Bank Bailout 3.0

I’d have to agree with this. As we’ve said all along, saving the banking system was necessary, saving the bankers was not. Now we’re set up for the next bailout of the financial elite. What a great casino this is: heads they win, tails we lose.

The bank bailout of 2008 was unnecessary. Fed Chairman Ben Bernanke scared Congress into it

By Dean Baker

This week marked 10 years since the harrowing descent into the financial crisis — when the huge investment bank Lehman Bros. went into bankruptcy, with the country’s largest insurer, AIG, about to follow. No one was sure which financial institution might be next to fall.

 

The banking system started to freeze up. Banks typically extend short-term credit to one another for a few hundredths of a percentage point more than the cost of borrowing from the federal government. This gap exploded to 4 or 5 percentage points after Lehman collapsed. Federal Reserve Chair Ben Bernanke — along with Treasury Secretary Henry Paulson and Federal Reserve Bank of New York President Timothy Geithner — rushed to Congress to get $700 billion to bail out the banks. “If we don’t do this today we won’t have an economy on Monday,” is the line famously attributed to Bernanke.

The trio argued to lawmakers that without the bailout, the United States faced a catastrophic collapse of the financial system and a second Great Depression.

Neither part of that story was true.

Still, news reports on the crisis raised the prospect of empty ATMs and checks uncashed. There were stories in major media outlets about the bank runs of 1929.

No such scenario was in the cards in 2008.

Unlike 1929, we have the Federal Deposit Insurance Corporation. The FDIC was created precisely to prevent the sort of bank runs that were common during the Great Depression and earlier financial panics. The FDIC is very good at taking over a failed bank to ensure that checks are honored and ATMs keep working. In fact, the FDIC took over several major banks and many minor ones during the Great Recession. Business carried on as normal and most customers — unless they were following the news closely — remained unaware.

 

The prospect of Great Depression-style joblessness and bread lines was just a scare tactic used by Bernanke, Paulson and other proponents of the bailout.

Had bank collapses been more widespread, stretching the FDIC staff thin, it is certainly possible that there would be glitches. This could have led to some inability to access bank accounts immediately, but that inconvenience would most likely have lasted days, not weeks or months.

 

Following the collapse of Lehman Bros., however, the trio promoting the bank bailout pointed to a specific panic point: the commercial paper market. Commercial paper is short-term debt (30 to 90 days) that companies typically use to finance their operations. Without being able to borrow in this market even healthy companies not directly affected by the financial crisis such as Boeing or Verizon would have been unable to meet their payroll or pay their suppliers. That really would have been a disaster for the economy.

However, a $700-billion bank bailout wasn’t required to restore the commercial paper market. The country discovered this fact the weekend after Congress approved the bailout when the Fed announced a special lending facility to buy commercial paper ensuring the availability of credit for businesses.

 

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Without the bailout, yes, bank failures would have been more widespread and the initial downturn in 2008 and 2009 would have been worse. We were losing 700,000 jobs a month following the collapse of Lehman. Perhaps this would have been 800,000 or 900,000 a month. That is a very bad story, but still not the makings of an unavoidable depression with a decade of double-digit unemployment.

 

The Great Depression ended because of the massive government spending needed to fight World War II. But we don’t need a war to spend money. If the private sector is not creating enough demand for workers, the government can fill the gap by spending money on infrastructure, education, healthcare, childcare or many other needs.

There is no plausible story where a series of bank collapses in 2008-2009 would have prevented the federal government from spending the money needed to restore full employment. The prospect of Great Depression-style joblessness and bread lines was just a scare tactic used by Bernanke, Paulson and other proponents of the bailout to get the political support needed to save the Wall Street banks.

 

This kept the bloated financial structure that had developed over the last three decades in place. And it allowed the bankers who got rich off of the risky financial practices that led to the crisis to avoid the consequences of their actions.

 

While an orderly transition would have been best, if the market had been allowed to work its magic, we could have quickly eliminated bloat in the financial sector and sent the unscrupulous Wall Street banks into the dustbin of history. Instead, millions of Americans still suffered through the Great Recession, losing homes and jobs, and the big banks are bigger than ever. Saving the banks became the priority of the president and Congress. Saving people’s homes and jobs mattered much less or not at all.

 

Dean Baker is senior economist at the Center for Economic and Policy Research and the author of “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.”

