[jeffkrol]

A wave of sovereign and banking crises | Martin Wolf, Financial Times | Commentary | Business Spectator

It is nearly five years since financial turmoil broke upon an unsuspecting world, in August 2007. So how are crisis-stricken high income countries doing? Badly, is the only answer.

Above all, private sectors are running large surpluses of income over spending. In the US, the financial balance of the private sector turned from a deficit of 2.4 per cent of GDP in the third quarter of 2007 to a surplus of 8.2 per cent in the second quarter of 2009. This massive shift would surely have caused a huge depression if the government had been unwilling to run offsetting fiscal deficits. That is how the depression was contained.

Policy must both sustain demand and facilitate de-leveraging.
This means aggressive monetary and fiscal policies, working in combination, along with interventions aimed at recapitalising banks and accelerating restructuring of private debt. The Obama administration attempted all this. But it was not ambitious enough. It was also thwarted by Republican intransigence. Yet, provided the US avoids going over its “fiscal cliff” later this year, a moderate private sector-led recovery should proceed. Once that is securely in place, serious fiscal consolidation could begin. Austerity should follow a strong recovery, not proceed it
Unfortunately, the troubled big economies do not consist of the US alone. The crisis has also caused a deep rift inside the eurozone, the world’s second largest economy. The latter’s inability to craft a response guarantees turmoil. The people shaping policy worry more about moral hazard than about panic. This makes a wave of sovereign and banking crises, culminating in exchange controls and disintegration of the eurozone, all too conceivable.
Far too much policy making and advice neither recognises the post-crisis challenges nor crafts effective answers. The heart of the matter is accelerating deleveraging, while promoting recovery. By that standard, the policies now in place are, alas, very far from good enough.

Interesting take on bank reform:
Seven ways to clean up a banking stench | Martin Wolf, Financial Times | Commentary | Business Spectator

not that any will listen.........

digging into Mr. Wolf's interview........
Moisés Naím: The World According to Martin Wolf

What aspects of the crisis surprised you?
Martin Wolf: How undercapitalized were the financial institutions. Many were taking enormous risks based on a capital base that was clearly inadequate. And they relied on a lot of "hot money"; shorter term funds that were allocated to longer term deals.

With the benefits of hindsight what were the most important mistakes you made in your analyses and writings?
MW: I was paying too much attention to the macro and not enough to the micro. I was analyzing aggregate flows and did not look closely enough at the inner workings of the financial institutions. I think of this as the most important mistake in my career. My other mistake was not to realize how weak and inadequate the controls and regulations on banks and other financial companies were.

Yet, Obama is fiercely criticized for his handling of the economy.
MW: Critics argue that the U.S. recession should have been shorter and the recovery faster and more vigorous. But based on historical experience and objective analysis, it is uncontestable that the crisis that Obama inherited could have led to an even deeper recession than there was and probably even a severe depression. Obama's main achievement is that he was able to avoid this catastrophe. In fact today, the U.S. economy is far ahead in terms of recovery since the crisis erupted compared to the other five largest advanced economies.

But in this crisis economists did not have a stellar performance either. They failed to anticipate the crash and now they can't agree on how to deal with the situation. Who were the exceptions in terms of seeing ahead of others what was coming?
MW: Nouriel Roubini warned early on about the price bubbles and about the dangerous link between overvalued asset prices and high debt levels. Robert Shiller dissected better than anyone else what was happening in real estate and its explosive implications. And Raghuram Rajan alerted early on about the fragility of the financial sector and explained how it was becoming a threat to global stability. Paul Krugman was also prescient in some of his early warnings. But the list is short and in truth there aren't many more names that deserve to be included. It has become quite obvious to me that mainstream economics is useless to explain what happened or how to deal with this mess.

Bit on LIBOR:

Yves Smith of Naked Capitalism notes that the British are much more worked up about this than we are (Barclays is British) and flags this Guardian quote:

Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced - and would have been if British regulators had been weaned off the doctrine of “light touch” regulation earlier and if the Serious Fraud Office’s budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour - the beast that is devouring British capitalism.

