," he added, "just threw gasoline on the fire." Across the Atlantic, investors were eyeing Lloyd's Banking Group (LLOY.L) as the second major British financial firm lining up to tap a government-backed insurance scheme. The bank, which revealed a 10 billion pound ($14.28 billion) loss for 2008, said it had not finalized a plan yet but said talks with the UK government were "well advanced." On Thursday, Britain agreed to insure 500 billion pounds ($715 billion) of risky bank assets and struck a deal that could raise the government holding in Royal Bank of Scotland (RBS.L) to 95 percent. Global development banks also launched a two-year plan to lend up to 25 billion euros to shore up troubled banks and businesses in eastern and central Europe. The crisis has dried up credit and capital flows into the once-booming region, pressuring exchange rates and forcing some countries to seek help from the International Monetary Fund. Fannie Mae (FNM.P), the government-controlled company seen by the U.S. administration as a key conduit to stabilize the housing market, reported a $25.2 billion fourth-quarter loss, forcing it to ask for $15.2 billion from the U.S. Treasury Read the rest of the article Labels: bailout, banking crisis, banking system, Citibank, Fannie Mae, financial crisis, Royal Bank of Scotland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). US 4Q GDP Falls 6.2%, Biggest Drop Since '82From Reuters:U.S. fourth-quarter GDP drop biggest since 1982 Fri Feb 27, 2009 12:29pm EST Reuters By Lucia Mutikani WASHINGTON (Reuters) The U.S. economy suffered its deepest contraction since early 1982 in the fourth quarter, shrinking at a much worse-than-expected 6.2 percent annual rate as exports plunged and consumers slashed spending. A month ago, the Commerce Department had estimated the economy shrank at a 3.8 percent pace in the October-December quarter. But downward revisions to inventories, exports and spending led it to issue a much weaker figure on Friday. "It's just doom all over. There's nothing good to take away from this report. I think there's a few more bad quarters to come," said Boris Schlossberg, director of currency research at GFT Forex in New York. The grim data shocked Wall Street, which had braced for a downward revision, but not one nearly so deep. The consensus was for a decline of 5.4 percent. U.S. stocks fell, with the Standard & Poor's 500 Index hitting a fresh bear market low, weighed down by the data and news the government could take a large common equity share in troubled financial firm Citigroup. Government bond prices rallied. A separate report showed mounting job losses turned consumers gloomier in February, evidence the U.S. recession continues to deepen. The final Reuters/University of Michigan consumer sentiment index fell to 56.3 from January's 61.2. Read the rest of the article Labels: bailout, financial crisis, GDP Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). G.M. Loses $9.6 BillionJust posted to the New York Times website. Sorry if this ruins tomorrow morning's paper for you. It probably won't be such a good day for Rick Wagoner either, and he's probably ruining lots of UAW members' days too.DETROIT—The chief executive of General Motors met with government overseers on Thursday to explain the carmaker's financial situation, hours after G.M. reported a $9.6 billion south-quarter loss and said it was rapidly spending its cash reserves. The G.M. chief, Rick Wagoner, is expected to ask for more assistance as he sits down with the auto industry task force created by President Obama. The panel, led by Treasury Secretary Timothy F. Geithner and Lawrence H. Summers, the White House economic adviser, will oversee the restructuring at G.M. and Chrysler. Even as the meeting unfolds, G.M. finances were reaching a crucial point. The company said Thursday that its cash reserves were down to $14 billion at the end of 2008, including $4 billion it had borrowed from the government that month. G.M. spent $19.2 billion of its cash reserves in 2008. It spent $6.2 billion of the reserves—$2 billion a month—in the fourth quarter alone. Since then, G.M. has borrowed $9.6 billion more, but the company expects to go through that money quickly, and says more aid is necessary to remain solvent. "The economic situation is having a dramatic impact on our industry, on General Motors," G.M.'s chief financial officer, Ray Young, said on a conference call Thursday. "We're still forecasting a cash flow burn of $14 billion in '09, so we will need some additional funding support." The company has said that it needed a minimum of $11 billion to $14 billion in reserves to finance operations, but the estimates were made before the recent drop in auto sales and cuts by G.M. in response. G.M. lost $30.9 billion, or $53.32 a share, in 2008. For the fourth quarter, it lost $9.6 billion, or $15.71 a share, as its global sales fell 26 percent. In 2007, the company lost $43.3 billion, a record, mostly the result of a noncash accounting charge; it adjusted the figure higher by $4.6 billion on Thursday. The losses, though, are unlikely to shake investors, who have already realized the automaker's perilous state. G.M. said last week that it might need as much as $30 billion to complete the restructuring plan that it has submitted to the Treasury Department. Read the rest of the article. Labels: auto industry, auto industry loans, bailout, financial crisis, General Motors, Rick Wagoner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Stiglitz Criticizes O.'s Speech, Favors Single-PayerThis seems pretty explosive to me: Nobel-Prize-winning economist Joseph Stiglitz came put in favor of a single-payer universal health program as "the only alternative" in an interview with Amy Goodman on Democracy Now!. Hat-tip to Dr. Christine Adams of Health Care for All Texas. Very interesting also that he also criticizes Obama as having "confused saving the banks with saving the bankers." (Amy Goodman's phrase, but Stiglitz responded: "Exactly.")There's also a discussion of nationalization, and from what I can tell Stiglitz calls for a Swedish-style "nationalization," which is really just temporary receivership (or what Krugman usefully calls "preprivatization"—though this is