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House of Cards: Truth Stranger Than Fiction

As a political economist and policy analyst I have to say I’ve found the NetFlix series, House of Cards very entertaining. Of course, it is over the top with political sleaze and corruption, something that probably syncs well with the public’s impression of Washington politics these days. (I find it interesting that the writers chose to designate the depraved, murderous POTUS Frank Underwood, played by Kevin Spacey, as a big “D” Democrat. With an annoyingly ambitious, self-righteous wife as co-president – sound familiar? Apparently, depravity with good intentions is somewhat acceptable these days in partisan circles, with Underwood often turning to the audience to explain the bare facts of Machiavellian realpolitik. How unfortunate for poor Niccolo, who was a true republican patriot, but recast by history as the apologist for a ruthless, depraved Prince.)

I have been most amused by Season 3, where Pres. Underwood proposes a massive jobs program paid for by slashing entitlements. This is just too juicy to let pass unnoticed. Let’s translate this “promise” of a full employment Nirvana: “I’m going to take your hard earned money we extorted through Social Security and Medicare taxes and give it away to companies that will employ workers for jobs that the productive private economy will not create because they lose money. Isn’t that grand? We’ll all feel better about humanity, even though we’ll be poorer for it (all except me, that is).”

The irony is that this absurd fiction is actually proposed too often as serious politics in the real Washington D.C. Quite a few other bloggers have explained the surrealness of a POTUS creating jobs from whole cloth just because he can command it from the White House. The numbers just don’t add up. But I was struck more by the widely accepted premise that asserts “jobs” as the end-all of what ails a society of free citizens. The Underwood character actually says, “People are dying from unemployment!” This cuts pretty close to home with Obama recently claiming that “chanting ‘Death to America’ does not create jobs.” Really? Is that what they’re beheading innocents over, a few good jobs?

People don’t die from unemployment, they die from poverty, deprivation, and disease. They die from oppression and violence. Unproductive jobs subsidized by governments do not alleviate poverty, they merely spread poverty around. The thing is, politicians focus on jobs because that is the only way they know how to spread the benefits of capitalism around the population. But we are moving into a new age that departs from the skilled labor-intensive manufacturing of the post-WWII years. Our financial policies have accelerated this trend away from labor by providing cheap capital to take advantage of cheaper labor overseas or machine/robot substitution. We are entering the information, artificial intelligence, and robotics age, and yet our politicians are still making false promises of a job and two chickens in every pot. Not going to happen. We need to think outside that box to discover how we are going to create and share wealth in the new economy. There are many alternative ways to participate in a market economy than solely as a labor input.

In the meantime, enjoy the entertainment. It’s hilarious. But don’t expect a job from America Works.

Welcome to the Fed’s Casino

WallStreetCasino1

“What Happens in the Fed’s Vegas …Spreads Everywhere.”

The article below focuses on the role of traders as the middle men between buyers and sellers of financial securities and the inefficiencies they generate from excessive churning. But trading volatility occurs in the context of a much larger issue of winners and losers in capital markets and society at large. Not only is trading excessive, but the swings in asset prices are creating massive winners and losers with arbitrary outcomes while enriching a winner-take-all circle of financial wealth that can buy up and shape our politics and regulatory policy.

These are the kinds of things that raise hackles among average Americans, but if we wish to fix the problem the more important question is how and why this has happened. It is a direct result of the Fed’s monetary policy and our governments’ fiscal policies in the face of a changing global economy. As I have explained in a previous post, Banking Vegas-Style, the focus of all macroeconomic policy on stabilizing headline statistics such as GDP growth, unemployment, and inflation has led to much greater price volatility in asset markets.

Economists refer to the past 35 years as The Great Moderation, denoting the reduction in the volatility of business cycle fluctuations starting in the mid-1980s. But to stabilize GDP growth with monetary liquidity means that excess liquidity must lead to productive investment. This is predominantly what happened with technology investment during the 1990s. But eventually excess credit leads to malinvestment and the misallocation of resources (Pets.com?). This is reflected in the volatility of asset prices, as we saw reflected in currency crises, the dotcom crash,  commodity and housing bubbles during this same period we refer to as The Great Moderation. Others mark this time as the transition to the Bubble Economy.

The  data that most reveals what has happened has been the explosion in trading and the transformation of capital markets into asset price casinos dominated by hedge funds, private equity, and big banking conglomerates. In other words, our policies created the hedge fund industry with currency volatility, credit bubbles and crunches, housing bubbles and crashes, commodity bubbles and crashes, and Too Big to Fail banks.

Think about it. If prices don’t move in wild gyrations, there is almost no money to be made from constant trading. Instead we’ve turned such markets into casino gambling dens.