Yow.
This scandal is coming to America soon enough, I’d bet, but it’s worth reading Smith’s thoughts on the American press.

— Listen to Audit Chief Dean Starkman talk to Richard Aedy of the Australian Broadcasting Corporation about how and why the business press failed in the years leading up to the global financial crisis

Or read the transcript:

http://www.cjr.org/the_audit/audit_notes_spains_dilemma_bri.php
such a simple comment.. yet heeded by few here (US):

But I agree with your larger point: if someone borrows more than they can afford, that is a bad borrower; but if a lender habitually lends money to those who cannot repay, it is a bad lender.

sidepath:

"First and most important, what is happening in credit markets today is a huge blow to the credibility of the Anglo-Saxon model of transactions-orientated financial capitalism. A mixture of crony capitalism and gross incompetence has been on display in the core financial markets of New York and London. From the “ninja” (no-income, no-job, no-asset) subprime lending to the placing (and favourable rating) of assets that turn out to be almost impossible to understand, value or sell, these activities have been riddled with conflicts of interest and incompetence. In the subsequent era of “revulsion”, core financial markets have seized up."

http://blogs.ft.com/economistsforum/2007/12/why-the-credit-html/#axzz20h7kYJo7

---

Last edited by jeffkrol; 07-15-2012 at 05:42 AM.

[Nesster]

How Close Are We to New Great Depression? - Yahoo! Finance

[jeffkrol]

How Close Are We to New Great Depression? - Yahoo! Finance

"We could keep deferring the depression, but that could just encourage the bad guys. If you do this, you possibly do more harm than good," Roger Nightingale, economist and strategist at RND Associates, told CNBC Monday.

"You can defer, but not prevent."

Nightingale argued that previous credit booms, for example in Japan in the 1980s, have led to sustained recessions.

and the sun goes around the earth.................
We should be so lucky to be Japan..........

[Nesster]

Then again CCN&Y sings...

If I had ever been here before I would probably know just what todo
Don't you?
If I had ever been here before on another time around the wheel
I would probably know just how to deal
With all of you.
And I feel
Like I've been here before
Feel
Like I've been here before
And you know
It makes me wonder
What's going on under the ground

Do you know?
Don't you wonder?
What's going on down under you.

We have all been here before
We have all been here before
We have all been here before
We have all been here before

1973?75 recession - Wikipedia, the free encyclopedia

The 1973–75 recession in the United States or 1970s recession was a period of economic stagnation in much of the Western world during the 1970s, putting an end to the general post-World War II economic boom. It differed from many previous recessions as being a stagflation, where high unemployment coincided with high inflation. The period was also described as one of "malaise" (ill-ease; compare "depression").

Among the causes were the 1973 oil crisis and the fall of the Bretton Woods system.[2] The emergence of newly industrialized countries increased competition in the metal industry, triggering a steel crisis, where industrial core areas in North America and Europe were forced to re-structure.[citation needed] The 1973-1974 stock market crash made the recession evident.

The recession in the United States lasted from November 1973 to March 1975,[3] although its effects on the US were felt until mid-term of Ronald Reagan's first term as president, characterized by low economic growth. Although the economy was expanding from 1975 to the first recession of the early 1980s, which began in January 1980, inflation remained extremely high until the early years of the 1980's.

During this recession, the Gross Domestic Product of the United States fell 3.2 percent. Though the recession ended in March 1975, the unemployment rate did not peak for several months. In May 1975, the rate reached its height for the cycle of 9 percent.[4] (Three cycles have higher peaks than this, the current cycle, where the unemployment rate peaked at 9.7 percent in August 2009 (currently 9.3%) in the United States, the Early 1980s recession where unemployment peaked at 10.8% in November and December 1982, and the Great Depression, where unemployment peaked at 25% in 1933.)

