Tuesday, November 25, 2008

The new plan: a way to understand it

Suppose there were an outbreak of flu in the city? How would the Fed/Treasury attack it using their modus operandi under TARP as an example?

First they would stockpile mountains of vaccine and tell us not to worry. The problem is under control. Then they would call in the all the bankers and inoculate them. The Fed/Treasury would then announce that major steps had been made to stopping the spread of the flu. In inoculating bankers they have taken one channel for the transmission of flu out of the public domain. You could expect the spread of influenza to slow its pace.

You see the Fed/Treasury would nothing for you directly. But in building up the bankers 'immunity system the Fed/Treasury would be helping you.

When this did not work the Fed/treasury would announce a program of government paid Vitamin supplements to be distributed to bankers to further bolster their health and block the spread of flue though their ranks. . Meanwhile more nonbankers with major flu problems and hydration issues would be admitted to hospitals. To help with that the Fed/Treasury would announce a plan to subsidize ambulance companies in the city hoping they would pass on the savings to flu victims they might have to pick up and take to the hospital.

So do you still think that the Fed/Treasury plans are so supportive?

So let's stop being negative. what could they do?
The Fed could limit its asset purchases to those backed by pools of newly generated consumer loans. It could buy Fannie/Freddie mortgage backed issues if the loans were recently generated instead of old (existing). This would help to get the flow of lending started for sure. Don't just buy old stuff and hope banks will lend. By new stuff on the margin. Make sure that new lending is the result. Restart the market repair economic conditions then banks will lend without prodding.


What the Feds won't tell you...

The not-so OK corral
You know the scene- or maybe not... Nell is tied to the railroad tracks. Cut to the picture of the train. It's coming with a full head of steam. The cowboy is riding hard, whipping his noble white (of course!) stallion across its flanks urging it on. Clouds of dust are churned by the cowboy and his noble steed. You see the train, smoke belching from its smoke stack, on the horizon. The cowboy urges his gallant thoroughbred to gallop faster. The train pounds on at a gathering pace. Nell is frightened, crying, struggling against her bindings. She is still tied tight, draped across the railroad tracks like a lovely limp lump of pristine white spaghetti (it's a spaghetti western, of course). The cowboy finally gets to Nell. He jumps off his horse his white hat flying off his head exposing golden locks of hair swept with wind whisking off the lone prairie. The camera catches him for one brief moment in profile as he moves quickly to grab Nell off the tracks. The train pounds down on his effort...and -


Reality bites...
The train runs over Nell cutting her in half spraying blood all over the cowboy and his white hat as it lays on the ground (camera close up on bloody hat). The cowboy's horse spooks at the spattering worthy of an R-rated Halloween slasher movie and it runs into the train; it too is ground under the wheel of that big steel beast, crushed against the silver rail that slickens with red fluid that shoots out from under the train as that steel sliver of rail stretches into the distance, straight and true.

Cowboy hell
The cowboys sits there drenched it the fair maiden's blood. And he wonders about how it might have been as blood drips off his forehead and cheek and it trickles into his mouth...
He wonders: did she have aids?

Yes this is the analogy of the the financial story told in terms of the cowboy and Nell. It is not the one you remember from your youth.

But it's where we are today in the financial markets. Nothing comes 'just in' time and those we once depended on fail us.

THERE WILL BE BLOOD and might well be YOURS!

The way we were...
In those days wearing the white hat was enough to know your horse would be fast enough, you would be clever enough, and strong enough, and tough enough, and that you would prevail.

The real world
But theses days things are different. Help does not come in time. It may not come for you at all. In a more accurate modern day portrayal the cowboy would ride to a BANK and try to pay ransom to get a banker to ride out to save you from under the wheels of the train. But the banker would be crippled or otherwise bust or short staffed or wary that the cowboy's check just might not clear. ...ohh sorry about that too late again..next?

The newest reality 'show'
The Fed is never going to ride to YOUR rescue. Neither will treasury. They have no plans to do things to directly impact new mortgages. There are some work out proposals to help 'troubled lenders' and borrowers. But the main thrust is to help you by helping banks its called trickle down and what is tricking down to you is your money, money spent by the Fed and Treasury on banks. If you are lucky there may be a a few crumbs to drift down to your level or a few drops to trickle if you prefer the liquidity analogy.

SOS SOS SOS SOS (same old stuff)
The plan remains to HELP BANKS> inject them with capital> Buy their bad assets>> then hope that they lend to to he public (i.e. YOU).

do not do anything to help the public directly.


This is something that they will never tell you.

Monday, November 24, 2008

Who is as dumb as a rock?

Scrambled logic
Detroit has been scrambling for money. The big three guys even went to Washington to testify on their needs. In the end the Congressional leaders were not impressed. No money boys. try again. Give us a plan.

But over the weekend Citigroup's shares dropped sharply and the Treasury couldn't trip over itself fast enough to cram MORE money into Citi's bank and indemnify it against some losses. Did Citi have to present 'a plan?" Right...

The Bank...40mpg and a free toaster
Maybe Detroit needs to make a new car called 'The Bank' so if THE BANK gets in trouble Detroiters can snap their fingers and get money.

Money, money, money, money, money

Banks are special...
Bankers are supposed to be so smart. In a paper written a number of years ago by former NY Fed Chief Gerry Corrigan, he opined on how banks are special, by raising the question. Corrigan wrote in 1982, so long ago that many of the rocket scientists on the Street had not yet been born - or at least were not reading treatises on banks or doing math except on their crib-based abacus. Banks have a special role in commerce and they have deposits insured with the public's money that they use to finance the assets on their balance sheets. Special? you bet...but then the banks did bet.

...But banks are not cool
Banks also are special as are most Wall Street firms because they deal in these intangible products. My God do you know how smart you have to be understand these things? Just try this experiment. Start talking to somebody at random about financial instruments or the outlook for interest rates or the key role of banks and financial intermediaries in an economy or the importance of the financial sector to a developing economy and see how quickly you will get the nick-name "Mr. Sleeping Pill".

Cars are cool
On the other hand start talking about cars, those with big engines or fancy European imports or cool paint jobs or specialty vehicles and suddenly you're Mr COOL. Yeah, cars are cool and even the guys on the assembly line that put them together can understand them. But talk the merits of a CD vs a TD vs a savings deposit or a money market mutual fund or MMDA deposit or AAARRHHHGGG!!!!