So, should this all be a surprise to our policymakers?

Legendary Fund Manager John Bogle Calls Wall Street’s Number—–99% Of Trading ($32 Trillion/Year) Is A Waste

by MITCH TUCHMAN @  • July 30, 2015

An astonishing $32 trillion in securities changes hands every year with no net positive impact for investors, charges Vanguard Group Founder John Bogle.

Meanwhile, corporate finance — the reason Wall Street exists — is just a tiny slice of the total business. The nation’s big investment banks probably could work for less than a week and take the rest of the year off with no real effect on the economy.

The job of finance is to provide capital to companies. We do it to the tune of $250 billion a year in IPOs and secondary offerings,” Bogle told Time in an interview. “What else do we do? We encourage investors to trade about $32 trillion a year. So the way I calculate it, 99% of what we do in this industry is people trading with one another, with a gain only to the middleman. It’s a waste of resources.”

Rent seekers

It’s a lot of money, $32 trillion. Nearly double the entire U.S. economy moving from one pocket to another, with a toll-taker in the middle. Most people refer to them as “stock brokers,” but let’s call them what they are — toll-takers and rent-seekers.

Rent-seeking as an occupation is as old as the hills. In exchange for working to build up credentials and relative fluency in the arcane rules of an industry, one gets to stand back from actual work and just collect money.

Ostensibly, the job of a financial adviser is to provide advice. Do you actually get that from your broker? It is worth anything?

Research shows, over and over, that stock brokers can’t do much of anything demonstrably valuable. They don’t know which stocks will go up or down and when. They don’t know which asset classes will outperform this year or next.

Nobody knows. That’s the point. If you’re among that small cadre of extremely high-level traders who can throw loads of cash at a short-term fluke, fantastic. If you have a mind for numbers like Warren Buffett that allows you to buy companies on the cheap and hold them forever, excellent.

If you’re a normal retirement investor trying to get from A to B and retire on time, well, you have a really big problem to face: The toll-taker wants your money.

Dead weight

So he needs you to trade — a lot. Because that’s how stock brokers make money. Not by doling out retirement advice, but by ensuring that your account is active and churning commissions on behalf of them and their employers.

What’s a highway with no traffic on it? If you’re a toll-taker, it’s a money loser. So Wall Street’s rent-seekers need traffic in the form of regular trading. An account that sits invested for months at a time with no trades is dead weight to them.

Nevertheless, as Bogle maintains, doing nothing is the key. “Don’t do something, just stand there!” he has often said.

A portfolio indexing approach to investing codifies Bogle’s time-tested and effective way of investing for retirement — without lining the pockets of toll-taking stock brokers along the way.

The Greek Tragedy Enters the 3rd Act

stock_market_bubbleDavid Stockman will be wrong until he’s right.

The only thing in this utterly broken “market” which is really priced-in is an unshakeable confidence that any disturbance to the upward march of asset prices will be quickly, decisively and reliably countermanded by central bank action.

It Is NOT Priced-In, Stupid!

by  • July 6, 2015

Among all the mindless blather served up by the talking heads of bubblevision is the recurrent claim that “its all priced-in”. That is, there is no danger of a serious market correction because anything which might imply trouble ahead—-such as weak domestic growth, stalling world trade or Grexit——is already embodied in stock market prices.

Yep, those soaring averages are already fully risk-adjusted!

So the “oxi” that came screaming unexpectedly out of Greece Sunday evening will undoubtedly be explained away before the NYSE closes on Monday. Nothing to see here, it will be argued. Today’s plunge is just another opportunity for those who get it to “buy-the-dip”.

And they might well be right in the very short-run. But this time the outbreak of volatility is different. This time the dip buyers will be carried out on their shields.

Here’s why. The whole priced-in meme presumes that nothing has really changed in the financial markets during the last three decades. The latter is still just the timeless machinery of capitalist price discovery at work. Traders and investors in their tens-of-thousands are purportedly diligently engaged in sifting, sorting, dissecting and discounting the massive, continuous flows of incoming information that bears on future corporate profits and the present value thereof.

That presumption is dead wrong. The age of Keynesian central banking has destroyed all the essential elements upon which vibrant, honest price discovery depends. These include short-sellers which insure disciplined two-way markets; carry costs which are high enough to discourage rampant leveraged speculation; money market uncertainty that is palpable enough to inhibit massive yield curve arbitrage; option costs which are burdensome enough to deny fast money gamblers access to cheap downside portfolio insurance; and flexible, mobilized interest rates which enable imbalances of supply and demand for investable funds to be decisively cleared.