[les3547]

Then again CCN&Y sings...

If I had ever been here before I would probably know just what todo
Don't you?
If I had ever been here before on another time around the wheel
I would probably know just how to deal
With all of you.
And I feel
Like I've been here before
Feel
Like I've been here before
And you know
It makes me wonder
What's going on under the ground

Do you know?
Don't you wonder?
What's going on down under you.

We have all been here before
We have all been here before
We have all been here before
We have all been here before

Good one. I would submit this Joni Mitchell verse:

Banquet

Come to the dinner gong
The table is laden high
Fat bellies and hungry little ones
Tuck your napkins in
And take your share
Some get the gravy
And some get the gristle
Some get the marrow bone
And some get nothing
Though there's plenty to spare

I took my share down by the sea
Paper plates and Javex bottles on the tide
Seagulls come down and they squawk at me
Down where the water skiers glide

Some turn to Jesus
And some turn to heroin
Some turn to rambling round
Looking for a clean sky
And a drinking stream
Some watch the paint peel off
Some watch their kids grow up
Some watch their stocks and bonds
Waiting for that big deal American Dream

I took my dream down by the sea
Yankee yachts and lobster pots and sunshine
And logs and sails
And Shell Oil pails
Dogs and tugs and summertime
Back in the banquet line
Angry young people crying

Who let the greedy in
And who left the needy out
Who made this salty soup
Tell him we're very hungry now
For a sweeter fare
In the cookie I read
"Some get the gravy
And some get the gristle
Some get the marrow bone
And some get nothing
Though there's plenty to spare

[Nesster]

Les, yeah, and that in turn reminds me of Georgie of the Beatles

Have you seen the little piggies
Crawling in the dirt?
And for all the little piggies
Life is getting worse
Always having dirt to play around in

Have you seen the bigger piggies
In their starched white shirts?
You will find the bigger piggies
Stirring up the dirt
Always have clean shirts to play around in

In their sties with all their backing
They don't care what goes on around
In their eyes there's something lacking
What they need's a damn good whacking

Everywhere there's lots of piggies
Living piggy lives
You can see them out for dinner
With their piggy wives
Clutching forks and knives to eat their bacon

[les3547]

Les, yeah, and that in turn reminds me of Georgie of the Beatles

Have you seen the little piggies
Crawling in the dirt?
And for all the little piggies
Life is getting worse
Always having dirt to play around in

Have you seen the bigger piggies
In their starched white shirts?
You will find the bigger piggies
Stirring up the dirt
Always have clean shirts to play around in

In their sties with all their backing
They don't care what goes on around
In their eyes there's something lacking
What they need's a damn good whacking

Everywhere there's lots of piggies
Living piggy lives
You can see them out for dinner
With their piggy wives
Clutching forks and knives to eat their bacon

[Nesster]

OK, back from the 70s...

Wall Street is ruining America - 1 - - MSN Money

The interesting point here has to do with levels of private debt generation.

Plus, there's the fact that the entire industry continues to get preferential treatment from the government -- be it the $700 billion bailout in 2008 or the ongoing right to borrow massive amounts of essentially free money from the Federal Reserve, then turn around and loan it, risk free, to Uncle Sam at 1.5% or more per year, thus pocketing billions in easy money.

This is what happens when Gordon Gekko's "greed is good" mantra gets out of control.

So for all the trouble, what do we get?

We get banks sitting on trillions in idle cash and not loaning it out into the economy because they are worried about their balance sheets and unwilling to help consumers struggling to get by in an environment of persistent joblessness, stagnant wages and rising living costs.

We get high-powered lobbyists fighting to defang already underpowered efforts to reform and contain the financial industry. And we get a continuation of the asymmetrical yet chummy relationship between regulators and the financial sector.

