Does Size Matter?

The antithesis to market capitalism is monopoly.  High market concentration has been historically a reason to use the US Justice Department to trust bust.  We’ve had laws on the books since the late 19th century.  The last real monopoly challenge was during the Clinton administration that took on Microsoft and its software bundling practices.  The Bush 2 administration promptly walked away from enforcing the suit.  The Eurozone found Microsoft guilty of monopoly behavior and are still in the process of enforcing their court’s findings.  We’ve been ignoring monopoly-creating behavior on the part of lawmakers and corporations for decades now and we’re living with the high costs of market failure as a result.

Much of the problems in the current downturn can be traced to the behavior of some of the country’s largest banks. Banks that were allowed to grow to sizes that allowed them power in the market, power in congress, and power in the setting the terms of their regulation. Several rationalizations were used to allow banks to grow from the 1980s to present time.  First, there were the arguments for economies of scale.  Big banks were more able to process huge batches of ACH transactions and checks.  These money center banks replaced the FED as the transaction processor of choice since they were generally cheaper given the various expenses of being a FED member bank that include leaving large amounts of money in reserve and on-going regulation and monitoring.

Second, there was the argument that huge money center banks were necessary to offset the power of the up and coming huge Japanese banks.  During the 1980s period, one US bank after another on the top ten largest banks in the word was knocked off the list by a Japanese bank, then later by Eurozone banks.  It was argued that in order to compete with these larger foreign institutions, US banks concentration should be looked at in a global context.  In a global context, they were ‘competitive’ and not part of a market concentration problem.   The basis of this argument was that the bank might be big in US terms, but as a global entity it was one of many.  During the 1990s, it was typical for market concentration to be defined more on a global basis which in turn led to less prosecutions based on the traditional measures.

We now know that poor regulation and  terrible understanding of the role of financial innovations in the financial system led to the current meltdown.  We also know that many of the offenders and the biggest failures have been the huge money center banks.  Many regional and small banks that continued to follow the loan and hold model of lending, rather than the loan, securitize and sell model are still thriving and did not contribute to the current crisis.  Given the global financial crisis and the role of the mega banks and the resultant demands on tax payer funds to bailout those deemed too big to fail, should we look at regulations that  limit bank size?

Many economists, liberal pundits, and I question the Geithner plan because it assumes we need the financial system to just work as it exists today.  His paradigm doesn’t really question the failure of the system in terms of the current set-up of the system itself.  Geithner’s plan blesses the poor system that was just swept off its feet by a passing oddity that surely won’t repeat itself.  James Kwak of  Baseline Scenario questions the basis of the Geithner plan that we need just need to prop up these too big to fail behemoths until they are back on their feet.  Here’s the central part of the Geithner proposition questioned by Kwak and others.

“. . . [W]e must create higher standards for all systemically important financial firms regardless of whether they own a depository institution, to account for the risk that the distress or failure of such a firm could impose on the financial system and the economy. We will work with Congress to enact legislation that defines the characteristics of covered firms, sets objectives and principles for their oversight, and assigns responsibility for regulating these firms.

In identifying systemically important firms, we believe that the characteristics to be considered should include: the financial system’s interdependence with the firm, the firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding, and the importance of the firm as a source of credit for households, businesses, and governments and as a source of liquidity for the financial system.”

London Calling

Grab the popcorn for the start of the G20 London Summit beginning April 2nd.  This will be an important meeting because it serves as a test of the resolve of the major nations’ commitment to both global development and trade.  It will also be a test for new US President Barrack Obama and his administration.  There will be challenges from many of the countries on several fronts.

Obama has called for all G20 countries to pledge GDP-appropriate global fiscal spending. Germany is not convinced of a need for global fiscal stimulation having announced many are not bad off when compared to the US or UK.     Reluctance on the part of other nations to follow the lead will put pressure on the US to stimulate the much of the world’s economies as well as its own on its own.   Steven Harper of Canada as said that Canada’s doing fine.  Angela Merkel has criticized the US call for fiscal stimulus.  Early last week, the President of the EU, called the Obama plan “a road to hell.”  This has caused both the US and the UK to back off of specific commitments to global fiscal stimulus.  Developing nations have been begging the G20 for pledges to shore up their own economic crises.  There also appears to be a varying commitment levels to that idea.  This from China View.

But a transatlantic rift over the necessity of further fiscal stimulus appears to complicate efforts of the summit.

