TheCenterLane.com

© 2008 – 2024 John T. Burke, Jr.

Wealth Redistribution

February 10th, 2011 Posted in Uncategorized
Feb, 10 2011
Comments Off on Wealth Redistribution

One of the sleaziest, most disingenuous arguments exploited by politicians is the “wealth redistribution” theme.  Whenever an influential corporate sponsor of some creepy politician is confronted with proposed legislation, which might change the status quo by reducing unconscionable profiteering, we are told that the new bill is a “socialist” attempt at “wealth redistribution”.  Unfortunately, there are too many sheeple who don’t realize that “wealth redistribution” already happened.

The recent uprisings in the Middle East have demonstrated how difficult it can be to maintain a plutocracy in the modern world.  As the American voting public becomes more familiar with the economic circumstances which led to the Egyptian turmoil, attention gradually gets refocused on how our domestic situation compares with Mubarak’s dystopia.  Blogger “George Washington” (a former law school professor) of Washington’s Blog recently wrote a piece concerning how the “Gini coefficient” demonstrates that America’s upward wealth redistribution has reduced this nation to banana republic status:

Egyptian, Tunisian and Yemeni protesters all say that inequality is one of the main reasons they’re protesting.

However, the U.S. actually has much greater inequality than in any of those countries.

Specifically, the “Gini Coefficient” – the figure economists use to measure inequality – is higher in the U.S.

*   *   *

Gini Coefficients are like golf – the lower the score, the better (i.e. the more equality).

According to the CIA World Fact Book, the U.S. is ranked as the 42nd most unequal country in the world, with a Gini Coefficient of 45.

In contrast:

  • Tunisia is ranked the 62nd most unequal country, with a Gini Coefficient of 40.
  • Yemen is ranked 76th most unequal, with a Gini Coefficient of 37.7.
  • And Egypt is ranked as the 90th most unequal country, with a Gini Coefficient of around 34.4.

And inequality in the U.S. has soared in the last couple of years, since the Gini Coefficient was last calculated, so it is undoubtedly currently much higher.

So why are Egyptians rioting, while the Americans are complacent?

Well, Americans – until recently – have been some of the wealthiest people in the world, with most having plenty of comforts (and/or entertainment) and more than enough to eat.

But another reason is that – as Dan Ariely of Duke University and Michael I. Norton of Harvard Business School demonstrate – Americans consistently underestimate the amount of inequality in our nation.

Ariely and Norton’s paper, based on their 2005 poll of 5,522 citizens about their preferences for wealth division, has been the subject of much commentary.  Last fall, Bruce Watson wrote an article for Daily Finance discussing Ariely and Norton’s report.  As Watson explained, the following empirical data compiled by Professor Edward Wolff, (and incorporated into the Ariely-Norton paper) portrayed the “real world” wealth distribution in America:

Currently, 85% of America’s wealth, which is defined as total assets minus total liabilities, is held by the country’s richest 20%.  Meanwhile the upper middle class holds 11%, the middle class has 4%, and the lower class and poor share an anemic 0.3%.

Here’s how Watson summarized the results of the Ariely-Norton research:

In the poll, the vast majority of Americans across the political, gender and wealth spectrum displayed a markedly skewed understanding of how America’s money is divided.  On average, respondents thought that the rich hold only 58% of the nation’s wealth, 32% less than their actual holdings.  They thought that the middle class controls 13% of the country’s wealth, more than three times their actual holdings.  As for the bottom 40% of the population, the assumption was that the lower class and poor own a measly 9% of the country’s wealth.  In reality, these two groups control about one thirtieth of that amount.

Who Should Get the Money?

Although the perception that America’s wealth distribution is unfair cut across partisan lines, Republicans and Democrats disagreed about the ideal distribution.  People who voted for George Bush believed that the richest 20% of the population deserved roughly 35% of the nation’s wealth.  Kerry voters radically disagreed:  they felt that the rich deserved only about 30%. When it came to the country’s poorest citizens, Bush voters felt that they deserved about 9% of the country’s assets; Kerry voters preferred to give them 12%.

Respondents making over $100,000 per year, the group most heavily skewed toward a top-heavy distribution of wealth, advocated a system in which the top 20% received about 40% of the country’s assets and the bottom 20% got roughly 7%.  Yet even this comparatively Dickensian wealth distribution still gave America’s rich less than half of their current holdings, while giving the poorest more than twenty times their current holdings.

In October of 2008, before the full extent of the Wall Street megabank bailouts had been completely understood by most Americans (and before those multi-million-dollar bonuses had been awarded to the malefactors who caused the financial crisis) the Gallup Organization conducted a poll on the subject of wealth redistribution.  This is what they observed:

A majority of Americans (58%) say money and wealth should be more evenly distributed among a larger percentage of the people, although slightly less than half (46%) go so far as to say that the government should redistribute wealth by “heavy taxes on the rich.”

*   *   *

Still, in each of the four times Gallup has asked this question in recent years, between 45% and 51% of Americans have gone so far as to agree with the fairly harsh-sounding policy of “redistribut[ing] wealth by heavy taxes on the rich.”

Because the polls discussed above reveal that the current wealth distribution is unacceptable to most Americans, the “wealth redistribution” argument — as it is often used by politicians – should be a non-starter.  Perhaps a program of  “enhanced tax incentives for generosity” might enjoy more widespread acceptance than Gallup’s “heavy taxes on the rich” – to the point where an overwhelming majority of Americans would support it.