You see what I mean.

Cavernous cranium crowd
Yes any moron can talk with some degree of intelligence about a car. But finance is reserved for the cavernous cranium crowd. I guess that's why they had so many of us bamboozled as this financial crisis took hold. They took advantage of poor home owners using fancy financing products...then...wait a minute these valueless pieces of financial paper they created, they also put in their own portfolios. They leveraged it. They BLEW THEMSELVES UP like some middle eastern terrorist. KA BOOM! Or at least they tried... Some brainiacs they turned out to be, eh? But on second thought they were brainiacs, because, through it all, guess what? THEY GOT PAID.

TFBTFF (too friggin' big to friggin' fail)
When the dust settled after these metaphorical bombs went off, instead of seeing banks lying in pieces all over Wall Street, the the Fed and/or Treasury stepped in to glue the little mischievous monkeys back together with applications of new capital some specialized debt forgiveness and other tricks. Yes that's what makes banks special. The have the money in them earned by auto workers, pizza makers and bus drivers so banks can't be allowed to fail - at least not big ones. Imagine if we let them fail and then there were no pizza?

So selling a product that is too difficult even for its own creators to understand (instead of being confused by this statement think FRANKENSTEIN!) is a reason for the government to treat you in a real special way. Oh you have such a big brain. It is so full of such esoteric thoughts we forgive you for losing your way...and our money. Here, take some more won't you?

Auto sector is a GLOBAL issue so why pick on DETROIT?
You many have noticed that Sarkozy (France) and Merkel (Germany) issued a joint statement JUST TODAY(!) saying that they intend to defend their beleaguered auto industries. So why are the automakers in the United States of American pariahs? Maybe because their leaders were not properly contrite? Maybe because the Congress people that need to approve those loans just don't get it? Maybe Congress has too much bank-doo-doo on its shoes and it needed to rebel a bit and ripping auto execs was considered 'safe?' We know you can't rebel against a bank because God knows what might happen- look at what did happen when the Treasury Secretary let Lehman fail in the midst of a financial storm. He still can't come to grips with it as he argues he had no choice. Be a man Hank. Step up and and tell us REALLY why you let Lehman fail. What were the issues? Don't hold your breath waiting for him to answer. You never get clear answers when mistakes are made. So now Congress is just afraid. 'The Citi' may never sleep but it does sneeze and when it does HELP IS THERE!

Auto shows no CD displays
Bankers do not have an annual CD or bank deposit showroom. You can't show off your most recent financial creations the way you can show off a car - or test drive it...

In the end the lemon you make is equal to the justice you take
So Detroit gets stiffed and Citigroup gets paid. It's a delicious irony and juxtaposition in that it happens right after Paulson told us everything was ok and the financial sector had been stabilized. Tell me..can that guy leave Washington fast enough? And he was the Goldman guy that lobbied the regulators for the rule changes that allowed investment banks to use even more leverage. Paulson is the THE POSTER BOY for what is going on and he does not begin to show any sign that he understands it - let alone that he can fix it. The best and the brightest have become dumb as rocks. maybe bankers have second career as pet rocks. Maybe Paulson should go to work in Detroit where 'getting it' won't be as hard.

Sunday, November 23, 2008

D-Troit becomes F-Troit

'F' is for failed auto deal
Congressional democratic leaders have given the automakers a failing grade, rejecting their plea for money and demanding a new plan be put before them in early December before the three caballeros reappear to grovel for money.

Is this good policy or good politics or good anything?

On the surface it sounds like Congress is toughing up to the problem instead of rolling over and signing checks for more bailout dough. At the same time it is failing to deliver help to needy union member blue state auto workers and that can't play well in Detroit.

The 'lawmakers' seem to be confused by the issues. If they did not want an estimate of Detroit's expected cash flow shortfalls and a request for a bridge loan to finance the gap, they might have made that clear the first time. Now they apparently want a plan for change, not for financing. With the economy so weak and unit auto sales nearly at 10.5mu at an annual rate, it's hard for anyone to give any estimates that are worth a damn. Autos need financing and with banks not lending to credit score-poor car buyers, the automakers could not sell them the best car in the world even if they made it. Clearly there will be funding shortfalls if sales remain anywhere NEAR that weak- an issue that has to do with the economy and bank lending, both factors that are out of the purview of the Big Three. In the midst of all this, asking them to sculpt a recovery plan will just raise the ante for the amount of money they need since change does not come cheap. But change is not only about money, and the lawmakers know it.

Be careful what you wish for...
The lawmakers should realize that the automakers have not made progress on their situation because of well, the law. The UAW has contracts with them that are paralyzing. They cover issues of pay and work rules and restrictions on further plant closing. The dealers that the automakers use to distribute their cars to the public have other contractual agreements that the automakers would like to renegotiate. But renegotiation takes two. Despite its troubles, GM and the others have not been able to cut the kind of cost saving deals they need. Are the Democrats offering the BIG Three assistance in dealing with the unions or its dealers? How are the BIG Three to make progress without leverage?

Leverage= chapter 11 not big bucks from the government
If you have followed this case at all you know that something called chapter 11 lurks as either the white horse to save Detroit or the troll hiding under the bridge that will grind their bones to make its bread. Which is it? Because of the nature of autos as a costly consumer product, the automakers fear bankruptcy (chapter 11) would be the end of them. They cite Chrysler's drop in sales by one-third when it last was rescued. They also contend that consumers will not buy cars with the fate of the company up in the air as car buyers worry about warranty issues and resale value. All this makes sense, but maybe there is a way for a third party or even government to provide guarantees to smooth that over. The reason it might still be worth the risk is that unless there is some collective bargaining miracle it is hard to see how the automakers get union concessions or dealer concessions so necessary to getting the sort of structural change Congress now seems to be seeking. Nancy Pelosi and Harry Reid must have just finished reading Joseph Heller's Catch -22 when they cooked up this idea of having the automakers re-present their case with some real change.

The question is not why don't those Detroit chickens cross the road but rather how could they with the heavy flow of traffic? Are the law makers helping by stopping any traffic here? No. So what do they expect to happen?