In response to U.S. pressure on the European Union (EU) countries to boost their fiscal stimulus, Czech Prime Minister Mirek Topolanek, whose country holds the current EU presidency, slammed U.S. plans to spend its way out of recession as “a road to hell.”

Topolanek’s blunt criticism exposed European differences with Washington and signaled a hard job for Brown to achieve greater international cooperation.

Playing down the transatlantic rift, British Foreign Secretary David Miliband said on Sunday Britain and the United States will not push G20 leaders to announce specific spending pledges.

In a preparatory meeting two weeks ago, G20 finance ministers and central bankers agreed to “take whatever action is necessary” to support the economy. They pledged to continue coordinated and comprehensive action to boost demand and jobs, adding the key priority now is to restore lending by tackling toxic assets in the financial system.

The “Incompetence Crisis”

All last year,  ALL  I heard was how experience didn’t matter.  I heard that being ‘ready on day one’  was a meaningless campaign slogan.  I was told that what mattered was perceived good judgment, intelligence, and speaking skills.  I remember watching the first Democratic Debates and thinking, this guy isn’t ready to be dogcatcher, let alone President. There were no wonky answers on economics or foreign policy.  There was never a show of any detailed plan.  There was always just a nice speech read from a teleprompter with a preacher’s patois, incredible (somewhat contradictory) promises, and messages that could have come from a motivational seminar instead of a political campaign.  I never got on the bandwagon.

I finally found a home over here in the Pumasphere with people of similar thought after being treated like a scourge by other sites (blog or MSM) that had gone over to the hope side.  I’ve been getting used to my role as pariah. I was thinking I’d have to live with it for at least a year.  I figured I’d start getting the you were so right calls sometime in the fall.

Boy, was I wrong!

I figured that because of my experience during the early calls for the Iraq war.  I was the one saying “Iraq has nothing to do with 9/11.  Iraq is a different agenda.  Iraq is a bad idea.”   I actually had some one get up in a restaurant to tell me what a lousy, unpatriotic American I was that didn’t deserve to live in the US. I became a the scourge of all true American patriots.  I’ve been thinking that my 9/11 protest was just a character building experience that would serve me well during the Obama fascination period and that it would probably take a few years of, yet again, being a scourge to all true American patriots before the worm would turn.  Luckily, I found a other like minded out in the Pumasphere so I don’t have to be quite alone as I was with my opinion on the Iraq Invasion.

I think I can honestly speak for a number of us around here.  We didn’t expect to be proven so right so quickly.  At least I didn’t. I was hoping that maybe it wouldn’t be as bad as my gut and head had deduced.  So many of my friends said, he’s not Dubya, so he’s got to be better, you’ll see.   After all, we’d get rid of a lot of really evil signing statements that restrict women’s reproductive choices, the right of all people to love and marry whom they wish, and we’d move ahead on science again.  I’ve said this before, but nearly any democrat would have done any of those things–including Joe Lieberman. Lieberman is one of those folks that I consider marginally a democrat, but even he would have done those things if he were POTUS.  We certainly wouldn’t see any nasty supreme court appointments either.  These were marginal hopes and small changes that I could cling to while knowing that eventually, I would be proven right.  I just didn’t even imagine it would wind up quite like this, quite so fast.

So, if I haven’t made myself clear here, Rush Limbaugh and Governor Jindal may be cheering for a failure.  I’m not in that camp at all.  I’ve just been quietly sitting here telling myself that with all the beautiful things written into the constitution as well as the resiliency of the American people, that perhaps it won’t be quite as bad as I thought it would be.   After all, we survived the incompetency of George Bush and the lunacy of Dick Cheney. Things can’t fall apart that fast!

Boy, was I wrong!

Pumas are the new Cassandras.  Our warnings, unheeded, demonized, and marginalized, are now the stuff of MSM op ed pieces.  I’d like to point you to a few that are searing Obama with legitimate criticisms.   I would think they came from one of the edgier Puma sites but they don’t.  One is from CNN. The other from the UK’s Prospect.  I also have two from the NY Times.  These comments are simply alarming.

Toxic Treasuries Redux

While the equity markets are reacting positively to whatever bit of good news they can grab, economists are eying  the market for government bonds.  The United States and the United Kingdom have huge deficit driven budgets and stimulus plans that are testing the willingness of their creditors.  The US is skating on the thin ice.  The UK fell into the pond.  This from Market Watch:

NEW YORK (MarketWatch) — Treasury bond auctions, not usually the stuff that fires up equities traders, rocked stocks this week as investors homed in on worries about the ability of the government to borrow more than $2 trillion to fund its financial and economic rescue plans.