Unfortunately, unless that “overwhelming majority of Americans” has an army of lobbyists to advance such an initiative, the cash registers politicians portraying the effort as “socialism” will be the only voices that matter.


wordpress visitor


, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More

Bad Timing By The Dimon Dog At Davos

February 7th, 2011 Posted in Uncategorized
Feb, 07 2011
Comments Off on Bad Timing By The Dimon Dog At Davos

Last week’s World Economic Forum in Davos, Switzerland turned out to be a bad time for The Dimon Dog to stage a “righteous indignation” fit.  One would expect an investment banker to have a better sense of timing than what was demonstrated by the CEO of JPMorgan Chase.  Vito Racanelli provided this report for Barron’s:

The Davos panel, called “The Next Shock, Are We Better Prepared?” proceeded at a typically low emotional decibel level until Dimon was asked about what he thought of Americans who had directed their anger against the banks for the bailout.

Dimon visibly turned more animated, replying that “it’s not fair to lump all banks together.”  The TARP program was forced on some banks, and not all of them needed it, he said.  A number of banks helped stabilize things, noting that his bank bought the failed Bear Stearns.  The idea that all banks would have failed without government intervention isn’t right, he said defensively

Dimon clearly felt aggrieved by the question and the negative banker headlines, and went on for a while.

“I don’t lump all media together… .  There’s good and there’s bad.  There’s irresponsible and ignorant and there’s really smart media.  Well, not all bankers are the same.  I just think this constant refrain [of] ‘bankers, bankers, bankers,’ – it’s just a really unproductive and unfair way of treating people…  People should just stop doing that.”

The immediate response expressed by a number of commentators was to focus on Dimon’s efforts to obstruct financial reform.  Although Dimon had frequently paid lip service to the idea that no single institution should pose a risk to the entire financial system in the event of its own collapse, he did all he could to make sure that the Dodd-Frank “financial reform” bill did nothing to overturn the “too big to fail” doctrine.  Beyond that, the post-crisis elimination of the Financial Accounting Standards Board requirement that a bank’s assets should be “marked to market” values, was the only crutch that kept JPMorgan Chase from falling into the same scrap heap of insolvent banks as the other Federal Reserve welfare queens.

Simon Johnson (former chief economist at the International Monetary Fund) obviously had some fun writing a retort – published in the Economix blog at The New York Times – to The Dimon Dog’s diatribe.  Johnson began by addressing the threat voiced by Dimon and Diamond (Robert E. Diamond of Barclay’s Bank):

The newly standard line from big global banks has two components  .  .  .

First, if you regulate us, we’ll move to other countries.  And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.

This rhetoric is misleading at best.  At worst it represents a blatant attempt to shake down the public purse.

*   *   *

As we discussed at length during the Senate hearing, it is therefore not possible to discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, put it well in his latest quarterly report, which appeared last week: perhaps TARP’s most significant legacy is “the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’ ”

*   *   *

In this context, the idea that megabanks would move to other countries is simply ludicrous.  These behemoths need a public balance sheet to back them up, or they will not be able to borrow anywhere near their current amounts.

Whatever you think of places like Grand Cayman, the Bahamas or San Marino as offshore financial centers, there is no way that a JPMorgan Chase or a Barclays could consider moving there.  Poorly run casinos with completely messed-up incentives, these megabanks need a deep-pocketed and somewhat dumb sovereign to back them.

After Dimon’s temper tantrum, a pile-on by commentators immediately ensued.  Elinor Comlay and Matthew Goldstein of Reuters wrote an extensive report, documenting Dimon’s lobbying record and debunking a good number of public relations myths concerning Dimon’s stewardship of JPMorgan Chase:

Still, with hindsight it’s clear that Dimon’s approach to risk didn’t help him entirely avoid the financial crisis.  Even as the first rumblings of the crisis were sounding in the distance, he aggressively sought to boost Chase’s share of the U.S. mortgage business.

At the end of 2007, after JPMorgan had taken a $1.3 billion write-down on leveraged loans, Dimon told analysts the bank was planning to add as much as $20 billion in mortgages from riskier borrowers.  “We think we’d get very good spreads and … it will be a drop in the bucket for our capital ratios.”

By mid-2008, JPMorgan Chase had $95.1 billion exposure to home equity loans, almost $15 billion in subprime mortgages and a $76 billion credit card book.  Banks were not required to mark those loans at market prices, but if the loans were accounted for that way, losses could have been as painful for JPMorgan as credit derivatives were for AIG, according to former investment bank executives.

What was particularly bad about The Dimon Dog’s timing of his Davos diatribe concerned the fact that since December 2, 2010 a $6.4 billion lawsuit has been pending against JPMorgan Chase, brought by Irving H. Picard, the bankruptcy trustee responsible for recovering the losses sustained by Bernie Madoff’s Ponzi scam victims.  Did Dimon believe that the complaint would remain under seal forever?  On February 3, the complaint was unsealed by agreement of the parties, with the additional stipulation that the identities of several bank employees would remain confidential.  The New York Times provided us with some hints about how these employees were expected to testify:

On June 15, 2007, an evidently high-level risk management officer for Chase’s investment bank sent a lunchtime e-mail to colleagues to report that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”

Even before that, a top private banking executive had been consistently steering clients away from investments linked to Mr. Madoff because his “Oz-like signals” were “too difficult to ignore.”  And the first Chase risk analyst to look at a Madoff feeder fund, in February 2006, reported to his superiors that its returns did not make sense because it did far better than the securities that were supposedly in its portfolio.