Washington and Wall Street
Half the time, Wall Street outmaneuvers the bureaucrats with better talent and higher pay packages. What's more, big political donations and a revolving door keep pro-Wall Street types in the halls of power. For example, former Treasury Secretary Hank Paulson, European Central Bank chief Mario Draghi, Italian Prime Minister Mario Monti and former Greek Prime Minister Lucas Papademos all have strong ties to one institution: Goldman Sachs. Wall Street also heavily funded President Barack Obama's 2008 campaign.

Just look at how the Libor scandal has progressed. Regulators in at least seven countries are now investigating a wide swath of the financial system, even though members of the Fed were aware of deficiencies in the survey system that sets the interest rate five years ago. And now, there is evidence the Bank of England was complicit in the manipulation of rates in 2008.

Barclays' disgraced CEO Robert Diamond was forced out by British authorities for his failures -- yet was about to get a "you're fired" bonus of as much as $31 million before public rancor forced him to relinquish it.

As for penalties, Morgan Stanley estimates that the 12 global banks tied to the scandal will be on the hook for $22 billion in regulatory penalties. Barclays, the first to pay, shelled out just $456 million in June. That would be just 4% to 13% of 2012 earnings per share for the group, according to Morgan Stanley's analysts -- or just 0.5% of book value. Nothing more than a limp slap on the wrist.

How does the scandal affect you?

Well, about half of all variable-rate student loans are tied to Libor. Out of all adjustable-rate mortgages, 45% of prime loans and 80% of subprime loans are tied to it. State and local governments have exposure to Libor when they use interest-rate derivatives to control their credit exposure. And many types of consumer loans are tied to the rate.

Small is beautiful
It doesn't have to be this way. Indeed, it shouldn't be this way.

Research shows (.pdf file) that there is a threshold above which too much finance -- securities engineering, repackaged loans, all of it -- no longer has a positive effect on growth. In other words, there is a point at which selling more "synthetic" credit-default swap protection against an index of corporate investment-grade bonds -- the trade that blew up in JPMorgan's face -- won't benefit the collective good. That point is when credit to the private sector reaches 110% of the overall economy.

Right now, according to the World Bank, we're at 193% on this measure, down from a peak of 214% in 2007 but up from 92.2% in 1982, as shown in the chart above. And we're not alone: The developed rich-world economies as a whole are at 162%.

What's more, separate research shows that despite all the growth, the industry hasn't become any better or more efficient at channeling funds from savers to investors -- which, after all, is the raison d'être of banks.

Academicians aren't sure what causes growth to slow when bankers get too powerful, but they have some ideas.

The first is that too much finance encourages economic volatility, increasing the probability of large economic crashes.

The second is that the accumulation of power encourages the misallocation of resources in the good times via excessive leverage. Thus, Pets.com and Miami condos with granite counters and outlandish price-to-rent ratios.

It could also contribute to higher levels of inflation via things like the recent commodity-trader-driven spikes in food and fuel prices.

The takeaway is that we need tighter regulation and capital requirements for large, global institutions, despite worries from the industry and some on the right that this will reduce profitability and tighten lending.

The 2010 Dodd-Frank financial reform, which addressed the problem with tools like the new Consumer Financial Protection Bureau, was criticized by Republicans as being too harsh. In reality, the package was too lenient, because it failed to address Wall Street titans' too-big-to-fail status.

This analysis suggests tighter credit would actually be a good thing, because, with lending to households already down, it would hit the "shadow" banking system of derivatives, collateralized loans and other types of gimmickry the usurers are indulging in at our expense.

We've been here before
With our economy and indeed our very liberty at stake, it's comforting to know that our predecessors fought similar problems and found creative solutions. I checked in with Robert Wright, an economic historian at Augustana College in Illinois, for some perspective on all this. He noted two things:


First, it's unusual, and somewhat frightening, that, aside from GOP presidential candidate Rep. Ron Paul of Texas, there is no political figure sounding the anti-Wall-Street battle cry.