On Wednesday, concerns were sparked after the U.K. failed to get enough bids to sell the full amount of 4-year gilts it offered, the first time this happened in 14 years. Later in the day, a U.S. government auction of $34 billion of 5-year notes drew only tepid interest from foreign investors.

“Everybody knows that the government is auctioning stuff like there’s no tomorrow,” said Paul Nolte, director of investments at Hinsdale Associates. “The question is who’s going to buy all this stuff,” he said. “If there’s not enough buyers, interest rates will have to go higher, which means mortgage rates would have to go higher and that could derail any recovery we might have.”

Treasury bond yields, which move inversely to bond prices, are used to benchmark the interest rates on many consumer loans, including some mortgages. When buyers don’t show up at an auction, bond prices fall and their yields rise.

This brings us back to China and their call to review the dollar’s role as a reserve currency.  The offset on the Fed’s balance sheet to Treasury Bills and Bonds is dollars.   These things and the interest rates that prevail in the economy are causally linked.  You mess with one, you mess with them all.

Meanwhile, China, the largest buyer of U.S. Treasury bonds, expressed concern earlier this month about the safety of its investments. The massive amounts of U.S. debt issued have pressured bond prices and also threatened the strength of the dollar, which could further reduce the value of holding Treasurys.

China also rocked the boat when the governor of its central bank on Monday called for a new global reserve currency to replace the dollar.

The Treasury had announced that the would be heavily involved in the market this week.  The FED is also out there with its quantitative easing program.    Odd things are happening.   It became obvious by mid Wednesday that their announcements and actions were causing the Treasury to actually buy at  high price mid-morning then selling much later at a low price.  It doesn’t take a rocket scientist to know that’s bad math for the taxpayer.    Larry Doyle over at NQ heard that Wall Street was trying to sell three times the amount that the Treasury actually bought.

Bloomberg also noted the supply concerns.

The Treasury Department is selling a record $98 billion in notes this week, eclipsing the record $94 billion auctioned the week ended Feb. 27. The U.K. failed to attract enough bidders today at an auction of 1.75 billion pounds ($2.55 billion) of gilts for the first time in almost seven years.

President Barack Obama’s government is selling record amounts of debt to revive economic growth, service deficits, and cushion the failures in the financial system. Debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc.

Orders for U.S. durable goods unexpectedly rose by 3.4 percent in February, the Commerce Department said today in Washington. Purchases of new homes in the U.S. unexpectedly jumped in February, increasing 4.7 percent to an annual pace of 337,000 after a 322,000 rate in January, Commerce said.

“Better than expected economic data, failure of the long- end auction in the U.K. and low demand at the five-year Treasury auction; all these factors combined are leading to higher yields,” said Anshul Pradhan, an interest-rate strategist in New York at Barclays Capital Inc., another primary dealer.

The Fed said it purchased $7.5 billion of U.S. debt spread among 13 of the possible 19 securities eligible for purchase. The notes mature from February 2016 to February 2019, the Federal Reserve Bank of New York said in a statement today. Nearly $22 billion was submitted to the central bank in the first day of buying, the New York Fed said.

“We are really not seeing any kind of meaningful support for the Treasury market,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley’s individual investor clients. “Conventional wisdom in the market is that the Fed will concentrate on the five- to 10-year or the seven- to 10-year sector.”

Basic Truths and Common Sense

I woke up from nap with this thread writing itself.   This happens frequently to me when when I’m trying to reconcile ideas that look separate and unconnected but I know intuitively that isn’t true. I just haven’t found the way to make the connection. This latest dream tapestry came from what seems like three distinct sources.  The first inspiration was a conversation from The Confluence.  The second kick came from a rude comment from an even ruder blog.  The third click came from my basic market structure lectures to my freshman survey classes where I have to teach economics to non-business majors.  This means I teach economics concepts without much use of graphs and math so you have to tell a lot of stories to get your  point across and be very down to earth about things.  It makes me really work my brain so I can explain complex concepts in intuitive ways.

So the thread at the Confluence was about what  is ‘crude populism.’  The rude comment was about me being at times seemingly ‘Keynesian’ and at other times a ‘rabid free market libertarian’.  The primary concept that I’m leading up to in my survey class is  ‘market failure.’  There’s actually a middle path between these concepts and we’re about to go down it.  The connecting point is market failure and its root source as well as the source of resolution.  The source of market failure can frequently be the government.  It can also frequently be something with in the market itself that has nothing to do with the government.  Either way, to deal with the market failure,the government must find the root source and remove it.  This means creating laws.  Sometimes, this means removing government intervention.  Other time it means adding it.  I’ll give you some examples here in moment, but stay with me on those points because I’m going to tie it to American populism in its varied forms.