At The Daily Beast, Allan Dodds Frank began his report on the suit with questions that had to be fresh on everyone’s mind in the wake of the scrutiny The Dimon Dog had invited at Davos:

How much did JPMorgan CEO and Chairman Jamie Dimon know about his bank’s valued customer Bernie Madoff, and when did he know it?

These two crucial questions have been lingering below the surface for more than two years, even as the JPMorgan Chase leader cemented his reputation as the nation’s most important, most upright, and most highly regarded banker.

Not everyone at Davos was so impressed with The Dimon Dog.  Count me among those who were especially inspired by the upbraiding Dimon received from French President Nicolas Sarkozy:

“Don’t be accusatory of us,” Sarkozy snapped at Dimon at the World Economic Forum in Davos, Switzerland.

“The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything.”

*   *   *
“We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense,” the Frenchman said.  “That’s what happened.”

Sarkozy also took direct aim at the bloated bonuses many bankers got despite the damage they did.

“When things don’t work, you can never find anyone responsible,” Sarkozy said.  “Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed.”

Why don’t we have a President like that?


wordpress visitor


, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More

There WILL Be Another Financial Crisis

January 27th, 2011 Posted in Uncategorized
Jan, 27 2011
Comments Off on There WILL Be Another Financial Crisis

The latest Quarterly Report from SIGTARP – the Special Inspector General for the Troubled Asset Relief Program (Neil Barofsky) – was released on January 26, 2011.  The report brought a mix of good and bad news.  Among the good news was this tidbit:

Where fraud has managed to slip in, SIGTARP’s Investigations Division has already produced outstanding results in bringing to justice those who have sought to profit criminally from TARP, with 45 individuals charged civilly or criminally with fraud, of whom 13 have been criminally convicted. SIGTARP’s investigative efforts have helped prevent $555.2 million in taxpayer funds from being lost to fraud.  And with 142 ongoing investigations (including 64 into executives at financial institutions that applied for and/or received TARP funding through TARP’s Capital Purchase Program [“CPP”]), much more remains to be done.

Much of the bad news from SIGTARP stems from the never-ending problem of “moral hazard” resulting from the perpetually-increasing growth of those financial institutions, which have been “too big to fail” for too long:

In short, the continued existence of institutions that are “too big to fail” — an undeniable byproduct of former Secretary Paulson and Secretary Geithner’s use of TARP to assure the markets that during a time of crisis that they would not let such institutions fail — is a recipe for disaster.  These institutions and their leaders are incentivized to engage in precisely the sort of behavior that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts, and bailouts.

Worse yet, as Mr. Barofsky pointed out in a January 25 interview with the Center for Public Integrity, the system has been rigged to provide additional advantages to the TBTF banks, making it impossible for smaller institutions to compete with them:

Noting that the major financial institutions are 20 percent larger than they were before the financial crisis, Barofsky said that the financial markets simply don’t believe that the government will allow one of these biggest banks to collapse, regardless of what they say will happen.  Those big banks enjoy access to cheaper credit than smaller institutions, based on that implicit government guarantee, he said.

As evidence, he cited the ratings agency Standard & Poor’s, which recently announced its intention to add the prospect of government support into its calculation when determining a bank’s credit rating.

At 1:35 into the video clip of the Center for Public Integrity’s interview with Mr. Barofsky, he explained:

There’s going to be another financial crisis.  Of course, there is.

He went on to point out that once the next crisis begins, we will have the option of implementing the mechanisms established by the Dodd-Frank bill for breaking up insolvent banks.  The question then becomes:  Will be break up those banks or bail them out?  Barofsky suspects that the market is anticipating another round of bailouts.  He noted that “there’s a question of whether there will be the political will as well as the regulatory will to do that”.  As he pointed out on page 11 of the latest SIGTARP Quarterly Report:

As long as the relevant actors (executives, ratings agencies, creditors and counterparties) believe there will be a bailout, the problems of “too big to fail” will almost certainly persist.

Let’s not forget that most dangerous among those problems is the encouraged and facilitated “risky behavior” by those institutions, which will bring about the next financial crisis.  This is the “Doomsday Cycle” problem discussed by Mr. Barofsky.  “The Doomsday Cycle” was the subject of a paper, written last year by economists Simon Johnson and Peter Boone.

The SIGTARP Report then focused on what has been discussed as TARP’s biggest failure:

As SIGTARP discussed in its October 2010 Quarterly Report, after two years, TARP’s Main Street goals of “increas[ing] lending,” and “promot[ing] jobs and economic growth” had been largely unmet, but it is TARP’s failure to realize its most specific Main Street goal, “preserving homeownership,” that has had perhaps the most devastating consequences.  Treasury’s central foreclosure prevention effort designed to address that goal — the Home Affordable Modification Program (“HAMP”) — has been beset by problems from the outset and, despite frequent retooling, continues to fall dramatically short of any meaningful standard of success.  Indeed, even the “good news” of falling estimates for TARP’s cost is driven in part by the ineffectiveness of HAMP and related programs, which provide for TARP-funded grants and incentives.