Dancing with the morons
At the hearing last week it was clear that the Big Three had met and agreed to make a common front. Everyone was so nice. The union guy was there and no one pointed fingers at anyone. So civil... so contrived. The union guy went out of this way to note how many jobs had been cut back and how new hires are on the rolls at different and lower pay. But no one mentioned the legacy workers who continue to work and get paid -well paid - under the old rules. When the automakers were asked how come they could be profitable in overseas markets but not at home they responded that it was easier to make money in growing markets than when they have to incur the costs of constant downsizing. True enough, but not the whole answer. The auto guys must have promised to be supportive of the union guy, too. They never mentioned work rules or high pay or constraints on closing factories from collective bargaining agreements. The union guy represents workers who are probably 95% democrat voters. So it suited most Congressman to play along. But if they are serious about getting the automakers to submit a plan with real change they also are seriously trying to destroy high-paying blue collar jobs.

Caught in their own trap?
Did the democrats plan ahead for this or just shoot from the hip. Ready! Fire! Aim! This could really come back to haunt them. Or maybe the CEOs will just come back with agreements to cut their own pay more and will apologize and prostrate themselves in front of the great legislative Po Bahs and that will be enough...maybe.

Turncoat or playing the players
No one should think that those multi-hour testimonies put the real issues on the table. The automakers were looking to fund business as usual through the recession. Structural change was not in their plans. It is not clear how much they now can put into in their plans. To offer any significant change is to ask for much more money. But it's not clear that Detroit can get where it wants to go since it is bound by various legal agreements with their dealers and are bound by collective bargaining rules with their workers. Basically the Congress has just shoved Detroit back into the same corner it has been in. Obviously the CEOs do not know how to get out of it. Chapter 11 is a way but they think it is far too dangerous. So now they have this Catch-22 problem to solve with Congress. Indeed, one suspects that the reason the automakers are not more successful in renegotiation is the realization by its counterparties (unions dealers etc) that there WILL BE federal assistance. Auto workers expect the Democrats to go to bat for them. Actually real change required the opposite.

Strategy to nowhere
All I can say is that it should be quite a spectacle. Congress- they are lawmakers after all- should know better. They joke about not wanting a bridge loan to nowhere. But if it is going to make progress something else is going to have to carry the load other than this bridge. It is not clear that they have anything at all in mind other than making the auto executives uncomfortable as possible and making them sweat in public and take money out of their pockets. So how does that help the US economy and the autoworkers? I don't get it. Are the democrats really willing to tamper with THEIR BASE? I doubt that too. So where are they going? It's the strategy to nowhere.

Friday, November 21, 2008

Take me to your leader...

These are your leaders?
Rest assured that if Martians landed and had seen the events of the past several days they would not to be meeting the leadership of either the House or the Senate. With the economy reeling and a big chunk of the MFG sector on the line these grate leaders of ours (no spelling error there...) sent the auto guys back home because they did not say 'mother may I' before they asked for $25bln. You'd think the House and Senate had never given money away before- ya know?

After this sorry display you know why Will Rogers used to say, "I don't belong to any organized political party, I'm a Democrat."

Let's make a deal..oh, never mind
There had been a deal struck earlier in the day-a bi partisan deal - to rework the previous $25bln retooling monies for the auto companies and as those Senators planned to meet to announced they had reached a compromise their LEADERS headed them off at the pass announced an earlier prcess conference and promptly declared that there was n deal that could pass both houses. Why? BECAUSE I'M THE MOMMY- THAT'S WHY.

Yes welcome to the power-hungry world of Nancy Pelosi and Harry Reid. We are the leaders. You are the peons. The peons do not cut deals without the leaders say-so.

But in their magnanimous leader-fashion they decided they would reconvene in December and the auto guys could try again to beg for big bucks. Oh OH this time they had better be properly subservient. They had better not fly there in corporate jets. maybe a commercial flight and not first classs or... maybe by bus a Greyhound perhaps? Or should they drive one their own cars- something geared for the proletariat not the upper crust. Wagoner could drive a Neon from Detroit. Mullaly could drive a pick-up. Nardelli could drive anything since he is the lone guy who said he would work for - and is working for - a buck a year. He gets it. While I think for the most part these auto execs did not take and pass the course 'begging for $25billion bucks 101,' they nonetheless need the money: that much is clear. And if they need more they'll come back for that too. Until they know how weak the economy is going to be and for how long how COULD THEY know how much they will need?

Gosh this leadership is STUPID. Well they are only politicians you know.

It makes you wonder what will happen when Barack steps in. He 's got four years and maybe eight. But the House and Senate leaders have their own power and the potential for limitless consecutive terms. Hey Barack: You're not the boss of MEeeee! said Pelosi...and Reid.

Just wait.

This leadership did not mind passing the $700bln package after a two week stall and hanging all sorts of pork on it like barnacles on the hull of a ship. Now they send the auto guys back when they are on the brink of running out of money. Ooooo I guess they showed THEM who's boss.

Well I'm not made to feel better. This is another example of politicians getting their egos out in front of their brains and mucking up the country just to flex their own muscle. I am having a bad feeling about this.

Save first. Blame later.

For those of you that are happy that we got rid of Bush just remember the old curse, "be careful what you wish for." I do not have a good feeling about the way this playing out. Not only is the Democratic leadership squashing what looked like a perfectly good deal, it is endangering the work force in a bluer than blue state. Michigan was so blue McCain did not even try to compete there. What a way to say THANK YOU!

Well they did say "You" but the first word wasn't "Thank.'

Dang a lang a ding dong. That is real leadership.

Good luck trying keep control of these 'guys' Barack. I think a Congress full of Republicans might have been easier. If they keep this up, you may find out if that is true or not in your second term.

You see it does not matter if the president is black. Underneath the skin they are all Democrats now. But inside of that they are all power-hungry. And that's exactly the trait did in the Republicans. Now you know why I say, they are all the same to me. In the end all of them are in it for themselves.

Tuesday, November 18, 2008

Capitalism or Socialsim? Other Isms

ISMs for the year 2008

Paulsonism: You have two cows. They get sick. You diagnose them and apply medicine for a different malady. They get worse. You declare yourself committed to your cows and tend your chickens. The cows get worse. You freeze to efforts on behalf of the cows since a new owner will buy your farm in two months.

TARPism- You have two cows. You say they are fine. Then you say they are endangered. You say you need special expensive and experimental feed to save them from certain death. You get money from the government to buy that feed. Then you decide there is a better way, but you keep the money and spend half of it on new barn, and sell the farm to get the monkey off your back.