The most recent form of American populism in this country comes from Ronald Reagan.  A previous form of American populism came from Huey Long.  They were both very skilled at speechifying the masses into jingoistic furor, but with very different views of what the government’s role in messes were. Reagan’s speeches were full of the “government is always the problem.”   Here’s example one, the first Reagan inaugural address.

Here’s the part of the speech that describes the Reagan brand of Populism.

These United States are confronted with an economic affliction of great proportions. We suffer from the longest and one of the worst sustained inflation in our national history. It distorts our economic decisions, penalizes thrift, and crushes the struggling young and the fixed-income elderly alike. It threatens to shatter the lives of millions of our people.

Idle industries have cast workers into unemployment, human misery, and personal indignity. Those who do work are denied a fair return for their labor by a tax system which penalizes successful achievement and keeps us from maintaining full productivity.

But great as our tax burden is, it has not kept pace with public spending. For decades we have piled deficit upon deficit, mortgaging our future and our children’s future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals.

You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we’re not bound by that same limitation? We must act today in order to preserve tomorrow. And let there be no misunderstanding: We are going to begin to act, beginning today.

The economic ills we suffer have come upon us over several decades. They will not go away in days, weeks, or months, but they will go away. They will go away because we as Americans have the capacity now, as we’ve had in the past, to do whatever needs to be done to preserve this last and greatest bastion of freedom.

In this present crisis, government is not the solution to our problem; government is the problem. From time to time we’ve been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.

This is the philosophical basis of the tea parties of Michelle Malkin.  The line goes like this, there is this gang of elitists sitting in government taking our tax money and creating problems with our jobs to help their buddies and themselves.  Let’s get them!  We’re little businesses! We’re little people!  We’re the solution !  They are they problem!

Here’s some highlights from the life of  Louisiana Governor Huey Long, the Kingfish. He’s another politician associated with populism.  Notice his breed of populism is quite different.   Listen to his speeches.  This line is one that grabs me.

“How many men ever went to a barbecue and would let one man take off the table what’s intended for nine-tenths of the people to eat? The only way you’ll ever be able to feed the balance of the people is to make that man come back and bring back some of that grub that he ain’t got no business with!”

Long’s type of populism puts the government squarely as the root of the solution and not the problem.  This is another type of populism that is the philosophical catalyst spurring the pitchforks and torches aimed squarely at the AIG bonuses.  Huey attacked the corporatist that he saw as distinct from the government.  So, the line here goes, there is a gang of elitists taking our money and creating problems for our jobs.  Let’s grab the government and go get them!  We’re little businesses! We’re little people!  We’re the solution but we can’t really do much unless the government is there to help us get them!  But, let’s get them!

So yes, the problem can somewhat be boiled down to the government is the elitist problem for populist Republicans.  The government is part of the solution to the elitist problem for populist Democrats.  These are both ideological oversimplifications and I’m going to use simple economics to show you why.  We can see that both can be true when you study market failures in economics. They aren’t completely irreconcilable viewpoints.

Punch Drunk on Tax Funded Bailouts

While the Right Wing is off having tea parties and screaming class war, there appears to be some legitimate soul searching going on  in left Blogistan about our “punch drunk” POTUS and his continual campaign like appearances.  A lot of the discussion is focused on his dogged support of Turbo Tax Timmy and his bailout of the Suckers who created this bad economy for the rest of us.  We’ve been overwhelmed with “heckuva-job-Timmy moments and distasteful ‘gallows humor’.  When is enough enough?

Meanwhile, those of us that can’t avoid our jobs by taking a permanent vacation in TVLand are watching the economy unwind in spasms of agony and ecstasy. The market, starved for specific plans and information, provided a big thumbs up on a bail out program that at best reheats Dubya’s.  If any one was punch drunk, it was the equity markets today.  The leaders were the  financials, of course, who will continue to provide profits to the market while writing their costs off to the taxpayer.  If you were looking for the fresh cold breath of reality, it wasn’t on Wall Street or on Pennsylvania Avenue.

Lucidity, however,  is on the rise in other places.   I’m finding it in interesting places like the second episode of South Park where the lampoon on the Dark Knight included this little back ground gem;  a satire of the famous Obama picutre with a deer-in-the-headlights appearing  Obama and the change mantra tagged by a bright red WHEN?