As we begin fighting over the Final Report of the Financial Crisis Inquiry Commission (FCIC) — which investigated the causes of the financial crisis — it is important to be mindful of Neil Barofsky’s admonition that there will be another financial crisis.  If our government fails to prosecute the malfeasance that caused the crisis itself, that neglect — combined with the enhanced size of those “too big to fail” banks — could create a disaster we would have to characterize as “TBFAB” – Too Big For A Bailout.  What will happen at that point?


wordpress visitor


, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More

Jeremy Grantham And Ike

January 17th, 2011 Posted in Uncategorized
Jan, 17 2011
Comments Off on Jeremy Grantham And Ike

As an avid reader of Jeremy Grantham’s Quarterly Letter, I was surprised when he posted a Special Topic report on January 14 — so close to release of his Fourth Quarter 2010 Letter, which is due in a couple of weeks.  At a time when many commentators are focused on the 50th anniversary of John F. Kennedy’s historic Inaugural Address, Jeremy Grantham has taken the opportunity to focus on President Dwight Eisenhower’s Farwell Address of January 17, 1961.  (Grantham included the full text of Ike’s Farwell Address at the conclusion of the Special Topic essay.)

One passage from Ike’s Farwell Address seemed particularly prescient in the wake of the TARP bailout (which was not a success) and the “backdoor bailouts” including the Maiden Lanes (which were never to be repaid) as well as the cost of approximately $350 billion per year to investors and savers, resulting from the Federal Reserve’s zero-interest-rate-policy (often referred to as “ZIRP”).  Keep those Wall Street bailouts in mind while reading this passage from Ike’s speech:

Crises there will continue to be.  In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties.  A huge increase in newer elements of our defense; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research – these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.

But each proposal must be weighed in the light of a broader consideration:  the need to maintain balance in and among national programs – balance between the private and the public economy, balance between cost and hoped for advantage – balance between the clearly necessary and the comfortably desirable; balance between our essential requirements as a nation and the duties imposed by the nation upon the individual; balance between actions of the moment and the national welfare of the future.  Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration.

In his Special Topic report, Jeremy Grantham focused on the disappointing changes that caused Ike’s America to become 21st Century America.  After quoting Ike’s now-famous admonition about the power of the military-industrial complex (for which the speech is frequently quoted) Grantham pointed out that the unrestricted influence of corporate power over our government has become a greater menace:

Unfortunately, the political-economic power problem has mutated away from the military, although it has left important vestiges there, toward a broader problem:  the undue influence of corporate America on the government, and hence the laws, taxes, and social policies of the country. This has occurred to such a degree that there seems little real independence in Congress, with most Congressmen answering first to the desire to be reelected and the consequent need to obtain funding from, shall we say, sponsors, and the need to avoid making powerful enemies.

*   *   *

The financial resources of the carbon-based energy companies are particularly terrifying, and their effective management of propaganda goes back decades.  They established and funded “independent” think tanks and even non-profit organizations that have mysteriously always come out in favor of policies favorable to maintaining or increasing the profits of their financial supporters.  The campaign was well-organized and has been terrifyingly effective.

*   *   *

The financial industry, with its incestuous relationships with government agencies, runs a close second to the energy industry.  In the last 10 years or so, their machine, led by the famously failed economic consultant Alan Greenspan – one of the few businessmen ever to be laughed out of business – seemed perhaps the most effective.  It lacks, though, the multi-decadal attitude-changing propaganda of the oil industry.  Still, in finance they had the “regulators,” deregulating up a storm, to the enormous profit of their industry.

Grantham concluded his report with a suggestion for the greatest tribute we could give Eisenhower after America ignored Ike’s warnings about the vulnerability of our government to unrestricted influences.  Grantham’s proposed tribute to Ike would be our refusal to “take this 50-year slide lying down”.

To steal a slogan from the Tea Party, I suggest the voters need to “take America back” from the corporations which bought off the government.  Our government has every intention of maintaining the status quo.

In the 2010 elections, voters were led to believe that they could bring about governmental reform by voting for candidates who will eventually prove themselves as protectors of the wealthy at the expense of the disappearing middle class.  In the 2008 elections, Barack Obama convinced voters that he was the candidate of change they could believe in.  In the real world of 2011, economist Simon Johnson explained what sort of “change” those voters received, as exemplified by the President’s appointment of his new Chief of Staff:

Let’s be honest.  With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout.  The risk inherent to our financial system is now higher than it was in the early/mid-2000s.  We are set up for another illusory financial expansion and another debilitating crisis.

Bill Daley will get it done.

Just as Jeremy Grantham explained how Eisenhower’s concerns about the military-industrial complex were materialized in the form of a corporate-controlled government, another unholy alliance was discussed by Charles Ferguson, director of the documentary film, Inside Job.  Ferguson recently offered an analysis of the milieu that resulted in President Obama’s appointment of Larry Summers as Director of the National Economic Council.  As Larry Summers announced plans to move on from that position, Ferguson explained how Summers had been granted the opportunity to inflict his painful legacy upon us:

Summers is unique but not alone.  By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government.  What few Americans realize is that the revolving door is now a three-way intersection.  Summers’ career is the result of an extraordinary and underappreciated scandal in American society:  the convergence of academic economics, Wall Street, and political power.