what Krugman favors too). This puts him barely to the left (on this issue at least) of Alan Greenspan, who as we've reported here, has said that "nationalization" will probably be necessary. Wish Amy had asked him about full, permanent nationalization... Click here for Fred Moseley's argument for it in the March/April issue of D&S. We'll have an article about single-payer in that issue too. Here is the beginning of the DN! transcript: AMY GOODMAN: Your first assessment of the speech last night? JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he did an excellent job of wending his way through the fine line of trying to say—give confidence about where we're going, and yet the reality of our economy—country facing a very severe economic downturn. I thought he was good in also giving a vision and saying while we're doing the short run, here are three very fundamental long-run problems that we have to deal. The critical question that many Americans are obviously concerned about is the question of what do we do with the banks. And on that, he again was very clear that he recognized the anger that Americans have about the way the banks have taken our taxpayer money and misspent it, but he didn't give a clear view of what he was going to do. AMY GOODMAN: Let's go to the clip last night. During his speech, President Obama acknowledged more bailouts of the nation's banks would be needed, but didn't directly say, as Joe Stiglitz was saying, whether the government would move to nationalize Citigroup and Bank of America. PRESIDENT BARACK OBAMA: We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible; force the necessary adjustments; provide the support to clean up their balance sheets; and assure the continuity of a strong, viable institution that can serve our people and our economy. AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he holding the banks accountable? JOSEPH STIGLITZ: Well, so far, it hasn't happened. I think the more fundamental issues are the following. He says what we need is to get lending restarted. If he had taken the $700 billion that we gave, levered it ten-to-one, created some new institution guaranteed—provide partial guarantees going for, that would have generated $7 trillion of new lending. So, if he hadn't looked at the past, tried to bail out the banks, bail out the shareholders, bail out the other—the bankers' retirement fund, we would have easily been able to generate the lending that he says we need. So the question isn't just whether we hold them accountable; the question is: what do we get in return for the money that we're giving them? At the end of his speech, he spent a lot of time talking about the deficit. And yet, if we don't do things right—and we haven't been doing them right—the deficit will be much larger. You know, whether you spend money well in the stimulus bill or whether you're spending money well in the bank recapitalization, it's important in everything that we do that we get the bang for the buck. And the fact is, the bank recovery bill, the way we've been spending the money on the bank recovery, has not been giving bang for the buck. We haven't gotten anything out. What we got in terms of preferred shares, relative to what we gave them, a congressional oversight panel calculated, was only sixty-seven cents on the dollar. And the preferred shares that we got have diminished in value since then. So we got cheated, to put it bluntly. What we don't know is that—whether we will continue to get cheated. And that's really at the core of much of what we're talking about. Are we going to continue to get cheated? Now, why that's so important is, one way of thinking about this—end of the speech, he starts talking about a need of reforms in Social Security, put it—you know, there's a deficit in Social Security. Well, a few years ago, when President Bush came to the American people and said there was a hole in Social Security, the size of the hole was $560 billion approximately. That meant that if we spent that amount of money, we would have guaranteed the—put on sound financial basis our Social Security system. We wouldn't have to talk about all these issues. We would have provided security for retirement for hundreds of millions of Americans over the next seventy-five years. That's less money than we spent in the bailouts of the banks, for which we have not been able to see any outcome. So it's that kind of tradeoff that seems to me that we ought to begin to talk about. AMY GOODMAN: So, you say Obama, too, has confused saving the banks with saving the bankers. JOSEPH STIGLITZ: Exactly. AMY GOODMAN: Should they all have been fired? JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank basis. Clearly, the banks that have not been managed very well, we need to not only fire them, we have to change their incentive structure. And it's not just the level of pay; it's the form of the pay. Their incentive structures encourage excessive risk taking, shortsighted behavior. And in a way, it's a vindication of economic theory. They behaved in the irresponsible way that their incentive structures would have led them to behave. Read or listen to the rest of the interview. Labels: Amy Goodman, bailout, bank nationalization, Barack Obama, financial crisis, Joseph Stiglitz, Paul Krugman, single-payer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dull Compulsion (vi): Obama's SpeechThe Dull Compulsion of the EconomicA series of posts by D&S collective member Larry Peterson Obama's Mixed Up Metaphor I suppose it's a luxury, of sorts, these days, to look at a presidential address as something more than an opportunity for a good laugh, but President Obama's first attempt to articulate his vision of economic recovery to the suffering nation was, if more sincere and confident, all the more incoherent. And it wasn't just me: markets clearly didn't buy Obama's line, falling on the morning after the speech. They recovered later, but much of this was on the back of a rising oil price (which boosted oil stocks), while losing the momentum that saw Tuesday's rally bring the indices away from dangerous lows. The main problem with the speech was crystallized in one particular statement of the president: "You see, the flow of credit is