Bernankeism: Your neighbor has two cows. They get sick. You apply everything in your medicine cabinet to help them. They stabilize. You invent new uses for medicine but the cows still waver in their health. You help other peoples’ sick cows that come into contact with your neighbor’s cows. You empty your resources and leave the job up to your neighbor who then sells his farm, sick cows and all. You still live next to him an are blamed for being a poor vet..

Bushism: Your neighbors have cows, ducks, pigs and chickens. The cows get ill. You panic. You hire veterinarians to tend to them taxing the pig, duck, and chicken breeders to pay for it. You claim to believe in rugged individualism and say the nation depends on beef and milk.

AynRandism: You have two cows. You botch their care. The government steps in to help them. You complain: ‘What doesn’t kill them makes them stronger’ Capitalism forever!

GMism: You have two cows; you used to have 100. You still employ 50 people. You have 20 people retired who you still support. You pay your workers more than the chicken farmer across the street, whose chickens are healthier than your cows. You are going bankrupt but tell the government you can breed a better chicken than the guy across the street if it lends you money that the private sector won’t. If it won’t lend, you point out that you employ at least 70 people that will become anarchists.

Fordism: You have two cows. You used to have 50. You used to have better ideas. Now you just have a family member whose football team has not won a game all season long and who refused to fire the worst general manger EVER in the history of the NFL until just this year. You put your cows out to graze on the artificial turf of that field. It turns out not to be a better idea. They get sick. You ask for aid.

Chryslerism- You have two cows. They already were sick once but have recovered and have retained no immunity. Once they ate sauerkraut. Now they are eating a private recipe. They are still sick. You want help.

Bankerism- You have two cows. They are special and partly insured by the government. They get sick. One dies. The neighboring banker-breeders panic and stop using the same feed you used. There is no feed, the cows begin to starve. The government steps in and loans you money to give them Feed. The cows improve. The bankers butcher the cows and eat them all themselves in a huge orgy and feast, burp!

Treasury Secretary's NYT Op-Ed annotated

In Case You Missed It:
“Fighting the Financial Crisis, One Challenge at a Time”

Annotations in BOLD added by me

By Secretary Henry M. Paulson, Jr.
The New York Times
November 18, 2008

We are going through a financial crisis more severe and unpredictable than any in our lifetimes (assuming you don’t count the fact that it was CAUSED in large part by our own neglect) . We have seen the failures, or the equivalent of failures, of Bear Stearns, IndyMac, Lehman Brothers, Washington Mutual, Wachovia, Fannie Mae, Freddie Mac and the American International Group. Each of these failures would be tremendously consequential in its own right. But we faced them in succession, as our financial system seized up and severely damaged the economy.

By September, the government faced a systemwide crisis. After months of making the most of the authority we already had, we asked Congress for a comprehensive rescue package (with no strings attached no oversight and no review a request so ridiculous it scared the Heck out of financial markets) so we could stabilize our financial system and minimize further damage to our economy.

By the time the legislation had passed on Oct. 3, (and after our request itself scared the beejeebers out of markets…) the global market crisis was so broad and so severe that we needed to move quickly and take powerful steps to stabilize our financial system and to get credit flowing again. Our initial intent was to strengthen the banking system by purchasing illiquid mortgages and mortgage-related securities (...after saying that housing was the real problem). But the severity and magnitude of the situation had worsened to such an extent that an asset purchase program would not be effective enough, quickly enough (…well it was far too slow, it was experimental and the wheels were coming off the wagon so we reacted to the news on the ground we had helped to create) . Therefore, exercising the authority granted by Congress in this legislation, we quickly deployed a $250 billion capital injection program (...that we had never before mentioned or endorsed, but that followed on the heels of a plan the Brits seemed to be using with some success), fully anticipating we would follow that with a program for buying troubled assets ( WINK,WINK).

There is no playbook for responding to turmoil we have never faced (..and when it comes to thinking outside the box hey I’m only from Wall Street. If you can’t solve it with more leverage or de-regulation, count ME OUT!). We adjusted our strategy to reflect the facts of a severe market crisis, always keeping focused on our goal: to stabilize a financial system (.. or housing?) that is integral to the everyday lives of all Americans. By mid-October, our actions, in combination with the Federal Deposit Insurance Corporation's guarantee of certain debt issued by financial institutions, helped us to accomplish the first major priority, which was to immediately stabilize the financial system. (Thats’ why banks are lending again, the housing market is recovering…oh, wait it isn’t? Geeze, rats…)

As we assessed how best to use the remaining money for the Troubled Asset Relief Program, we carefully considered the uncertainties around the deteriorating economic situation in the United States and globally (...and we decided to BAIL. That’s right we FREEZE our actions for now declare victory Iraq> and plan to DUMP the whole schmear in Obama’s lap) . The latest economic reports underscore the challenges we are facing. The gross domestic product for the third quarter (which ended Sept. 30, three days before the bill passed) shrank by 0.3 percent. The unemployment rate rose in October to a level not seen since the mid-1990s. Home prices in 10 major cities have fallen 18 percent over the previous year. Auto sales numbers plummeted in October and were more than a third lower than one year ago. The slowing of European economies has been even more drastic (Huh? The slowing in Europe is weaker than a drop of 33%?) .

I have always said that the decline in the housing market is at the root of the economic downturn and our financial market stress (..and that is why I am bailing out the banks, that are buying other banks, not lending at anything but high rates to the best possible borrowers!). And the economy, as it slows further, threatens to prolong this decline, as well as the stress on our financial institutions and financial markets.

A troubled-asset purchase program, to be effective, would require a huge commitment of money (…you call it a TARP but we realize it’s a TRAP so we are freezing it!). In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact. But half of that sum, in a worse economy, simply isn't enough firepower.

If we have learned anything throughout this year (…and that is doubtful…), we have learned that this financial crisis is unpredictable and difficult to counteract (DUH!?). We decided it was prudent to reserve our TARP money, maintaining not only our flexibility, but also that of the next administration (Freezing it and doing nothing makes us VERY flexible since now we can do nothing is so many ways…).

The current $250 billion capital purchase program is strong medicine for our financial institutions. More capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is essential to increasing lending, which is vital to economic recovery (…even if they don’t do it).

