February 26, 2009
In 1999, UCLA Professor Franklin D. Gilliam wrote a report for Harvard University’s Nieman Foundation for Journalism. That paper concerned a study he had done regarding public perception of the “welfare queen” stereotype and how that perception had been shaped by the media. He discussed how the term had been introduced by Ronald Reagan during the 1976 Presidential campaign. Reagan told the story of a woman from Chicago’s South Side, who had been arrested for welfare fraud. The term became widely used in reference to a racist (and sexist) stereotype of an iconic African-American woman, enjoying a lavish lifestyle and driving a Cadillac while cheating the welfare system.
Ten years after the publication of Gilliam’s paper, we have a new group of “welfare queens”: the banks. The banks have already soaked over a trillion dollars from the federal government to remedy their self-inflicted wounds. Shortly after receiving their first $350,000,000,000 in payments under the TARP program (which had no mechanism of documenting where the money went) their collective reputation as “welfare queens” was firmly established. In the most widely-reported example of “corporate welfare” abuse by a bank, public outcry resulted in Citigroup’s refusal of delivery on its lavishly-appointed, French-made, Falcon 50 private jet. Had the sale gone through, Citi would have purchased the jet with fifty million dollars of TARP funds. Now, as they seek even more money from us, the banks chafe at the idea that American taxpayers, economists and political leaders are suggesting that insolvent (or “zombie”) banks should be placed into temporary receivership until their “toxic assets” are sold off and their balance sheets are cleaned up. This has been referred to as “nationalization” of those banks.
Despite all the bad publicity and public outrage, banks still persist in their welfare abuse. After all, they have habits to support. Their “drug” of choice seems to be the lavish golf outing at a posh resort. The most recent example of this resulted in Maureen Dowd’s amusing article in The New York Times, about a public relations misstep by Sheryl Crow.
The New Welfare Queens have their defenders. CNBC’s wildly-animated Jim Cramer has all but pulled out his remaining strands of hair during his numerous rants about how nationalization of banks “would crush America”. A number of investment advisors, such as Bill Gross, co-chief investment officer at Pacific Investment Management Company, have also voiced objections to the idea of bank nationalization.
Another defender of these welfare queens appears to be Federal Reserve Chairman Ben Bernanke. In his latest explanation of Turbo Tim Geithner’s “stress test” agenda, Bernanke attempted to assure investors that the Obama administration does not consider the nationalization of banks as a viable option for improving their financial health. As Craig Torres and Bradley Keoun reported for Bloomberg News on February 25, the latest word from Bernanke suggests that nationalization is not on the table:
. . . while the U.S. government may take “substantial” stakes in Citigroup Inc. and other banks, it doesn’t plan a full- scale nationalization that wipes out stockholders.
Nationalization is when the government “seizes” a company, “zeroes out the shareholders and begins to manage and run the bank, and we don’t plan anything like that,” Bernanke told lawmakers in Washington today.
The only way to deal with The New Welfare Queens is to replace their directors and managers. The Obama administration appears unwilling to do that. During his February 25 appearance on MSNBC’s Countdown, Paul Krugman (recipient of the Nobel Prize in Economics) expressed his dread about the Administration’s plan to rehabilitate the banks:
I’ve got a bad feeling about this, as do a number of people. I was just reading testimony from Adam Posen, who is our leading expert on Japan. He says we are moving right on the track of the Japanese during the 1990s: propping up zombie banks — just not doing resolution.
. . . The actual implementation of policy looks like a kind of failure of nerve.
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On the banks — I really can’t see — there really seems to be — we’re going to put in some money, as we’re going to say some stern things to the bankers about how they should behave better. But if there is a strategy there, it’s continuing to be a mystery to me and to everybody I’ve talked to.
You can read Adam Posen’s paper: “Temporary Nationalization Is Needed to Save the U.S. Banking System” here. Another Economics professor, Matthew Richardson, wrote an excellent analysis of the pros and cons of bank nationalization for the RGE Monitor. After discussing both sides of this case, he reached the following conclusion:
We are definitely caught between a rock and a hard place. But the question is what can we do if a major bank is insolvent? Sometimes the best way to repair a severely dilapidated house is to knock it down and rebuild it. Ironically, the best hope of maintaining a private banking system may be to nationalize some of its banks. Yes, it is risky. It could go wrong. But it is the surest path to avoid a “lost decade” like Japan.