the lifeblood of our economy." I suppose we've all become so inured, in the wake of the fall of Lehman Brothers, to economists and economic commentators using the metaphor of the circulatory system, so that we are conditioned to accept such references to the financial system, tacitly assuming money in the place of blood. But to use the metaphor in relation to credit is another thing altogether. And the fact that this statement made it past the president's handlers, and attracted no comment, so far as I have seen, concerns me. As anyone who read my post of last week knows, I'm hardly a stickler on the issue of the definition of money; and I'm certainly not going to push some rigid definition that neglects the central role of credit creation in any modern economy. But the economic crisis has featured not only a credit system that was a little oversized: as we all know now, credit creation, under the sleepy eyes of the ideologues and crooks who "regulated" the financial industry for decades, reached altogether ruinous heights in the run-up to the crisis. So, far from being like blood, the credit injected into the economy for much of the time leading up to the crisis resembled the tainted blood samples we've read about in China, only watered down by a factor involving several digits. This is important because Obama appealed earlier in the speech to the capacities that would allow the nation to fend off the crisis: the work being done in the laboratories, the imaginations of entrepreneurs, and so on. And, in this vein, Obama said his entire agenda "begins with jobs." Some of us would say that this is more like the true lifeblood of the nation's economy. But Obama, after making his circulatory analogy, and even adding a few boilerplate denunciations of bankers, tries to steer us in the following rhetorical direction: we have to accept that rescuing the banking system, in much the same form as we have come to know it, is absolutely essential to reviving the economy. Why? Because only bank lending will create the means of reproducing, and even enhancing the American lifestyle: "That's what this is about. It's not about helping banks; it's about helping people. Because when that credit is available again, that family can finally buy a new home. And then some company will hire workers to build it. And then those workers will have money to spend, and if they get a loan, too, maybe they'll finally buy that car, or open their own business." Failure to do this, on the other hand, will lead to years of stagnation, and more remedial government spending down the line. This doesn't exactly sound like a jobs-led recovery to me: it sounds more like the type of trickle-down thinking that brought us the subprime mess in the first place. And the fact that Obama failed to mention our abysmal, if rapidly rising savings rate, reveals clearly the level of duplicity being at least tacitly employed in the speech, especially insofar as President Obama did mention the looming Medicare crisis. This is all the more the case if one looks at some of the appeals to patriotism Obama made. No doubt, many of them could not but have been looked at by attentive foreign creditors as hints of a possible protectionism to come: "Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders and I know you don't either. Its' time for America to lead again." So it seems Obama is trying to force the peons into signing onto his program: one that has, as one of its main goals, no less, a re-uptake of highly leveraged players looking for big yields, who have been sitting on top of big, if declining cash piles on the sidelines as the crisis has progressed, into the financial system, with the huge loans they depend on being backed somehow by taxpayers and foreign bondholders. And these people have hardly shown themselves to be big job-creators. This is what the so-called P-PIF (Public-Private Investment Fund) seems to be about. So Obama must find something to connect, rhetorically, the former with the indispensable banking system, while downplaying the fact that the latter still, somehow--and they continue to borrow US bonds as fast as the Treasury can print them, even as their economies decline--hold an important veto power over the plan. And then, Obama added insult to injury by saying "three-quarters of the fastest growing occupations require more than a high-school diploma" when he discussed his education proposals. As Doug Henwood noted in his fine book, After the New Economy in 2003, "Of the top 30 occupations [projected by the Bureau of Labor Statistics], about 40% of job growth will be among those in the lowest quarter of the income distribution. Another 28% will be in the top-paying quartile, with only 31% in the middle two. Less than a quarter of the top 30 jobs will require a bachelor's degree or higher; 54% will require short on-the-job training." The upshot? "It's hard to see from this how "the problem is that many people don't have the right skills,"" and that "[i]t is, however, easy to see the polarizing tendencies in today's labor market...It produces a fair number of high-end jobs, a lot of low end jobs, but not much in the middle (New Press, pages 72-73)." Though his emphasis on education is laudable, the structure of the American economy remains less than favorable for most job seekers, educated or not, and will remain so, whether or not their taxes subsidize the "indispensable" recapitalization of the banks, and the re-integration of leveraged players into the financial system. This is all the more the case, of course, as the economy continues its unavoidable (given all that bad debt) decline. And it is the rhetorical device of a circulatory system which is the focal point which is employed to illustrate a totally disingenuous connection between the debt-based financial system and working people (especially inasmuch as it airbrushes the connection of foreign creditors in propping up this arrangement to the latter, even as it attempts to appease them with appeals to their patriotism, while tacitly threatening the foreigners who pay a big part of the bill). And as long as working people accept this ruse, he's right: the financial system will have to be revived in much the way it was, even if