Recently I've been asked two questions. First, Congress gave you the authority you requested, and the economy has only become worse. What went wrong? Second, if housing and mortgages are at the root of our economic difficulties, why aren't you addressing those problems?

The answer to the first question is that the purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it. It is not a panacea for all our economic difficulties (…we pursued this goal despite our repeated statements that the housing market is the problem so not fixing housing has been a clever plan of ours to stop the contagion fro housing as it gets worse since we are clueless about what to actually do to help housing..) . The crisis in our financial system had already spilled over into the overall economy. But recovery will happen much, much faster than it would have had we not used TARP to stabilize our system. If Congress had not given us the authority for TARP and the capital purchase program and our financial system had continued to shut down, our economic situation would be far worse today.

The answer to the second question is that more access to lower-cost mortgage lending is the No. 1 thing we can do to slow the decline in the housing market and reduce the number of foreclosures (..and our plan is not achieving that goal at all) . Together with our bank capital program, the moves we have made to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, will promote mortgage lending ( eventually…). We are also working with the Department of Housing and Urban Development, the F.D.I.C. and others to reduce preventable foreclosures (at long last).

I am very proud of the decisive actions by the Treasury Department, the Federal Reserve and the F.D.I.C. to stabilize our financial system (..even though they have been see-saw and last minute and have not worked) . We have done what was necessary as facts and conditions in the market and economy have changed (or have been changed by us and our indecision…) , adjusting our strategy to most effectively address the crisis (after we worsened it, for example by letting Lehman go down) . We have preserved the flexibility of President-elect Barack Obama and the new secretary of the Treasury to address the challenges in the economy and capital markets they will face ( by backing out and increasing the probability that things get even worse by the time he gets here…) .

As policymakers face the difficult challenges ahead, they will begin with two considerable advantages: a significantly more stable banking system, one where the failure of a major bank is no longer a pressing concern (probably) ; and the (scratch ’the’ replace with ‘some’…) resources, authority and potential programs available to deal with the future capital and liquidity needs of credit providers (and nearly nothing done for homeowners where prices STILL decline and foreclosures set new records – but don’t worry! The White House is paid for!) .

Deploying these new tools and programs to restore our financial institutions, financial markets and the flow of lending and credit will determine, to a large extent, the speed and trajectory of our economic recovery. I am confident of success, because our economy is flexible and resilient, rooted in the entrepreneurial spirit and productivity of the American people (…so we admit our cluelessness and end the TARP here, taking a risk that nothing will blow up in the next two months and hope that the new administration has a better idea than we did how to fix this thing).

Sunday, November 16, 2008

US economic risks and the G-20

The G-20 met but little action came from this group -partly because the attending US president is a lame duck. Europeans are eager to affix blame to the US and use that as leverage to get the sort of regulatory oversight that they would prefer.

The financial situation continues to be unsettled and banks are pulling back from lending after getting stung so badly on mortgages and in the face of a downturn of increasing severity. Government injections of capital into banks have helped to ease the sense of worry on the part of banks but it has not emboldened them to lend. An unusual joint statement from the Fed, the FDIC, the OTS and the OCC (see below) http://www.federalreserve.gov/newsevents/press/bcreg/20081112a.htm represents some of the strongest moral suasion the central bank and other regulators can bring to bear to get banks lending again.

That statement warns banks to discharge their responsibility to lend to creditworthy borrowers. It warns them against a payout out of excessive dividends as well as warning on compensation. The statement also urges lenders to work with mortgage borrowers.

The Fed is trying to do all it can. It has even been allowing the funds rate to trade below its 1% target making any call for a further rate cut really a moot point.


The BIG NEWS this past week also has featured discussions about the automakers. Detroit’s ‘big three’ are hurting and are running out of cash. An unusual series of events helped to put them in this situation. First of all they have been reeling from problems stemming from a slowing economy and a mix of cars tilted to SUV’s and vehicles that get poor mileage. An ongoing rise in gasoline prices pressured them severely impacting their sales followed by a slowing in overall demand as the economy weakened. Then the financial crisis led banks to clam up on their lending at the same time the commercial paper market shut the door the auto companies’ finance arms. Now a more severe recession threatens. Certainly, the auto companies are not poster boys for US competitiveness. But the unusual set of events reinforced by lending issues for banks and car buyers with low credit scores has exacerbated an already difficult situation, taking a bad situation and making it worse – making it life threatening.

While Congress has been eager to approve money for banks it appears much more reluctant to address the special problems in commerce even for a high-value product like an autos even when banking and financial sector problems seem to be an import reason for the problem in the auto sector. Car and truck sales have been averaging between 16mu to 16.5 mu of sales (saar) until this year when they have suddenly fallen off to 10.5mu. That’s a drop of 36% in the structural pace of sales not in some flakey m/m calculation. Autos need financing the financing arm is broken so why blame the automakers?

This a big issue because one and ten jobs is estimated to be auto-related. These jobs are concentrated in Detroit which will be decimated if the automakers fail. Moreover, with the democrats now taking over, the big problem in Detroit becomes more controversial: that is the relatively rich pay for auto workers. Auto wages are high and the automakers’ promise to retirees to pay benefits for them has been a real drag on GM’s earnings. The unions point out that some sort of public paid health care reform could take that drag off the automakers’ books, but that is not going to happen soon if at all – Obama’s idea is to have health care costs manageable not publicly paid.

The G-20:

The G-20 communiqué is a mixture of objectives. In an attempt to convince us they are on top of things, I get the impression that they are spinning their wheels. The ‘mandates’ at the country level are obvious for the most part.


There are no ground-breaking statements of intent in this document. There is nothing ambitious. No country by country tasks are assigned or promises are made. We are impressed that the leaders are full of intent to make things right. We are less impressed that there is anything of real structural significance in the works. We are not surprised at the lack of actual achievement since with the office of the US presidency in transition that much seemed obvious from the outset. But there is no sense of vision or purpose in this communiqué; little promise for the future other than to fix the errors of the past. It is chock-a-block with technical details that are, on close inspection, mostly obvious or things that we would take for granted or are already being done. Despite its extensiveness, I consider it a disappointment.