As the experts report on their scrutiny of the “stress testing” methodology, I get the impression that it’s all a big farce. Eric Falkenstein received a PhD in Economics from Northwestern University. His analysis of Geithner’s testing regimen (posted on the Seeking Alpha website) revealed it to be nothing more than what is often referred to as “junk science”:
Geithner noted he will wrap this up by April. Given the absurdity of this exercise, they should shoot for Friday and save everyone a lot of time. It won’t be any more accurate by taking two months.
On a similar note, Ari Levy wrote an illuminating piece for Bloomberg News, wherein he discussed the stress testing with Nancy Bush, bank analyst and founder of Annandale, New Jersey-based NAB Research LLC and Richard Bove of Rochdale Securities. Here’s what Mr. Levy learned:
Rather than checking the ability of banks to withstand losses, the tests outlined yesterday are designed to convince investors that the firms don’t need to be nationalized, said analysts including (Nancy) Bush and Richard Bove from Rochdale Securities.
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“I’ve always thought that this stress-testing was a politically motivated approach to try to defuse the argument that the banks didn’t have enough capital,” said Bove, in an interview from Lutz, Florida. “They’re trying to prove that the banks are well-funded.”
Will Turbo Tim’s “stress tests” simply turn out to be a stamp of approval, helping insolvent banks avoid any responsible degree of reorganization, allowing them to continue their “welfare queen” existence, thus requiring continuous infusions of cash at the expense of the taxpayers? Will the Obama administration’s “failure of nerve” — by avoiding bank nationalization — send us into a ten-year, “Japan-style” recession? It’s beginning to look that way.
Getting It Right
October 29, 2009
For some reason, a large number of people continue to rely on the advice of stock market prognosticators, long after those pundits have proven themselves unreliable, usually due to a string of erroneous predictions. The best example of this phenomenon is Jim Cramer of CNBC. On March 4, Jon Stewart featured a number of video clips wherein Cramer wasn’t just wrong — he was wildly wrong, often when due diligence on Cramer’s part would have resulted in a different forecast. Nevertheless, some individuals still follow Cramer’s investment advice.
This summer’s stock market rally made many of us feel foolish. John Carney of The Business Insider compiled a great presentation entitled “The Idiot-Maker Rally” which focused on 15 stock market gurus “who now look like fools” because they remained in denial about the rally, while those who ignored them made loads of money.
One guy who got it right was a gentleman named Jeremy Grantham. His asset management firm, GMO, is responsible for investing over $85 billion of its clients’ funds. On May 14, I discussed Mr. Grantham’s economic forecast from his Quarterly Letter, published at the end of this year’s first quarter. At that time, he predicted that in late 2009 or early 2010, there would be a stock market rally, bringing the Standard and Poor’s 500 index near the 1100 range. As you probably know, we saw that happen last week. Unfortunately, he was not particularly optimistic about what would follow:
Mr. Grantham’s Quarterly Letter for the third quarter of 2009 was recently published by his firm, GMO. This document is essential reading for anyone who is interested in the outlook for the stock market and our economy. Grantham is sticking with his prediction for “seven lean years” which he expects to commence at the conclusion of the current rally:
Scary as that may sound, Mr. Grantham does not believe that the S&P 500 will reach a new low, surpassing the Hadean level of 666 reached last March. On page 4 of the report, Grantham expressed his view that the current “fair value” of the S&P 500 “is now about 860”.
What I particularly enjoyed about the latest GMO Quarterly Letter was Grantham’s discussion of the factors that brought our economy to where it is today. In doing so, he targeted some of my favorite culprits: Alan Greenspan (who was pummeled on page 3), Larry Summers, Turbo Tim Geithner (who “sat in the very engine room of the USS Disaster and helped steer her onto the rocks”), Goldman Sachs and finally: Ben Bernanke — whose nomination to a second term as Federal Reserve chairman was treated with well-deserved outrage.
The report included a supplement (beginning at page 10) wherein Mr. Grantham discussed the imperative need to redesign our financial system:
Grantham’s suggested changes include forcing banks to spin off their “proprietary trading” operations, wherein a bank trades investments on behalf of its own account, usually in breach of the fiduciary duties it owes its customers. He also addressed the need to break up those financial institutions considered “too big to fail”. (As an aside, the British government has now taken steps to break up its banks that pose a systemic risk to the entire financial structure.) Grantham’s final point concerned the need for public oversight, to prevent the “regulatory capture” that has helped maintain this intolerable status quo.
Jeremy Grantham is a guy who gets it right. Our leaders need to pay more serious attention to him. If they don’t — we should vote them out of office.