that serves no economic purpose for the workers. But if we can look beyond Obama's flawed metaphors--as well as those of economic commentators and the financial press--maybe we can move in a better direction. Labels: bailout, Barack Obama, Doug Henwood, financial crisis, Larry Peterson, the dull compulsion of the economic Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank Throws $Million Bailout PartyYou know it's bad when entertainment blog TMZ breaks a story on a bank blowing millions on a party after it received $1.6 billion in bailout funds, which is exactly what happened to Chicago bank Northern Trust.The bank not only spent millions sponsoring a golf open at the Riviera Country Club in Los Angeles, it flew hundreds of clients and employees to LA, put them up in some of the fanciest hotels in town (including the Ritz), treated them to swanky dinners, hosted a private concert by Chicago (because they are a Chicago-based bank, of course) rented a hanger for a private concert with Earth, Wind, and Fire, rented out the House of Blues for another fancy dinner and a private concert with Cheryl Crow, and gave female guests trinkets from Tiffany and Co. TMZ has posted pictures and camera footage of all the fun. For it's part, the bank claims that it is all part of the normal course of business, and that it is doing fine financially. It did, however, lay off 450 workers (4% of its workforce) in December. No word of whether laid-off employees were invited. Labels: bailout, banking crisis, financial crisis bailout, Northern Trust, TMZ Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Nigerians Scammers Pluck $27 mil. from CitiNigerian scammers have decided to skip the middleman and go straight to the bank. According to the NY Times, the scammers convinced the sharp minds at Citibank that they represented the National Bank of Ethiopia. The bank duly wired $27 million to the scammers. Citibank only became aware of the fraud when the folks from Ethiopia noticed some unauthorized withdrawals and some of the recipient banks weren't able to process the transactions.Citi has refunded the money to Ethiopia--not a hard thing for them to do since they aren't lending the billions in taxpayer bailout funds they have received. From the Times: Swindles in which someone overseas seeks access to a person's bank account are so well known that most potential victims can spot them in seconds. Read the full story here. Labels: bailout, Citibank, Nigerian Scam Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Huge Protest over Irish EconomyFrom the BBC:Huge protest over Irish economy Up to 100,000 people have gathered in Dublin city centre to protest at the Irish government's handling of the country's recession. Many are angry at plans to impose a pension levy on public sector workers. Trade union organisers of the march said workers did not cause the economic crisis but were having to pay for it. In a statement, the Irish government said it recognised that the measures it was taking were "difficult and in some cases painful". The pension levy was "reasonable", the government said. reflecting "the reality that we are not in a position to continue to meet the public service pay bill in the circumstances of declining revenue". Read the rest of the article Labels: bailout, financial crisis, Ireland, labor unrest, pensions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Two Down: How Many More To Go?The first being Iceland, a few weeks ago. From The New York Times:February 21, 2009 Latvia's Government Falls on Economic Toll By DAVID L. STERN KIEV, Ukraine Latvia's center-right coalition government collapsed Friday, a victim of the country's growing economic and political turmoil. It was the second European government, after Iceland, to disintegrate because of the international financial crisis. The government in Riga, faced with forecasts of a severe drop in the economy this year, was the first in Eastern Europe to succumb to turmoil caused by the crisis. Its collapse rounded out a week in which worries about feeble investment and output and shaky banks in Central and Eastern Europe coursed through international markets. Latvia has had a history of revolving-door politics and complex coalitions since pulling free of the Soviet Union in 1991. Prime Minister Ivars Godmanis, who presented his resignation to President Valdis Zatlers on Friday, had been in power only since December 2007. But the precipitous plunge of Latvia's economy, which helped provoke riots last month that were the country's worst since 1991, played a major part in the government's downfall. Mr. Godmanis said he would continue to govern until a new coalition was formed. His departure comes at a critical juncture for Latvia, a country of 2.2 million people. After entering the European Union in 2004, Latvia and its neighbors Estonia and Lithuania posted Europe's highest growth figures, earning the moniker the Baltic Tigers. Now Latvia shows the Continent's biggest losses. Gross domestic product shrank at an annual rate of 10.5 percent last month, and by the end of 2009, Latvia's economy is projected to shrink by a shocking 12 percent, Finance Ministry officials say. Other analysts believe that even these figures may be optimistic. "I wouldn't be surprised if it's 15 percent," Peteris Strautins, chief economist for Swedbank in Riga, said last week. The crisis led the government last fall to secure an aid package worth nearly $10 billion from the European Union, the International Monetary Fund and other sources. It came with strict conditions, and now the government is cutting spending wherever it can. Hospitals and schools throughout the country are under threat of closing, as local administrations find their budgets reduced by as much as 40 percent. Government salaries have been cut by 25 percent. Read the rest of the article Labels: bailout, Eastern Europe, financial crisis, labor unrest, Latvia Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More on Canada (N. Folbre on NYT econ blog)More on Canada's banking system, as Pres. Obama visits our neighbor to the north. This one is by left economist and UMass-Amherst professor Nancy Folbre, at the New York Times Economix blog, to which she seems to be contributing