Wednesday, November 12, 2008

Paulson does a re-think

Paulson: bloodied but still fighting
It is easy to be critical of a plan that weaves back and forth changing focus and emphasis. But these are difficult times and flexibility in and of itself is not a bad thing. Hank Paulson made this point with a reference reminiscent of the great economist John Maynard Keynes. Keynes, once was told he was now argung the opposite side of the argument that he previously had taken, he replied, "When the facts change I change my mind, sir. What do you do?"

This response also raises the question of how much HAVE the facts really changed?

There has been no pat answer to the ongoing problems. Treasury Secretary Paulson came to us with the best of the best of the best of Wall Street pedigrees: head of Goldman Sachs. But I must conclude that he has not fulfilled his promise. On the positive side I'll say he is still in there making changes and trying. He has tried to be bi-partisan. His efforts are showing some progress... but they may also have caused confusion and that might have come at the cost of confidence and progress. Moreover, the new direction he is hinting at has dangers in its own right.

A brief on Hank's resume
CHINA -Paulson came into this Administration to replace John Snow. Snow had been ineffectual in dealing with China Paulson was supposed to be skilled in plying the Chinese while at Goldman. As Treasury Secretary, however, his secret powers failed him. He mostly succeeded in getting us to be tolerant of their slow speed of response. He had no real success with China, prompting me at one point to term him, The "Manchurian Candidate.'
Stimulus - Paulson was good in working with Congress and reaching across the aisle. He did help to rebuild a dialog with democrats in an administration that had been very strained in its bipartisan thinking. This talent proved significant when it came time to implement an economic stimulus package.
Crisis: SIV- When the economic crisis broke out Paulson's idea was to form a giant SIV (special investment vehicle) to contain the 'bad' assets. This idea proved unworkable.
Crisis: Fed - When the Fed was shorthanded on its board the Treasury Secretary used a little known rule to add the needed vote at the Fed to get a Fed program in place. Hank is and has been a team player- it is one of this true strengths.
Crisis: TARP - The TARP is his biggest efforts and has been the most controversial so far. In the first place he scared the heck out of us by asking for $700billion with no strings no oversight and no recourse in a joint appearance with Fed chief Bernanke. Eventually that plan was scrapped for something more elaborate with checks and balances. In their initial presentation, Bernanke and Paulson were championing the idea of asset purchases from banks using a 'reverse auction' that is a new and untested vehicle. However, this auction would take a long time to put in place. And, in the aftermath of the Lehman failure, markets unraveled quickly. The Fed began to employ its funds to put capital into banks and was forced to modify an earlier plan to assist the insurance giant AIG. On November 12th Paulson announced that asset purchases no longer were an objective. After frantically trying to line up professionals to execute this plan the treasury is shifting gears again. It is dropping teh idea of bad asset purchasing and looking instead to do something to assist the asset-backed markets that are a source for much of consumer credit. They are also thinking of making future capital injections in firms contingent on that firm getting private funds as well. This is another big change since up to this point capital injections have been made on their own.

Requiring firms that get future capital injections to also have private funds injected means that the new treasury plan switches to being one that picks winners. Up until now Treasury has avoided that as it purposely injected capital in some banks that DID NOT WANT IT when it first began these injections. The idea was to put funds in all institutions so that the receipt of funds did not flag an institution as 'troubled.' Now that the Treasury apparently has 'stabilized all the main institutions, it is more willing to start giving the market signals about who is good. It is not clear if this was the treasury's plan all along. But it may have been. Co-mingling Treasury funds with private funds help the treasury to make its money go farther, sort of like a financial hamburger helper. But when you do this you run the risk of signaling who is good and who is not. Financial markets are not exactly back to normal so there may still be some 'good' firms that will have a hard time obtaining private capital matching funds.

Trying to find the right gear...
While some are worried that the Treasury has been switching gears too often on its plans and that could be making it harder for firms to figure out what to do, at least it is staying flexible. But, on closer look, it seems that the Treasury is simply changing its tactics when it realizes its old tactics are lacking. There is not much evidence that market conditions have changed appreciably calling for a new Treasury response. There is evidence that the treasury's first plan to use reverse auctions was just too new, too untried, and took too long in developing to be effective. Jettisoning that makes sense. It also seems that the Treasury is simply coming to have a different realization about the markets and their needs than that it is reacting to new circumstances. We will have to see if its assistance to the asset backed market really works.

Saturday, November 8, 2008

Electing a BLACK President is not real change

...So let me say something that other people can't or won't say

A rose is a rose is a rose? A man is a man is a man
In America we believe in the equality of people. I understand that electing a BLACK man is an important symbol for America and for others in the rest of the world. But it's only a symbol, so get over it. America does not become more free, black rights are not enhanced nor are black people's opportunities made more even by having a black man as President.

Color is only skin deep
Barack is not smarter than a white man. He does not jump higher, run faster or legislate better, just because he is 'black'. True he breaks a string of Republican control in Washington at the helm. But that is his 'democratness' not his blackness. As politicians go he is not even particularly radical. We did not elect Al Sharpton or Al Gore.

People who want REAL CHANGE need to look for something else.

Another democrat...
The fact is that OBAMA is simply another democrat. And, to me, as long as there is democrat or a republican in the White House it is ALL THE SAME. The great fiction of the Obama campaign and why I am less than impressed with him was that John McCain, a war hero, was said to be the same as George W. Bush, a near draft dodger and national guard member. Bush invaded Iraq something McCain surely would not have done. This was a stupid tactic and I don't really think it got traction outside of the party faithful (who liked it very much). Moreover Barack's claims to have been against the war while true was sort of irrelevant. At the time he was a 'nobody senator.' Had Hillary voted against the war THAT would have been bold. The acid test? Barack's dissent did not make headlines.

IF OBAMA wants to be an agent of change then he should work to DISMANTLE the electoral college. Gore would have beaten Bush had the president been elected by popular vote in that contest.

Election Shenanigans
In this election there are allegations that in Mississippi and in Alabama some counties had more registered voters than they had residents of legal voting age. When Kennedy beat Nixon there was talk of election shenanigans in Chicago that might have cost Nixon the White House but he refused to pursue it 'for the good of the country.' That's not the sort of thing we remember Nixon for, is it? Gore and Bush fought over votes (hanging chads...) in Florida with the Supreme court weighing in. Why all this conflict over a few votes? Because the electoral vote system is a winner take all system. Fifty one point one percent is worth 100 percent in electoral arithmetic and forty nine point 9 percent can be worth nothing. the system and its stakes are fraught with the incentive for and possibility of corruption.