There is no modern-day Andrew Jackson, who took down the Second Bank of the United States -- one of our early central banks -- out of concern that stockholders were earning easy profits from taxpayers via the privilege of using cheap government money to make loans. Sounds like the deal today's Federal Reserve member banks get.

Second, although the Fed has held short-term interest rates near 0% since 2008 and has spent trillions pushing down long-term rates, many households still aren't benefiting in a big way because of the problems of tightened credit standards, negative home equity and Wall Street's need to protect profit margins.

Wright suggests one remedy would be to bypass Wall Street completely and have the government issue mortgage loans at 0.25%, the upper end of the Fed's short-term policy-rate window.

This would cut defaults by significantly lowering monthly payments, and it wouldn't require write-downs of mortgage principal (a bailout to homeowners that helped fuel the genesis of the Tea Party). Such a move would give every Tom, Dick and Harry access to the kind of financing enjoyed by Citigroup and JPMorgan.

On a typical 30-year $250,000 mortgage, a drop in rates from 3.5% to 0.25% would slash payments by 30%, from $1,435 to around $1,000.

Yes, there is a risk of political exploitation. And, despite the availability of the Internal Revenue Service to collect on these loans via things like wage garnishment, the government might be too lenient on borrowers. But there are precedents for it. In the colonial period, general loan offices in Massachusetts, Pennsylvania, New Jersey and New York made loans to farmers to help support the economy. And right now, the state of North Dakota is issuing loans via its Bank of North Dakota -- an institution funded by state deposits created in 1919 on a wave of populist anger toward the moneyed interests back east.



Socialized financing of the type pioneered by the founding fathers and maintained by one the reddest states in the union? No one said the cure to a problem generations in the making would be easy.

[Nesster]

and more...
For the U.S. Economy the News Is Bad and Worse - US News and World Report

A more revealing clue to where we are lies in the term "structural unemployment," which indicates where jobs have vanished because of basic changes in how the economy works. In this area, people have little or no prospect of returning to the jobs they once had.

This is a fundamental fact similar to what happened to farm workers over several decades with the advent of threshing machines and other devices, easy credit, land consolidation, and the like. Those workers found jobs in the new factories, but today manufacturing is the great source of our structural unemployment. We've lost some 6 million manufacturing jobs in the last decade or so. Automation has replaced many of them, but today, so different from earlier decades, there is another big jobs thief: globalization. Work is shipped abroad because of competition in skills, speed, and pay in all those places called Somewhere Else.

Here now is the worse news: America is adding to the length of unemployment lines in the future by falling behind today in skill areas where global competition has become so intense. Too few of our younger people are benefiting from what is called STEM education. STEM stands for science, technology, engineering, and mathematics, the human capital at the core of any productive economy.

America has long been a STEM leader. We have dominated the world in innovation over two centuries but most recently in computer and wireless power, the development of the Internet, and cellphones, and with those innovations came well-paying jobs. But our leadership is at risk.

A stunning illustration of how far America has started to lag in training its youth is that we are only one of three countries in the 34-member Organization for Economic Cooperation and Development where the youngsters are not better qualified than their fathers and mothers. Men and women ages 55 to 64 have the same or better education than the 25-to-34 generation. The younger workers in most other OECD countries are much better educated than those nearing retirement.

This is an astonishing commentary on the limits of, and the deterioration of, America's system of public education. The National Academies warned years ago that the United States would continue to lose ground to foreign economic rivals unless the quality of its science education improved. In a 2010 report by the academies, an advisory group on science and technology, the United States ranked 27th among 29 wealthy countries in the proportion of college students with degrees in science and engineering. In a larger study conducted by the OECD in 2009, American 15-year-olds were 31st in math and 23rd in science. Yet another study found American 12th graders near the bottom of students from 20 nations, and this doesn't even focus on the achievement gap between low-income and minority students and their peers.

[jeffkrol]

and more...
For the U.S. Economy the News Is Bad and Worse - US News and World Report

MBA's are sooo much more profitable...