My answer to the when question is probably never.

Most left wing angst appears to be directed at Tim Geithner since the Light Bringer is still too new to the job to blame.  We continue to learn how involved both he and his staff at the NY Fed were in the AIG Bonuses.  In fact, the Obama administration is trying to scuttle the Excise tax on the bonuses while verbally denouncing executive greed on TV. We’ve also found out that Citibank has managed to insert similar language to protect its executive bonuses. Let’s see how much change we get on that one too.

Not only are right wing shrills like Fox’s Sean Hannity calling for the head of Timmy Geithner but Progressive Diva Arianna Huffington front paged the call on HuffPo today. When Hannity and Huffington carry the same headline, it’s time for more than a few campaign appearances on Leno and 60 minutes.  I’m not sure where all this shock and angst is coming from because it’s been rather obvious to some of us for some time that Obama represented rather narrow interests (not ours).  How can every Obama supporter be calling the AIG Bailout a travesty while knowing that the architects and enablers of AIG are continuing the task with the Light Bringer’s blessings and attaboys?  Well, Obama just mustn’t realize that it’s all Timmy’s fault and we need his head on a limited edition Obama inaugural platter.  But, wait, isn’t Obama the one with that great judgement ?  C’mon folks reconcile all this in your mental ledger. It really isn’t that hard.

Super Heroes of Macroeconomics

Somebody must have a lot of time on their hands to write a song called “Hey, Paul Krugman” but still, if the angsty, artsy fartsy creative class that foisted this POTUS on us is finally waking up, then Twitter me when the Revolution comes.  I’ve even read the orange cheeto place  and seems even a few of them are beginning to see the writing on their blackberries.

So, Paul is still appalled and speaking out against the Zombie Plan.   I’d say this is another sfz! warning to the White House.  What I can’t repeat enough is that it’s not just Paul.  It’s not just me.  It’s everyone with any knowledge of macroeconomics and the financial system.

Why am I so vehement about this? Because I’m afraid that this will be the administration’s only shot — that if the first bank plan is an abject failure, it won’t have the political capital for a second. So it’s just horrifying that Obama — and yes, the buck stops there — has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006.

I don’t know if you’ve ever sat in an economics class, but most of you who have will attest that few economics professors are what you would call the dramatic, excitable types.  However, I’ve seen more animation out of them recently than I’ve seen in all recent Marvel Comic Books.

From “Reasons Why The Obama Administration will not solve this crisis by the end of 2009″ at The Underground Investor:

Consider that President-elect Obama voted FOR the horrible $700 billion bailout plan that accomplished less than zero in fixing the global economy while only transferring wealth from people that were struggling the most to the unethical financial executives that created this problem. These were my exact words in October, 2008, verbatim, about the eventual effect of the bailout plan: “Don’t believe the media spin. This will fix nothing. Even if and when the government overpays Wall Street and US banks by 300%, 500% and 1000% for their toxic assets, this temporarily recapitalizes these financial institutions but only creates A MUCH BIGGER PROBLEM for the future.” If I understood why the bailout plan would most definitely fail, as I blogged here, and the next President of the United States could not, that is a scary thought. On the other hand, if President Obama understood that the bailout plan would likely accomplish nothing but the transference of wealth from hard-working citizens to corrupt financial executives and still voted for the bill, then this action needs no further discourse.

From FT’s Willem Buiter:

Why are the unsecured creditors of banks and quasi-banks like AIG deemed too precious to take a hit or a haircut since Lehman Brothers went down?  From the point of view of fairness they ought to have their heads on the block.  It was they who funded the excessive leverage and risk-taking of banks and shadow banks.  From the point of view of minimizing moral hazard – incentives for future excessive risk taking – it is essential that they pay the price for their past bad lending and investment decisions.  We are playing a repeated game.  Reputation matters.

Three arguments for saving the unworthy hides of the unsecured creditors are commonly presented:

• Unless the unsecured creditors are made whole, there will be a systemic financial collapse, with dramatic adverse consequences for the real economy.

• If the unsecured creditors are forced to take a hit, no-one will ever lend to banks again or buy their debt.

• The ultimate ‘beneficial owners’ of these securities – notably pensioners drawing their pensions from pension funds heavily invested in unsecured bank debt and owners of insurance policies with insurance companies holding unsecured bank debt – would suffer a large decline in financial wealth and disposable income that would cause them to cut back sharply on consumption.  The resulting decline in aggregate demand would deepen and prolong the recession.