regularly (we re-posted something by her from there on early childhood education last week). She makes some of the same points that Maurice Dufour makes in the article we posted this morning, but Folbre's discussion of public spending, and single-payer in particular, is excellent. And it is nice to see her criticize the fatuous Fareed Zakaria. (For a great critique of Zakaria's oeuvrre, see frequent D&S author Roger Bybee's article in Extra! from a few months back.Canada and the Recession: Angles of Deflection By Nancy Folbre O Canada. That big, beautiful country to the north is a lot like us, just colder and a few degrees less ... neoliberal. Canada has moved more slowly than the United States to deregulate its economy and shrink its social safety net. The resulting differences in the impact of global recession are small, but instructive. As Fareed Zakaria points out in a recent Newsweek article, Canada is weathering the financial crisis better than we are. Canadian banks are more old-fashioned (that is, centrally regulated) than our own. Stricter leverage requirements have been enforced. Subprime mortgages have not been encouraged. Prohibitions against foreign bank takeovers have protected Canadian institutions from competition from the United States, but also buffered them against financial contagion. Mr. Zakaria overstates the case when he claims that no government bailout has taken place there. The Canadian government has provided substantial assistance to the financial sector. But its efforts to increase available credit remain far less costly than our trillion-dollar subsidies. A more serious concern for Canadians is the likelihood that the sinking American and global economy will pull them down. If unemployment continues to rise over the next few months in the United States, as predicted, many families will lose their health insurance coverage or struggle to pay premiums they can ill afford. By contrast, increased unemployment won't reduce Canadian access to health care. As the economist (and fellow Economix blogger) Uwe Reinhardt explains, the single-payer Canadian health care system delivers very good results for about half the per-person cost of ours—with huge savings from reduced paperwork. Economic disparities in access to health care are significantly lower there. President Obama promises to expand health insurance coverage in the United States with little threat or inconvenience to the private sector. But some Democrats in Congress, led by Representative John Conyers, advocate a single-payer "Medicare for All" bill strongly influenced by the Canadian model. Both American and Canadian unemployment insurance systems are less generous than those of most countries of Northwestern Europe. Neither provides assistance for more than 40 percent of the unemployed. But Canadians have long provided a higher replacement rate for lost earnings. According to latest estimates from the Organization for Economic Cooperation and Development, a married worker earning the average wage, with two children, could expect 78 percent wage replacement in Canada, compared to 52 percent in the United States. The differences are even greater for those earning higher than average wages, because of low benefit ceilings. The recently passed Economic Stimulus and Recovery Act offers incentives to states to expand unemployment provision to part-time workers and to those leaving jobs for "compelling family reasons." The Canadian unemployment insurance system offers more comprehensive family benefits, including paid sick leave, paid compassionate care leave, and paid maternal and parental leaves of up to 50 weeks. Many American workers aren't even eligible for the 12 weeks of unpaid family leave guaranteed by the Family and Medical Leave Act—although President Obama promises to change that. There's no evidence that Canada's public provision of health care and social benefits has reduced its economic growth, and the federal budget just presented is the first to show a deficit in 11 years. What explains more support for public spending there? Slightly lower income inequality may encourage slightly more solidaristic policies. Such policies, in turn, reduce income inequality. The French social-democratic traditions of the province of Quebec exert a distinct influence. The Canadian political scientist Keith Banting argues that explicit efforts to develop a strong but multicultural national identity have strengthened norms of mutual support. The national anthem ends with a promise (at least in translation of the original French) to protect Canadian homes and rights. (This is the full post.) Labels: bailout, banking crisis, banking regulation, Barack Obama, Canada, Fareed Zakaria, financial crisis, Maurice Dufour, Nancy Folbre, Roger Bybee Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Canadian Banks--Shovel-ReadyAs Obama visits Canada today, we are posting an article by Maurice Dufour on the supposed health of the Canadian financial sector. Maurice has been livening up our pages with satirical articles, including most recently "Hooked on Hydrocarbons?", a piece on the Alberta oil-sands that takes seriously (sort of) the notion that the United States is "addicted to oil." The article is available only in the January/February print edition (here's the table of contents). Order that issue here; subscribe here.Shovel-Ready in Canada Pundits are praising the financial health of the United States's northern neighbor—but should they? Canadians have long been trying to shed what they feel is an undeserved stereotype, namely, that our country is boring. Try as we might, we can't seem to shake the association with dullness. The gap between our self-image and the way others perceive us is still yawning, so to speak. Recent developments might offer an opportunity for an extreme image makeover, though. That's because, amidst the recent global economic carnage, this country's financial system appears to have emerged relatively unscathed. So more and more people these days are actually getting excited when they think about the land of moose, Mounties and maple syrup. Now every country wants to be more like Canada, it seems. Read the rest of the article. Labels: bailout, Barack Obama, Canada, financia