But all these shenanigans are for one thing: a state's electoral vote. Ross Perot got about 19% of the popular vote and NO ELECTORAL VOTES when he ran (apologies: in an earlier posting I wrote that Ross got 27% but that was his high-water poll number; in the general election he actually tallied 19%). The electoral vote winner take all schemes is stacked against outsiders - and mavericks, too. The scheme for for resolving ties is through a vote in the House, another factor that favors existing parties. . Obviously no outsider would win the tie vote in the House if that happened. Ross Perot's campaign underlines how futile it is to run as an independent. The major parties OWN the elections and they in turn are heavily influenced by big money and lobbyists. NY Mayor Michael Bloomberg thought of running early in this campaign but did not I think after pondering the Perot result. You must win states, not just votes, and a lot of them.

Party TIME!!
The electoral system is supposed to be a sort of large state/small state compromise since states get votes in proportion to their number of senators and representatives. In fact this arrangement is a conservative system that supports the existing party structure. Parties own America not the voters. Parties even OWN the primaries in some states. I cannot vote in NY unless I am a registered something such as a republicans or democrat. Yet my tax dollars pay for these 'elections'. Parties have divvied up the states. Most have such set behavioral tendencies that they are committed almost without regard to the candidate to republicans or democrats election after election.

One state, two state, red state, blue state, Independent? screwed state
Electoral votes were thought to be a way to make small states relevant. But voting patterns have become so set that democrats always know they win NY so why spend much time there? Republicans have similar states/regions of strength. Modern elections focus on campaigning in swing states and so those voters come to have the most influence. As a resident in NY I might not even bother to vote for a republican in the national election since democrats will win the state and all the electoral votes will go to their candidate. The system disenfranchises minority voters in states that are overwhelmingly Red or Blue.

This is I contend is unamerican and certainly NOT democratic. IF ever we want real change - and here I think also of what we are trying to achieve in the financial markets as well with the role of big money and lobbyists - we need to break out of this two-party choke hold.

It is not one man one vote. For a republican in NYC it is one man no vote. For voters in Ohio or Florida it is one man swing vote. Those are the sorts of states that decide who gets to be president these days not NY, not Texas, not California. Big states begone.

If we had a popular vote all votes would count equally as we now pretend they do.

Moreover with q popular vote tally, anyone could run for president. The party structure would not loom as large. We could have more factions that could combine to back a candidate. We could 'unbundle' the parties. For example the Republican party is a factionalized amalgam of religious conservatives and small government advocates that want taxes low. The republican party lumps them together as 'republicans'. Why? These points of view have nothing in common. The same is true of democrats and their factions. Will Rogers famously said, 'I don't belong to an organized political party, I'm a democrat.' With factions formed to support candidates we would have swing factions instead of swing states. Elections would be determined by ideology on the margin instead of by an assault on a piece of geography where voters were thought to be more pliable. Or where gobs of money could turn the tide. That is not democracy. But it is what we got.

So Barack, want to implement some real change? Try that.

Wednesday, November 5, 2008

More registered voters than 'of age' residents

Can you Spell M-I-S-S-I-S-S-I-P-P-I
More than a third of Mississippi counties have more registered voters than residents old enough to cast a ballot, according to an Associated Press analysis.

In addition to providing ammunition for people who say the voting system is vulnerable to fraud, the flabby voting rolls may make it difficult to accurately determine turnout for the Nov. 4 presidential election...see excerpt form Oct 24th story below.


There is no reason in the world why some of these counties should have more registered voters than they have living, breathing people," Mississippi Senate Elections Committee Chairman Terry Burton said.

Twenty-nine of Mississippi's 82 counties had more registered voters than people of voting age. Alabama has a similar problem _ The Birmingham News found that six of 67 counties there have more registered voters than people of voting age.

see AP story at link below:


So the parties love to blame one another for vote fraud and election irregularities. In this one registering enough voters to hike the percentage of black voters by 2% POINTS was a master stroke sine nearly all of these new voters went for Obama.

McCain ran better than his party?
I still think, though, if you dissect the numbers you find McCain ran better THAN HIS PARTY. For example, despite all the disgust with Bush, the Anti-Bush, liberal talk show host former SNL comedian, Al Franken in Minn, was not able to get himself elected.

Key tactics:

Race and Youth
Race and youth oriented registration seem to explain a lot of the election gap.

MONEY explains a lot too. One political analyst who ran campaigns said having a lot of money makes the job so much easier.

Then there is all the press coverage that favored Obama and that was FREE. the media loved him and promoted him. That was yet another uphill climb for McCain.

Finally there was the timing of the financial crisis. Smartly Democrats made it work for them. But they held chairs on the senate and house financial oversight committees. Dodd a democrat had balked at Fannie Mae reform for years. Fannie Mae grew large and had accounting and executive pay excess problems under Bill Clinton's administration and his choice to run it was Franklin Raines. Raines in 1999 went to head Fannie Mae as CEO, and became known as "the first black man to head a Fortune 500 company." And it was Raines who made the fortune.

In the end the Democrats were more successful in using the financial meltdown as a tool than were Republicans. Democrats blamed the Bush Administration while in truth the responsibility/failure was shared with Congress. Moreover Democrats had important troubled antecedents at Fannie Mae.

Press & Policy
Barack Obama's campaign drew a lot more press than did McCain. McCain was back on his heels from the start. He did not press on about the importance of national security even in the face of the domestic meltdown. His housing strategy seemed poorly conceived. Yet Obama's was hardly any better. McCain's DEFINING mistake was acceding early on that he was not an economic expert- as though Barack Obama was!

In retrospect: It's less of an ideological victory than it has been portrayed
So as we look back at the elections, what I see is a lot less landslide and mandate. I see tactics, money and voter registration as the keys to success much more than ideology despite the role ideology supposedly played. Remember th bush was elected twice once by an an electorate angry over the war. In the end the race card played and played in favor of Barack Obama.

DEMOCRATS RULE...such as they are
We will now have a Congress and Senate that is more overwhelmingly Democrat and will be held accountable to make change. But times are tough for that. Moreover, a lot of the newly elected democrats are not very liberal. The good news for the democrats is that the economy is so bad that in two years then four years when they run run again they will be able to lay claim (right or wrong) to how much the economy improved.