America needs new leaders who refuse to capitulate to the army of lobbyists on Capitol Hill.  Where are they?


wordpress visitor


, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More

Stock Market Bears Have Not Yet Left The Building

January 6th, 2011 Posted in Uncategorized
Jan, 06 2011
Comments Off on Stock Market Bears Have Not Yet Left The Building

The new year has brought an onslaught of optimistic forecasts about the stock market and the economy.  I suspect that much of this enthusiasm is the result of the return of stock market indices to “pre-Lehman levels” (with the S&P 500 above 1,250).  The “Lehman benchmark” is based on conditions as they existed on September 12, 2008 – the date on which Lehman Brothers collapsed.  The importance of the Lehman benchmark is primarily psychological — often a goal to be reached in this era of “less bad” economic conditions.  The focus on the return of market and economic indicators to pre-Lehman levels is something I refer to as “pre-Lehmanism”.  You can find examples of  pre-Lehmanism in discussions of such diverse subjects as:  the plastic molding press industry in Japan, copper consumption, home sales, bank dividends (hopeless) and economic growth.  Sometimes, pre-Lehmanism will drive a discussion to prognostication based on the premise that since we have surpassed the Lehman benchmark, we could be on our way back to good times.  Here’s a recent example from Bloomberg News:

“Lehman is the poster child for the demise of the banking industry,” said Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust Co. in Boston.  “We’ve recovered from that.  We’re comfortable with equities. If we do get a continuation of the strength in the economy and corporate earnings, we could get a reasonably good year for stocks in 2011.”

Despite all of this enthusiasm, some commentators are looking behind the rosy headlines to examine the substantive facts underlying the claims.  Consider this recent discussion by Michael Panzner, publisher of Financial Armageddon and When Giants Fall:

Yes, there are some developments that look, superficially at least, like good news.  But if you dig even a little bit deeper, it seems that more often than not nowadays there is less there than meets the eye.

The optimists have talked, for example, about the recovery in corporate profits, but they downplay the layoffs and cut-backs in investment that contributed to those gains.  They note the recovery in the banking sector, but forget to mention all of the financial and political assistance those firms have received — and are still receiving.  They highlight signs of stability in the housing market, but ignore lopsidedly bearish supply-and-demand fundamentals that are impossible to miss.

In an earlier posting, Michael Panzner questioned the enthusiasm about a report that 24 percent of employers participating in a survey expressed plans to boost hiring of full-time employees during 2011, compared to last year’s 20 percent of surveyed employers:

Call me a cynic (for the umpteenth time), but the fact that less that less than a quarter of employers plan to boost full-time hiring this year — a measly four percentage-point increase from last year — doesn’t sound especially “healthy” to me.

No matter how you slice it, the so-called recovery still seems to be largely a figment of the bulls’ imagination.

As for specific expectations about stock market performance during 2011, Jessie of Jesse’s Café Américain provided us with the outlook of someone on the trading floor of an exchange:

I had the opportunity to speak with a pit trader the other day, and he described the mood amongst traders as cautious.  They see the stock market rising and cannot get in front of it, as the buying is too well backed.  But the volumes are so thin and the action so phony that they cannot get comfortable on the long side either, so are buying insurance against a correction even while riding the rally higher.

This is a market setup for a flash crash.

Last May’s “flash crash” and the suspicious “late day rallies” on thin volume aren’t the only events causing individual investors to feel as though they’re being scammed.  A recent essay by Charles Hugh Smith noted the consequences of driving “the little guy” out of the market:

Small investors (so-called retail investors) have been exiting the U.S. stock market for 34 straight weeks, pulling almost $100 billion out of the market. They are voting with their feet based on their situational awareness that the game is rigged, and that the rigging alone greatly increases the risks of another meltdown.

John Hussman of the Hussman Funds recently provided a technical analysis demonstrating that – at least for now – the risk/reward ratio is just not that favorable:

As of last week, the stock market remained characterized by an overvalued, overbought, overbullish, rising-yields condition that has historically produced poor average market returns, and consistently so across historical time frames.  However, this condition is also associated with what I’ve called “unpleasant skew” – the most probable market movement is actually a small advance to marginal new highs, but the right tail is truncated and the left tail is fat, meaning that there is a lower than normal likelihood of large gains, and a much larger than normal potential for sharp and abrupt market losses.

The notoriously bearish Doug Kass is actually restrained with his pessimism for 2011, expecting the market to go “sideways” or “flat” (meaning no significant rise or fall).  Nevertheless, Kass saw fit to express his displeasure over the degree of cheerleading that can be seen in the mass media:

The recent market advance has spurred an accumulation of optimism.  S&P price targets are being lifted by many whose memories are short and who had blinders on as the equity market and economy entered the last downturn.  Bullish sentiment, coincident with rising share prices, is approaching an extreme, and the chorus of bullish talking heads grows ever louder on CNBC and elsewhere.

Speculation has entered the market.  The Iomegans of the late 1990s tech bubble have been replaced by the Shen Zhous, who worship at the altar of rare earths.

Not only are trends in the market being too easily extrapolated, the same might be true for the health of the domestic economy.