crisis, Maurice Dufour Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Greenspan (!): Nationalize the BanksWe weren't so surprised when Noriel Roubini called for (temporary) bank nationalization in a Washington Post op-ed co-authored with Matthew Richardson this past Sunday. But now this bombshell from the Financial Times, via Naked Capitalism, with Yves Smith's excellent-as-usual commentary:Greenspan Predicts TARP Will Prove Insufficient, Supports Bank Nationalization Before readers start throwing brickbats at the mention of the name of Alan Greenspan, it's important to remember that he has become the poster boy of the policy errors that lead to our financial mess. And that isn't an accurate picture. This crisis had many parents, and even though Greenspan was one of the key actors, he was far from alone. Treasury Secretaries Robert Rubin and Larry Summers were also backers of the financialization of the economy, the permissive regulatory posture, and the strong dollar policy. Greenspan, to his credit, at least appears chastened by the mess helped create. As far as I can tell, very few of the other perps have questioned their decisions. Greenspan spoke this evening at the Economic Club of New York. Some of his comments show that he has made some considerable shifts from his libertarian, anti-regulation stance. But he hasn't had a Damascene moment; he seems to be changing his views incrementally. Nevertheless, it's remarkable that Greenspan has come out saying that nationalizing banks is the "least bad" policy option, as he did in a Financial Times interview. Now we are seeing role reversal: the loyal libertarian reluctantly admitting the need for regulation and the advantages of taking over dud banks, even big dud banks, while the Democrats tip toe around the idea of doing anything that might ruffle bankers feathers too much. Note that he stresses, as we have, the need to clean up the financial system for fiscal stimulus to be effective (as in kick the economy into a higher gear, rather than provide a temporary amphetamine hit that quickly wears off). He also sounded a warning similar to Willem Buiter's, that the US is fiscally constrained and cannot run deficits as large as we might otherwise like without incurring serious sdverse consequences. Buiter has warned of the danger of a collapse in dollar assets. Greenspan seems more concerned about immediate effects, namely, rising long term bond rates (the Fed in theory can suppress a rate rise by buying long-dated Treasuries, but I suspect in practice this policy would lead to private investors and other central banks abandoning the long end of the yield curve, knowing the Fed could not continue this strategy on an unlimited basis, and the Fed having qualms about ballooning its balance sheet to grotesque size. Even at this level, the Fed seems cautious about further balance sheet growth, even though some have argued the Fed would need to expand its balance sheet far more aggressively to combat deleveraging). From the Financial Times: The US administration will have to go back to Congress for additional funds to recapitalise the banking system to restore the normal flow of credit in the economy, Alan Greenspan, former chairman of the Federal Reserve, said yesterday.... As for the idea of increasing capital levels, it's a poor second best to rethinking what the financial system ought to look like. And it is truly sobering how little serious thought has been done on that front. As for Greenspan depicting Congress champing at the bit to reform the industry, that couldn't be further from the truth. Enacting strict limits on pay to TARP recipients is a far cry from meaningful regulatory reform. From the Financial Times interview:
However, he wimped out on cramming down bondholders (note Martin Wolf and Nouriel Roubini, among others, have advocated that step, although Wolf did warn that it would need to be done with ample preparation for temporary disruption): "You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks," he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt." Greenspan is a consultant to Pimco, and Pimco has consistently bet that the Feds would be nice to banks (I am told by someone in a position to know that they own a lot of junior bank debt). So this statement may be de facto an admission by Greenspan that he sees nationalization as inevitable and is trying to shape what form it takes. (This was the full post.) Labels: Alan Greenspan, bailout, bank nationalization, financial crisis, Nouriel Roubini, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Germany May Rescue Debt-Laden EU MembersFrom Ambrose Evans-Pritchard's column. Yves Smith has linked to this page, too. But I haven't seen anything about it in my brief perusal of German newspapers today.Germany may rescue debt-laden EU members Germany has acknowledged for the first time that it may have to rescue eurozone states in acute difficulties, marking a radical shift in policy by the anchor nation of Europe's monetary union. By Ambrose Evans-Pritchard Last Updated: 7:18PM GMT 17 Feb 2009 Finance minister Peer Steinbruck said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation. "The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty." Credit default swaps (CDS) measuring risk on Irish debt rose to 386 basis points yesterday despite Berlin's show of support, suggesting that the markets remain sceptical over hard-line German financier's change of heart. The CDS on Austrian debt surged to 180 on fears of banking contagion from Eastern Europe, while Greece, Belgium, Italy and Spain have all seen a surge in default costs. However, it is clearly Ireland that is now in the eye of the storm as Dublin struggles to prevent the budget deficit spiralling up to 12pc or even 13pc of GDP as the economy contracts. Fears are mounting that Ireland may not be able to cover the massive liabilities of its banking system. The Maastricht Treaty prohibits eurozone bail-outs by EU bodies but Article 100.2 allows for aid to countries facing "exceptional occurrences beyond its control". The European Investment Bank is already providing aid by steering project finance to regions in distress. This could be expanded subtly into short-term help. Read