I believe all three arguments to be hogwash.

Zombie Banks must DIE!

Well, the Obama administration has decided to take the Zombie route which is something I’ve repeatedly argued against.  But why just take my word for it?  Let’s start with Nobel prize winning  economist Paul Krugman reporting  on his NY Times blog today in a thread aptly titled Despair over Financial Policy.

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.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

Just about every economist and financial blog on the web, especially the progressive ones, have warned against this option since similar plans put Japan into its lost decade of recession, high deficits, unemployment, and financial malaise.  This is worse than I even expected of the Obama administration.  This basically means more BIG subsidies for BIG investors.  It is nothing less than a massive transfer of wealth to the people and institutions most responsible for this mess from those of us that will suffer the most and have the most to lose. This threatens our jobs, our children’s future, and our country’s standing as the world’s largest single country economy.  This is THE single worst possible decision.

This from Calculated Risk:

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.

From Yves Smith  Naked Capitalism:

The New York Times seems to have the inside skinny on the emerging private public partnership abortion program. And it appears to be consistent with (low) expectations: a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper.

Key points:

The three-pronged approach is perhaps the most central component of President Obama’s plan to rescue the nation’s banking system from the money-losing assets weighing down bank balance sheets, crippling their ability to make new loans and deepening the recession….

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
Yves here. 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.

In addition, it has been said in comments more than once that the banks own some paper that is truly worthless. This program won’t solve that problem. Back to the piece:

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

Yves here. Hiring asset managers to do what? Some investors get 85% support (more as is revealed later), others get dollar for dollar? This makes no sense unless very different roles are envisaged (but how will the price for assets given to the asset managers be determined? Or are these for the off balance sheet entities that should be but are still not yet consolidated, like the trillion dollar problem hanging around at Citi?) Back to the article:

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.

Yves again. While the first TALF deal got off well, Tyler Durden points out its capacity is 2.7 times pre-credit mania annual issuance levels, which means the $1 trillion considerably overstates its near term impact. And credit demand by all accounts is far from robust. Cheap credit is not enticing in an environment of weak to falling asset prices and job uncertainty.

…

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

Later in the article, there is language that intimates that the banks will put up assets and take what they get. However, the failure to mention a reserve (a standard feature in auctions) does not mean one does not exist. Or the alternative may be, since bidding will almost certainly be anonymous, is to let the banks submit a bid, which would serve as a reserve. That is the common procedure at foreclosure auctions, when the bank puts in a bid equal to the mortgage value (so either a foreclosure buyer takes the bank out or the bank winds up owning the property).

From Financial Armageddon:

No Surprise to Anyone

If there is anything to be learned from the current crisis, it is the fact that Washington has a habit of screwing things up.

From setting up corrupt and self-serving government-sponsored enterprises that fail to accomplish their stated goals, to ill-conceived and underfunded insurance schemes, guarantee programs, and safety nets that don’t provide the benefits claimed, to rules and regulations that leave those who are “protected” high and dry, it’s amazing how often good intentions go wrong when the politicians are in charge.

From George Washington’s Blog:

Does a Single Independent Economist Buy the Geithner-Summers-Bernanke Approach?

Does a single independent economist buy the Geithner-Summers-Bernanke approach?

On the left, you have:

• Nobel economist Joseph Stiglitz saying that they have failed to address the structural and regulatory flaws at the heart of the financial crisis that stand in the way of economic recovery, and that they have confused saving the banks with saving the bankers

• Nobel economist Paul Krugman saying their plan to prop up asset prices “isn’t going to fly”. He also said:
  

  At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached. This was bad analysis, bad policy, and terrible politics. This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers.

• Prominent economists like Nouriel Roubini, James Galbraith, Dean Banker, Michael Hudson and many others slamming their approach

On the right, you have:

• Leading monetary economist Anna Schwartz saying that they are fighting the last war and doing it all wrong

• Former Assistant Secretary of the Treasury and former editor of the Wall Street Journal Paul Craig Roberts lambasting their approach

• Economist John Williams saying “the federal government is bankrupt … If the federal government were a corporation … the president and senior treasury officers would be in federal penitentiary.”

• Prominent economist Marc Faber and many others tearing their approach to shreds.

Of course, other Nobel economists, high-level fed officials, former White House economist, and numerous others have slammed their approach as well.

Sure, the economists for the banks and other financial giants which are receiving billions at the government trough think that the Geithner-Summers-Bernanke approach is swell.

And perhaps a couple of economists for investment funds which use their giant interventions into the free market to make some quick money.