On New Year’s Eve, Kelly Evans of The Wall Street Journal wrote a great little article, summing-up the year-end data, which has fueled the market bullishness.  Beyond that, Ms. Evans provided a caveat that would never cross the minds of most commentators:

Still, Wall Street’s exuberance should send shudders down any contrarian’s spine.  To the extent the stock market anticipates growth, the economy will have to fire on all cylinders next year and then some.  At least one cylinder, the housing market, still is sputtering.  Upward pressure on food and gas prices also threatens to keep a lid on consumer confidence and rob from spending power even as the labor market continues its gradual and choppy recovery.

The coming year could turn out to be the reverse of 2010:  decent economic growth, but a disappointing showing by the stock market.  That’s the last thing most people expect right now, precisely why investors should be worried about it happening.

The new year may be off to a great start  . . .  but the stock market bears have not yet left the building.  Ignore their warnings at your own peril.


wordpress visitor


, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More

Screw The People And Save The Banks

November 29th, 2010 Posted in Uncategorized
Nov, 29 2010
Comments Off on Screw The People And Save The Banks

The economic crisis in Ireland (and the rest of Europe) has resulted in a morass of published commentaries, some of which make sense and most of which don’t.  Sometimes it appears as though the writer hasn’t really formed an opinion on the issue, even though the tone of the article seems to be expressing one.  The problem experienced in Ireland is the same as it is everywhere else:  During tough economic times, governments always choose to bail out the banks regardless of the expense and suffering to be endured by the citizens.  The Pragmatic Capitalist recently upbraided the writer of one of the more poorly-thought-out essays dealing with the Irish predicament:

Sheila Bair, the head of the FDIC, has remained one of the more levelheaded and helpful leaders during the financial crisis.  But in an op-ed in the Washington Post this morning she took a decisive turn for the worse when she waded into waters that were certain to drown her.  Bair is now echoing the cries that have been heard across Ireland for the last 2 years – cries of fiscal austerity.  Of course, the USA is nothing like Ireland and has an entirely different monetary system, but Bair ignores all of this (in fact proves she is entirely ignorant of this).  What’s sad is that Bair clearly understands that this crisis is still largely hurting Main Street America   .   .   .

To the extent that the Irish situation bears any resemblance to what we are experiencing (or may soon experience) in the United States, economist John Hussman has written the best essay on this issue.  Hussman began with this point, made by another economist:

“If you have bad banks then you very urgently want to clean up your banks because bad banks go only one way:  they get worse. In the end every bank is a fiscal problem.  When you have bad banks, it is in a political environment where it is totally understood that the government is going to bail them out in the end.  And that’s why they are so bad, and that’s why they get worse.  So cleaning up the banks is an essential counterpart of any attempt to have a well functioning economy.  It is a counterpart of any attempt to have a dull, uninteresting macroeconomy.  And there is no excuse to do it slowly because it is very expensive to postpone the cleanup.  There is no technical issue in doing the cleanup.  It’s mostly to decide to start to grow up and stop the mess.”

MIT Economist Rudiger Dornbusch, November 1998

The TARP bailout was not the only time when our government chose a temporary fix (as in cure or heroin injection) at great taxpayer expense.  I’ve complained many times about President Obama’s decision to scoff at using the so-called “Swedish solution” of putting the zombie banks through temporary receivership.  John Hussman discussed the consequences:

If our policy makers had made proper decisions over the past two years to clean up banks, restructure debt, and allow irresponsible lenders to take losses on bad loans, there is no doubt in my mind that we would be quickly on the course to a sustained recovery, regardless of the extent of the downturn we have experienced.  Unfortunately, we have built our house on a ledge of ice.

*   *   *

As I’ve frequently noted, even if a bank “fails,” it doesn’t mean that depositors lose money.  It means that the stockholders and bondholders do.  So if it turns out, after all is said and done, that the bank is insolvent, the government should get its money back and the remaining entity should be taken into receivership, cut away from the stockholder liabilities, restructured as to bondholder liabilities, recapitalized, and reissued.  We did this with GM, and we can do it with banks.  I suspect that these issues will again become relevant within the next few years.

The present situation

Europe will clearly be in the spotlight early this week, as a run on Irish banks coupled with large fiscal deficits has created a solvency crisis for the Irish government itself and has been (temporarily) concluded with a bailout agreement.  Ireland’s difficulties are the result of a post-Lehman guarantee that the Irish government gave to its banking system in 2008.  The resulting strains will now result in a bailout, in return for Ireland’s agreement to slash welfare payments and other forms of spending to recipients that are evidently less valuable to society than bankers.

*   *   *

Over the short run, Ireland will promise “austerity” measures like Greece did – large cuts in government spending aimed at reducing the deficit.  Unfortunately, imposing austerity on a weak economy typically results in further economic weakness and a shortfall on the revenue side, meaning that Ireland will most probably face additional problems shortly anyway.

The “austerity” approach is more frequently being used as a dividing line to distinguish “liberal” economists from “conservative” economists.  The irony here is that many so-called liberal politicians are as deeply in the pocket of the banking lobby as their conservative counterparts.  Economist Dean Baker recently wrote an article for The Guardian, urging Ireland to follow the example of Argentina and simply default on its debt:

The failure of the ECB or IMF to take steps to rein in the bubble before the crisis has not made these international financial institutions shy about using a heavy hand in imposing conditions now.  The plan is to impose stiff austerity, requiring much of Ireland’s workforce to suffer unemployment for years to come as a result of the failure of their bankers and the ECB.