the rest of the article Labels: Ambrose Evans-Pritchard, bailout, Eastern Europe, financial crisis, Germany, Ireland, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Julian Delasantellis on Stress TestingThe witty Delasantellis offers his thoughts. Nice to read in conjuction with our post on Bill Black today:Perhaps a cool hand by Julian Delasantellis Asia Times February 17th, 2008 It wasn't the planet-killing asteroid from 1998's Armageddon that you heard slamming into Earth with a deafening thud last week, but the consequences of what it was may be just about as serious. It was but the latest attempt, the Treasury Secretary Tim Geithner plan, to pull the US financial system out of the deep hole it so aggressively and enthusiastically threw itself into during the great credit boom early in this decade. How bad was it? Well, as Wall Street secretary pretending to be investment banker Tess McGill (Melanie Griffith), in 1988's Working Girl, observed on her attempt to pitch a corporate buyout seemingly going badly, "They don't exactly have bouncers atthese things, they're a little more subtle than that." Geithner should be thankful for that as well. If not, he would have been grabbed by his collar and thrown out into the gutter on Pennsylvania Avenue, beneath the statue of Alexander Hamilton, his country's first Treasury secretary, realizing that, on the basis of the tax problems and this dubious financial system rescue plan that have essentially become the coming-out party for the Treasury debutante, he has a long way to go to even match up to the standards of Ogden Livingston Mills, Herbert Hoover's second Treasury secretary, let alone the giants in the office such as Hamilton. The basic complaint about the Geithner plan was that it was vague. At a time as dire as this, the press, and, it turns out, the markets, with the Dow Jones Industrial Average dropping over 350 points just as Geithner was speaking, wanted something a bit more substantial than just the Treasury secretary playing coy and batting his baby-blue eyes before the entire world. Read the rest of the article Labels: bailout, bank failures, bank stress testing, banking regulation, banking system, financial crisis, Julian delasantellis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Dull Compulsion of the Economic (iv)Links:(1) I forgot to post this New York Times piece yesterday: Do We Need a New Internet? (2) Yesterday I linked to a piece on the increasingly dire financial situation in Eastern Europe, which threatens to spill over into Western Europe (with both already seriously hobbled by the global financial crisis). Today, Baseline Scenario reminds us that Ireland requires immediate attention, and calls on G7 finance ministers, meeting in Rome, not to neglect another unexpectedly pivotal player in European finance. Unfortunately, as this article from Vienna's Die Presse (in German, but there's a good photo) recounts, the biggest news coming out of Rome seems to involve the possibly sozzled Japanese finance minister (3) I wish Veblen were alive to write about today's philanthropy barons. "Charity" really is turning into a kind of conspicuous compulsion that seems to have raw power (often ill-used at that) as its source. Lord knows what the effects could be. But I think it's key to understanding the evolution of a ruling class that has been the overwhelming beneficiary of a kind of economic growth that is itself only now evaporating away. (4) Nouriel Roubini writes that Republicans are starting to speak of bank nationalization. (5) Krishna Guha of the Financial Times writes of the strange shift in bond investors' perceptions of deflation risk in the medium term, and what that might mean for policy. (6) Plans for the "car czar" dropped in favor of a panel more subject to presidential control. (7) From Bookslut: "McGraw-Hill Cos., the owner of the Standard & Poor's credit-rating service, won't be publishing a book on the financial crisis that the author says addresses S&P's role in the markets' plunge." Thanks to Marginal Revolution. (8) More turmoil in UK financial sector as Lloyd's (buyer of HBOS) finds itself under the nationalization gun. (9) Yves Smith links to this FT story about big companies increasingly cutting links with partners they consider too risky to continue doing business with, in a kind of "corporate version of the paradox of thrift." Comment Response to Brad DeLong Yesterday I linked to an exchange between CUNY anthropology professor and political economy theorist David Harvey and Berkeley economist and former Treasury official Brad DeLong that I got off Marxmail. The exchange consisted of a blog entry by DeLong on his site that was prompted by the circulation on the internet of a short essay by Harvey on the Obama stimulus package, and Harvey's response to DeLong, published on his website. In my post, I made a short comment to the effect that DeLong seemed to be taking refuge in pedantry in his attack on Harvey. I didn't articulate why I felt this way, so it was in a sense unsurprising that DeLong left the following comment on our blog: Gee. And I remember when writers for Dollars & Sense had read Joan Robinson, and understood why objectively-reactionary Marxisant critiques of Keynesianism were ill-founded. DeLong has a point. I'm not an economist, and, of course, DeLong's knowledge of Marx almost certainly overwhelms my own (I've never read Theories of Surplus Value, for example), never mind his grasp of seminal figures in the non-Marxian tradition like Joan Robinson, Keynes and John Hicks (I'm sorry to say I've mostly read secondary literature on these writers, with the exception of Keynes). And I'm gratified that DeLong has a respect for the history of our magazine. For my part, I respect DeLong's work and visit his site almost every day. He's right: I shouldn't have posted the comment without some sort of substantive justification for my evaluation of the exchange between DeLong and Harvey; I could have simply directed readers to the exchange itself without comment. So, I offer Prof. DeLong a heartfelt and humble apology. That said, I still have reservations about Prof. DeLong's attacks on Harvey, though I do agree that Harvey lost the thread at several points