But other than them, no one seems to be buying it.

I may be one of the few in the chorus singing soprano, but I’m in a very huge chorus singing sfz! that this is the worst possible of ALL choices.  This is nothing more than a wealth transfer that will accomplish nothing other than keeping banks and financial institutions that are basically bankrupt on live support long enough to drain the daylight out of any recovery.  This President is AWOL from his job. Not only is he AWOL, but he is incompetent.  He can go on Leno, he can go on sixty minutes, he can give lavish St Patrick’s Day parties and he can hold town meetings in California but he is totally incapable of staying in Washington and doing his job.  By allowing this, he will have stolen more from every single honest taxpayer in this country than even Darth Cheney and the Texas Village idiot did with their adventures in nation building and subsidy of the oil and gas industries and the military industrial sectors.  If somebody in Congress doesn’t act to stop this, I say we start calling them to demand impeachment proceedings.  We’ll be lucky if we come out of recession by the time my daughters reach retirement.

There I said it.  If President Obama doesn’t stop this nonsense now he should be impeached for criminal misuse of  tax payer’s money.

The Endangered American Lifestyle

This economy has clearly shown that the lifestyle of most middle and working class Americans is precarious.  Many Americans now admit they could cover their bills for at best two months if the pink slip arrived in their paycheck. More and more people are dipping into their savings and credit to pay for food, gas, and day-to-day expenses if they are fortunate to have either.

A series of recent surveys checking the health of American households have found many of our neighbors are depressed and frightened about their financial status as the recession deepens and unemployment numbers worsen.  It appears Americans are downsizing their lives, their expectations, and their idea of what it means to live the American Dream.

Market Watch reported today on a number of findings about the financial health of Americans and their preparedness in light of the poor job market.   As things get worse, more and more Americans will find themselves falling behind in their bills and house payments.  Households are adjusting their buying habits and trying to find ways to save money “just in case”.

This is flashing so bright red,” said Paul Ballew, senior vice president of Nationwide Insurance Co. “Roughly 60% of the population was ill-prepared (financially) before the meltdown.”

A MetLife study released last week found that 50% of Americans said they have only a one-month cushion — roughly two paychecks — or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28% said they could not make ends meet for longer than two weeks without their jobs.

And it’s not just low-income earners who would find themselves financially challenged. Twenty-nine percent of those making $100,000 or more a year said they would have trouble paying the bills after more than a month of unemployment.

Meanwhile, more than four in 10 respondents told pollsters in a recent Pew Research Center study that job-related issues were the nation’s most important economic problem.

Lower-income Americans have already started belt-tightening to feed their rainy day funds.  One study has shown these income levels are now planning for vacations at home and have put off any major purchases.  The same study (by Pew) finds that upper middle income Americans are desperately re-arranging their retirement funds in hopes of preserving what capital remains after nearly six months of persistent market declines.  Lower-income Americans have switched to plain label and generic brands while upper middle income Americans have quit dining out.  American families continue to belt tighten where ever possible.   What is new about this typical recession behavior is that this new found thrift appears  to be a long run arrangement.

America’s Research Group found that nearly 57% of the consumers it polled said they would spend less this year while virtually no one plans to spend more.

But this is not just a one-year thing, according to consumers surveyed by BIGresearch. Nearly 91% said they see this crisis bearing down on their spending decisions — in effect, their lifestyles — over the next five years.

Fifty-five percent said they will think carefully before they make a purchase and 51% said they expect to be more price-conscious when buying clothing and food.

“American consumers are hunkered down, bracing for a depression,” said Britt Beemer, chief executive of America’s Research Group. “The dramatic drops in shopping levels have no match in our database in the last 30 years.”

The Big Ease

I’ve had a couple of request to talk about how the Fed creates money and what happens if it over expands the money supply so that’s the topic of this post.  Yesterday, the monetary policy authority of the Fed, the Federal Open Market Committee (FOMC) announced an injection of $1 Trillion.  It is doing so by buying back some long term bonds in a move that is called Open Market Operations.   Basically, Open Market Operations work like this.  If the Fed wants money out in the economy (to increase spending by businesses and consumers), it makes selling bonds back to it very appealing.  Investors won’t want to hold bonds because they’re not providing a good return.  They’ll look for other places to put their money like in vehicles that might be based more on lending like commercial bonds or mortgage-backed securities. Low interest rates should make it more like that people will want to borrow.  Banks won’t invest in bonds because they are low yield compared to what they can get from borrowers.  This is the gist expansive monetary policy. This is one of the classical tools of monetary policy and the most used in the Fed Tool box.  It generally works through lowered interest rates which is something that can’t really happen now.  The interesting thing about this move is that it is huge and  announced. This isn’t the usual SOP.