While it is often claimed that these institutions are not political, only the braindead could still believe this.  The decision to make Ireland’s workers, along with workers in Spain, Portugal, Latvia and elsewhere, pay for the recklessness of their country’s bankers is entirely a political one.  There is no economic imperative that says that workers must pay; this is a political decision being imposed by the ECB and IMF.

Bloomberg News columnist, Matthew Lynn wrote a great article for the Pittsburgh Tribune-Review, setting out five reasons why Ireland should refuse a bailout from the European Union and the International Monetary Fund to opt for default as the logical approach.

Pay close attention to how your favorite politicians weigh-in on the Irish situation.  It should give you a fairly good tip as to what actions those pols can be expected to take when the Wall Street bankers dash back to Capitol Hill for TARP 2 The Sequel.


wordpress visitor


, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More

Geithner Kool-Aid Is All The Rage

November 15th, 2010 Posted in Uncategorized
Nov, 15 2010
Comments Off on Geithner Kool-Aid Is All The Rage

Treasury Secretary Tim Geithner’s “charm offensive”, began one year ago.  At that time, a number of financial bloggers were invited to the Treasury Department for an “open discussion” forum led by individual senior Treasury officials (including Turbo Tim himself).  Most of the invitees were not brainwashed to the desired extent.  I reviewed a number of postings from those in attendance – most of whom demonstrated more than a little skepticism about the entire affair.  Nevertheless, Secretary Geithner and his team held another conclave with financial bloggers on Monday, August 16, 2010.  The second meeting worked more to Geithner’s advantage.  The Treasury Secretary made a favorable impression on Alex Tabarrok, just as he had done last November with Tabarrok’s partner at Marginal Revolution, Tyler Cowen.  Steve Waldman of Interfluidity provided a candid description of his own reaction to the August 16 event.  Waldman’s commentary exposed how the desired effect was achieved:

First, let me confess right from the start, I had a great time.  I pose as an outsider and a crank.  But when summoned to the court, this jester puts on his bells.  I am very, very angry at Treasury, and the administration it serves.  But put me at a table with smart, articulate people who are willing to argue but who are otherwise pleasant towards me, and I will like them.

*   *   *

I like these people, and that renders me untrustworthy. Abstractly, I think some of them should be replaced and perhaps disgraced.  But having chatted so cordially, I’m far less likely to take up pitchforks against them.  Drawn to the Secretary’s conference room by curiosity, vanity, ambition, and conceit, I’ve been neutered a bit.

More recently, a good deal of attention has focused on a November 4 article from Bloomberg News, revealing that back on April 2, Turbo Tim paid a call on Jon Stewart.  The disclosure by Ian Katz raised quite a few eyebrows:

Geithner and Stewart, host of Comedy Central’s “The Daily Show,” held an off-the-record meeting at Stewart’s office in New York on April 2, according to Geithner’s appointments calendar, updated through August on Treasury’s website.

Since that time, we have heard nothing from Jon Stewart about his meeting with Geithner.  I expect that Stewart will continue his silence about that topic, focusing our attention, instead, on the controversy concerning a book, which should have been titled, Pedophilia For Dummies, while referring to Amazon.com as “NAMBLAzon.com”.  If he uses that joke  – remember that you saw it here, first.

The November 13 New York Times article by Yale economics professor, Robert Shiller, raises the question of whether Professor Shiller is the latest victim of the Geithner Kool-Aid.  Shiller’s essay reeks of the Obama administration’s strategy of approaching the nation’s most pressing crises as public relations concerns — a panacea for avoiding the ugly task of actually solving those problems.  The title of Shiller’s article, “Bailouts, Reframed as ‘Orderly Resolutions’” says it all:  spin means everything.  The following statement is a perfect example:

Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July.  It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers.  Now they will be called “orderly resolutions.”

Yves Smith of the Naked Capitalism website had no trouble ripping this assertion (as well as Shiller’s entire essay) to shreds:

Huh?  It’s widely acknowledged that Dodd Frank is too weak.  In the Treasury meeting with bloggers last August, Geithner didn’t argue the point much, but instead contended that big enough capital levels, which were on the way with Basel III, were the real remedy.

It’s also widely recognized that the special resolution process in Dodd Frank is a non-starter as far as the institutions that pose the greatest systemic risk are concerned, the really big international dealer banks.  A wind-up of these firms is subject to the bankruptcy proceedings of all the foreign jurisdictions in which it operates; the US can’t wave a magic wand in Dodd Frank and make this elephant in the room vanish.

In addition, no one has found a way to resolve a major trading firm without creating major disruption.

*   *   *

Shiller’s insistence that the public is so dumb as to confuse a windown with a bailout reveals his lack of connection with popular perceptions.  The reason the public is so angry with the bailouts is no one, particularly among the top brass, lost his job, and worse, the firms were singularly ungrateful, thumbing their noses at taxpayers and paying themselves record bonuses in 2009.