Not one of these conditions any longer exists. The shorts are dead, money markets interest rates are pegged and frozen, downside puts are practically free and carry trade gambling is biblical in extent and magnitude.

So a vibrant market of atomized competition in the gathering and assessment of information relevant to the honest pricing of financial assets has been replaced by what amounts to caribou soccer. That is, the game that six-year old boys and girls play when the chase the soccer ball around the field in one concentrated, squealing pack.

The soccer ball in this instance, alas, is the central banks. Until Sunday the herd of speculators was in full rampage chasing the liquidity, word clouds and promises of free money and market “puts” with blind, unflinching confidence.

The only thing in this utterly broken “market” which was really priced-in, therefore, was an unshakeable confidence that any disturbance to the upward march of asset prices would be quickly, decisively and reliably countermanded by central bank action. But now an altogether different kind of disturbance has erupted. It is one that does not emanate from short-term “price action” of the market or an unexpected macroeconomic hiccup or lend itself to another central bank hat trick.

Instead, the Greferendum amounts to a giant fracture in the apparatus of state power on which the entire rotten regime of financialization is anchored. That is, falsified financial prices, massive, fraudulent monetization of the public debt and egregious and continuous bailouts of private speculator losses, mistakes and reckless gambling sprees.

What has transpired in a relative heartbeat is that one of the four central banks of the world that matter is suddenly on the ropes. In the hours and days ahead, the ECB will be battered by desperate actions emanating from Athens, as it struggles with a violent meltdown of its banking and payments system; and it will be simultaneously stymied and paralyzed by an outbreak of public confusion, contention and recrimination among the politicians and apparatchiks who run the machinery of the Eurozone and ECB superstate.

Yes, the Fed will reconfirm its hundreds of billions of dollar swap lines with the ECB, and the BOJ and the Peoples Printing Press of China will redouble their efforts to prop-up their own faltering stock markets and to contain the “contagion” emanating from the Eurozone.

But this time there is a decent chance that even the concerted central banks of the world will not be able to contain the panic. That’s because the blind confidence of the caribou soccer players will be sorely tested by the possibility that the ECB will be exposed as impotent in the face of a cascading crisis in the euro debt markets.

Here are the tells. If the Syriza government has any sense it will nationalize the Greek banking system immediately; replace the head of the Greek central bank with a pliant ally; refuse to heed any ECB call for collection of the dubious collateral that stands behind its $120 billion in ELA and other advances; and print ten euro notes until the plates on the Greek central bank’s printing presses literally melts-down.

If the Greeks seize their banking system and monetary machinery from their ECB suzerains in this manner—- out of desperate need to stop the asphyxiation of their economy—– those actions will trigger, in turn, pandemonium in the PIIGS bond markets. From there it would be only a short step to an existential crisis in Frankfurt and unprecedented, fractious conflict between Berlin, Paris, Rome and Madrid.

Either all of the Eurozone governments fall in line almost instantly in favor of a massive up-sizing of the ECBs bond buying campaign to stop the run on peripheral bond markets, or the Draghi “whatever it takes” miracle will be obliterated in a selling stampede that will expose the naked truth. Namely, that the whole thing since mid-2012 was a front-runners con job in which the ECB temporarily rented speculator balance sheets in order to prime the PIIGS bond buying pump, thereby luring the infinitely stupid and gullible managers of bank, insurance and mutual fund portfolios into loading up on the drastically over-valued public debt of the Eurozone’s fiscal cripples.

Needless to say, there is likely to emerge a flurry of leaks and trial balloons from the desperate precincts of Brussels, Berlin and Frankfurt. These will be designed to encourage the Greeks to leave their banking system hostage to “cooperation” with their paymasters, and to persuade traders that Draghi has been greenlighted to buy up the PIIGS debt hand-over-fist——-and to do so without regard to the pro-rata capital key under which the current program is straight-jacketed.

But that assumes that the Germans, Dutch and Finns capitulate to an open-ended and frenzied bond-buying campaign that would make the BOJ’s current madness look tame by comparison. Yet if they do, its only a matter of time before the euro goes into a terminal tail-spin. And if they don’t, collapsing euro debt prices will infect the entire global bond market in a tidal wave of contagion.

Either way, its not priced-in. That’s been the real stupid trade all along.

This is My (Pent)House

broken-ladderIllustrative quote from Larry Katz, Harvard economics professor, which apparently has been making the rounds for awhile…

Think of the American economy as a large apartment block. A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.