Usually open market operations are done in a hush-hush, behind closed doors, James Bond kind of atmosphere so as not to give information to the market to offset the action.  As I said earlier, deliberate policy announcement is one of the market-shaping policies that Chair Bernanke has opted for as a tool of policy since most interest rates are close to zero.  They are pulling in long term bonds as a form of quantitative easing (changing the structure of the Fed balance sheet to impact the term structure of interest rates.)  They want the long term mortgage rate to come down to encourage house buying from the public.  They also want to encourage lenders to renegotiate outstanding home loans.  The other portion of the announcement meant to shape investor behavior was the outlook statement which tends to give the markets a forward looking policy hint. Not only is the Fed doing this, they are actively asking the Treasury to print money to help them beef up the size of their balance sheet so it can be used for a variety of purposes.

Printing new money is just a straight forward increase in the Money Supply. The purpose is this. You give people more money and they will have more money to spend.  The issue comes down to this, however.  How much stuff is out there for us to buy?  A lot of stuff?  Not so much stuff?  Since interest rates are low, we may not save, we may buy lots of stuff.  However, if we’re scared, we may not spend anyway, we may just tuck the money away.  How this works depends on the response of both businesses and households.

This is from the previously linked NY Times article.

In its announcement, the central bank said that the United States remained in a severe recession and listed its continuing woes, from job losses and lost housing wealth to falling exports as a result of the worldwide economic slowdown.

“In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability,” the central bank said.

As expected, policy makers decided to keep the Fed’s benchmark interest rate on overnight loans in a range between zero and 0.25 percent.

But to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.

In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.

All these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. The central bank also said it would probably expand the scope of a new program to finance consumer and business lending, which gets under way this week.

In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.

Some Economist blogs are openly criticizing the FED’s move.  This is because what we know about the causes of deep-rooted, nasty inflation.  It is generally caused by too much money chasing too few goods.  In other words, if the economy is not producing enough goods and services because of the recession and suddenly there is more money, the money will be used to buy goods and services.  If the production does not catch up with the money, it will drive the average price of goods and services up and we will experience systemic inflation.

There are two situations right now that make inflation creation unlikely.  The first is that since we are in a deep recession, we are seriously under capacity .  This means we have many businesses that are basically ‘idle’.  They do not carry enough stock, they are not fully employing labor, and they are operating with a lot of excess overhead.  They could start up, un-idle the excess capacity, and increase their use of what they have now without creating much inflation.  The only place that inflation might occur would be in the raw materials sector which would have to gear up to supply any increased demand by manufacturing, but right now people, equipment, and facilities are underused.

The other situation that makes it highly unlikely we experience inflation in the short run is the fact that we don’t have

Is the Fed forever blowing bubbles?

much in the way of inflation now.  We also have deflation in many major sectors like housing.

However, the question of the day is this.  Is Bernanke solving a recession created by one bubble (housing) that was created by trying to cope with another bubble (dot.coms)?  This is where we separate the Keynesians from the Monetarists.  You can get a feel for what the discussion is if you hit some of the major econ-related blogs.   You can tell the monetarists.  They’re calling the Chairman Helicopter Ben.

It’s a very weird, somewhat circular transaction, and it was last done in a big way during World War II. At the time the Fed wasn’t so much making monetary policy as doing its patriotic bit to finance the war (it was a de facto division of the Treasury Department at the time), but it worked on both counts: The deflationary tendencies of the 1930s were finally fully expunged from the economy, and we beat the bad guys. Later on, Milton Friedman described this kind of transaction as the functional equivalent of a “helicopter drop” of money, and after Ben Bernanke mentioned this in a speech in 2002 he became known as Helicopter Ben. Now he’s finally living up to the name.*

Will it work? In the sense of fending off deflation, yeah, this should have an impact. But the financial world and America’s position in it are more complicated than in the 1940s. We now owe lots of money to creditors outside the U.S., and when they see the Fed buying long-dated Treasuries they’re bound to start worrying about what that means for the dollar. If they get too worried, they could drive up interest rates here and counter the impact of the Fed’s purchases. So there are limits to the Fed’s magical powers, and they already began showing up in currency markets this afternoon, with the dollar falling sharply against the euro and other foreign currencies. The adventure continues.