in his response to DeLong. DeLong says that David Harvey's piece on the stimulus is lacking in intellectual rigor, and that this lack of precision serves a kind of obfuscatory purpose. His argument is reminiscent of those employed by logical positivists against metaphysics in the middle of the last century, but the tool with which DeLong proposes to both illuminate this confusion and rectify it is the marginalist economics of the neoclassical tradition. To put it simply, DeLong says that Harvey's condemnation of the stimulus is a convoluted harangue that can really be reduced to a simple proposition that can be analytically refuted by the invocation of what is essentially an identity relation in mainstream economics: that there is no inherent level of debt that cannot be financed, because interest rates will set at a point that eventually matches supply of savings with demand for debt, either at a national or international level. In a follow-up post, DeLong refers to Harvey's position as a kind of revival of the "Treasury View" (a belief that deficit spending had to be kept at a clearly ineffective or even in ways counter-productive level to prevent what was considered inevitably crippling inflation from taking hold, that prevailed in the British Treasury during the depression and played no small role in increasing the latter's severity). And DeLong notes that it may be true that the price of government deficits run up in response to the crisis may become so high that domestic private investment will become depressed (or "crowded out"), and hence that economic growth will fall as a result, though that hasn't happened so far: demand for US public debt has remained high, and yields on government debt surprisingly--even, until very recently, alarmingly--low (while debt levels have blown into the stratosphere). So, according to DeLong, Harvey is not merely befuddled: he's plain wrong in attacking the Obama stimulus package, even on his own confused terms. The certainly naive--in mainstream economic terms, of which I am, admittedly, hardly a virtuoso practitioner, as I know DeLong is--objection I have to DeLong's position (which I think I share with David Harvey) is that the world has changed so much since Hicks and others did their great, though by no means flawless work--and that is beyond dispute, even for a relative novice--that the old identities no longer make much sense. Hicks himself said the following about the IS-LM diagram which DeLong refers to for support: "The IS-LM diagram, which is widely, though not universally, accepted as a convenient synopsis of Keynesian theory, is a thing for which I cannot deny that I have some responsibility ("IS-LM: an Explanation," Journal of Post Keynesian Economics, 3 (2): 139-54, 1980, quoted in Steve Keen, Debunking Economics , 2001, London, Zed Books)" Again, I'm not going to try to punch above my own inconsiderable weight, as I did yesterday, by getting involved in the technical details surrounding debate about IS-LM analysis. All In want to do here is point out some of the things that even I have seen in the literature that suggest that the kinds of identities DeLong sees as decisive are, well, somewhat porous, at least on the surface. The Neoclassical synthesis of Keynes and the marginalist tradition was, after all, forged at a time when all the major economies except the US were relatively closed, and for a good reason: they were devastated by depression and a World War. Accordingly, the US used its unique powers of seigniorage in the early post-war period to run up balance of payments deficits, expand export markets, and allow its allies to rebuild their economies (partly out of fear that they would otherwise fall to communism). As these economies quickly became competitors, though, this system broke down, and was replaced by Neoliberalism, which entailed a partial (official, anyway) rejection of the Keynesian tradition. Now that Neoliberalism is being, happily, toppled, interest in the Keynesian tradition has revived. But that doesn't alter the fact that history has moved on, often-times in ways that leave us breathless in accounting for its crazy effects. The hugely and breathtakingly expanded role of debt in the leading economies has perhaps been the most obvious instance of this, giving rise to other controversies that have upset other certainties of conventional economics (the "dark matter" debate, which hearkens to--of all things--the supremely bizarre world of subatomic physics and quantum mechanics to account for something that had been considered a heresy in economics, the tendency of savings in labor-intensive countries to migrate to capital-intensive ones, being perhaps the best instance of this). Steve Keen mentions another, related controversy, one that should give us further pause in considering the solidity of neoclassical "identities": Testing the first hypothesis takes some sophisticated data analysis, which was done by two leading neoclassical economists in 1990. If the hypothesis were true, changes in M0 should precede changes in M2. The time pattern of the data should look like the graph below: an initial injection of government "fiat" money, followed by a gradual creation of a much larger amount of credit money: How can savings and investment helpfully be considered an identity at all under such conditions? Keen says we need to go on to consider credit as having, in an important sense, completely eclipsed the ability of the authorities to match savings to investment via interest rates targeted at underlying economic activity (so LM--the money markets--becomes detached from IS--the goods markets): If only it were the world in which we live. Instead, we live in a credit economy, in which intrinsically useless pieces of pape--or even simple transfers of electronic records of numbers--are happily accepted in return for real, hard commodities. This in itself is not incompatible with a fractional banking model, but the empirical data tells us that credit money is created independently of fiat money: credit money rules the roost. So our fundamental understanding of a monetary economy should proceed from a model in which credit is intrinsic, and government money is tacked on later--and not th |