Bill Maher’s Real Time program of November 12 is just the most recent example of how Bill Maher and most of his guests from the entire season are Geithner Kool-Aid drinkers.  The show marked the ten-trillionth time Maher claimed that TARP was a “success” because the banks have “paid back” those government bailouts.  Bill Maher needs to invite Yves Smith on his program so that she can debunk this myth, as she did in her June 23 piece. “Geithner Yet Again Misrepresents TARP ‘Performance’”.  Ms. Smith is not the only commentator who repeatedly calls out the administration on this whopper.  Marshall Auerback and almost everyone else at the Roosevelt Institute have said the same thing.  Edward Harrison of Credit Writedowns wrote this piece for the Seeking Alpha website, in support of Aureback’s TARP critique.  Will Wilkinson’s October 8 essay in The Economist’s Democracy in America blog presented the negative responses from a number of authorities in response to the claim that TARP was a great success.  With all that has been written to dispute the glorification of TARP, one would think that the “TARP was a success” meme would fade away.  Nevertheless, the Geithner Kool-Aid is a potent brew and its effects can, in some cases, be permanent.


wordpress visitor


, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More

Maria Cantwell For President

November 4th, 2010 Posted in Uncategorized
Nov, 04 2010
Comments Off on Maria Cantwell For President

I was going to hold off on this and give President Obama the benefit of a doubt – at least for a few months.  Nevertheless, after reading the magnificent piece by Barry Ritholtz, entitled:  “The Tragedy of the Obama Administration”, I decided that it was time to start discussing leadership alternatives for the next Presidential term.

On October 30, the Associated Press published the results of a poll it conducted with Knowledge Networks.  Forty-seven percent of the Democrats surveyed expressed the opinion that Obama should be challenged for the 2012 Democratic Presidential nomination.  In the wake of the mid-term election massacre, I expect that more Democrats will be anxious to find a new standard-bearer for their party in 2012.  The AP article concerning the AP-KN poll, mentioned the theory that the public’s opinion of Obama could change if the economy improves.  Unfortunately, most American consumers will not observe any significant improvement in the economy during the next two years.  There is a greater likelihood that the Chicago Cubs will win next year’s World Series.

We currently find ourselves bombarded with a wide spectrum of opinions, which purport to explain what the results of the 2010 elections really mean.  The most obvious conclusion to be drawn from this event is that the voters resent being taken for chumps.  Obama’s supporters were promised change they could believe in by a President and a party that sold its soul to the Wall Street megabanks at the cost of America’s future economic health.  When he had the opportunity to do so in early 2009, Obama refused to put those too-big-to-fail, zombie banks through temporary receivership.  As a result, we are now approaching a situation which – according to financial risk management expert Chris Whalen – will necessitate another round of bank bailouts.  When President Obama had the opportunity and the public support (not to mention Democratic control over both houses of Congress) to enact an adequate stimulus program to save the economy from a decade(s) – long, Japanese-style recession, he refused to so.  If an extra $600 billion had been added to the $787 billion in 2009 (as part of a better-thought-out, infrastructure-based stimulus program) we would be experiencing significant economic growth and a recovering job market right now.  Australia keeps reminding us of this.  (Oops!  Australia just did it again!)  Instead, America finds itself in a situation wherein the Fed is now appropriating that $600 billion toward another round of quantitative easing, which will serve no other purpose than to push investors into the stock market.  According to economist Andy Xie, those stock investors will have an unpleasant experience when Chairman Bernanke’s latest asset bubble pops in 2012.

While many Senate Democrats (along with operatives from the Treasury Department) were busy removing all of the teeth from the financial reform bill, Maria Cantwell was fighting those efforts as one of the few advocates for the American taxpayers.  Back on May 19, Arthur Delaney and Ryan Grim of The Huffington Post described how Senator Cantwell stood up to the efforts of Harry Reid to use cloture to push the financial reform bill to a vote before any further amendments could have been added to strengthen the bill.  Notice how “the usual suspects” – Reid, Chuck Schumer and “Countrywide Chris” Dodd tried to close in on Cantwell and force her capitulation to the will of the kleptocracy:

There were some unusually Johnsonian moments of wrangling on the floor during the nearly hour-long vote.  Reid pressed his case hard on Snowe, the lone holdout vote present, with Bob Corker and Mitch McConnell at her side.  After finding Brown, he put his arm around him and shook his head, then found Cantwell seated alone at the opposite end of the floor.  He and New York’s Chuck Schumer encircled her, Reid leaning over her with his right arm on the back of her chair and Schumer leaning in with his left hand on her desk.  Cantwell stared straight ahead, not looking at the men even as she spoke.  Schumer called in Chris Dodd, who was unable to sway her.  Feingold hadn’t stuck around.  Cantwell, according to a spokesman, wanted a guarantee on an amendment that would fix a gaping hole in the derivatives section of the bill, which requires the trades to be cleared, but applies no penalty to trades that aren’t, making Blanche Lincoln’s reform package little better than a list of suggestions.

*   *   *

“I don’t think it’s a good idea to cut off good consumer amendments because of cloture,” said Cantwell on Tuesday night.

Senator Cantwell has proven herself worthy of our trust.  Her nomination as the 2012 Democratic Presidential candidate will revive the excitement and voter enthusiasm witnessed during the 2008 campaign.  On the other hand, if President Obama decides to seek a second term and wins the nomination, we will likely find a greater enthusiasm gap than the example of November 2.  As a result, by January of 2013 we could have a new administration in the White House, espousing what economist Nouriel Roubini describes as “the economic equivalent of creationism”.

Here’s to a bright future!


wordpress visitor

, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,
Read More
Newer Entries