The voter registration drive could give them a leg up for years to come...if they registered real people. See the AP story and the link above.

CHANGE! What is it good For?

I have a favorite joke about change...

You see there were these men who were incarcerated as prisoners of war... One day the head of the prison assembles them all in the prison square and announces, " Men, after two years as prisoners, I have for you some good news and some bad news".

"First, the Good News. This is a simple pleasure, but after two years, I finally have for you, a change of underwear." At this mention, the men look down at their feet and shuffle them. Some weep. It was an act of kindness... "Now," the prison-master goes on, beginning to point, "I have some bad news...You will change with you, you will change with you, you will change with you..."

So, not all change is for the better... and for some the change is better for some than for others.

As we ponder the changes we will see under Barack Obama, I can't help but notice the Russian announcement that they are moving new short range missiles into the Baltic region. Wow! That was a short honeymoon, Barack! I guess Biden was right about Barack getting tested. There is still a pending Russian statement about helping Cuba to set up a 'space launch center." and then there is our friend Mr Chavez in Venezuela who wants to divert more oil revenue so he can have THE BOMB.

In pre-election polls a number of foreigners had registered preference for Mr Obama as the new US president. I don't know why. Did they truly think he would be better for us Americans, or that he would be better for them? Did they want republicans out because Bush had tainted his party with a vision of an uncontrolled military? We don't know. Beware of at least wary of the way foreigners have embraced Barack, it may be the good news that it seems or it may not.

Nor do we know why Obama was elected in America. Exit polls will never tell us what made those few percentage points of difference in the overall vote. OK. Tell me young people and black people voted overwhelmingly for him and that the black voter share of the total electorate rose by about two percentage points in this election. That alone is worth more than one percentage point of this 'small ' popular vote margin over McCain. That is a bit part of the story. Putting that aside you see how close the race was elsewhere. While the electoral victory is huge, the popular vote is nowhere close to what polls said: eight to to nine points of difference? What crap! Had the democrats not spent so much money and so much effort in registering new voters it seems to me at least that Barack may not have won at all - at least not the popular vote. McCain got far more votes per dollar spent. As great a win as it is for Obama it seems to have been more hard fought and hard bought that it was a gain that was a rejection of the republican candidate. Political pundits can say Barack won by associating McCain with Bush but that does not seem to be the case. He won on getting a huge proportion of the young vote and the black vote and by registering a lot of new voters. Then he edged McCain in the remainder of the electorate - he edged him- he did not clobber him. Small things made the difference. Did Palin cost McCain THE JOB?

But the electoral gains in the House and Senate seem to be more in the vein of an old-fashinoned beating. Remember the electoral landslide comes from a winner-take-all contest, state by state. When Ross Perot ran for the office of president he got about 28% of the popular vote and NO electoral votes. The democrats did get break-through wins in some states where they had not won in a long time. But they outspent McCain by about two to one overall. Money matters. Still, there is a further question of where democrats beat republicans in the House and Senate of who won: did liberal democrats win or conservative ones? The party head count may exaggerate the extent oft the sea -change in Washington. For example, Bush-hater and former SNL comedian and democrat radio figurehead Al Franken lost his bid for office in Minnesota.

In the works
On domestic policy we look for changes without being certain what they will be. Obviously we have some framework. A stimulus package is sure to be in the works - a big one. Corporate excess is sure to be on the way out and under assault. We are not in the know about what he will do in terms of foreign trade policy and NAFTA, which he threatened to 'take another look at.' Some of his social policy goals may be hard to achieve because they compete with the ongoing crisis that remains JOB ONE for any president. Obama has a good chance of making a clean break with the past four years on foreign policy but the world remains a dangerous place and we will have to see how he positions himself and us. Changing our interface here will be a more delicate job than the campaign rhetoric suggested. From 'day one' of his election and two and one-half months ahead of his inauguration Barak's first foreign policy challenge has emerged in the Baltic. and it's not just the huge drop in the Baltic Dry index.

Change? Never mind?
There are many opportunities for change. But let's remember that over the past four years the democrats controlled the House and the Senate and held the top slots at the Senate banking Committee and on Financial Services in the House. Dodd, a democrat who headed the Senate banking committee, long opposed republicans that had sought more aggressive regulation of Fannie Mae. He also stonewalled appointments to the Fed making that regulator operate short -handed before and during the crisis that broke out. The view should not be that the republicans are out of leadership and now the fox is no longer guarding the hen house. These overseers are the same 'foxes' that were overseeing things before. It remains to be seen with all the monies Barack raised and all the 'debt' he has amassed to donors how large an engine of change he will be. Sure a lot of it was grassroots money, but not all of it.

As we said above.

Money matters. And that is true for republicans as well as for democrats.

Monday, November 3, 2008

Top Financial markets Flicks of the Week

Fan-ding-Dong-Dang-It Top Movie list for this week

  1. MBA Musical.001 Remedial Finance for Wall Street rocket scientists
  2. Ben and Hank make a financial porno
  3. Saw V: Senior loan officers learn to cut things off
  4. Changleings: Credit agencies learn to give low grades
  5. The haunting of the John McCain campaign
  6. Lou Dobbs featuring: Beverly Hills Chihuahua
  7. The secret life of Baa-rated bonds (top secret right now)
  8. Max Pain: Starring the US banking system
  9. Eagle Eye: Starring the Fannie and Freddie accountants
  10. Pride and Gory: Auditors inspect the ashes of Lehman

Senior loan officers grab heads and hide under tables

The Fed survey shows...

The weather outside is frightful, but the chill in the banking sector is even worse. While the Fed is busily pumping money into banks, banks are eagerly battening down the hatches and locking that money up safe and sound instead of LENDING IT! Who does that help, anyway? Banks are more willing to trade with each other, or so LIBOR tells us. But lend to a nonbanks? A Consumer? A business? FUGGEETTABOUDDIT!! Obviously that attitude will weight heavy on growth.

BANKS LENDING PRACTICES -Banks of all sizes are tightening their standards for lending and the spreads at which they lend. Both measures are up nearly across the board, by a percentage that closes in on 100% of the respondents compared to a peaking at about 60% of them for large and medium size banks last cycle (2001) and near 40% for small banks in the last cycle. This cycle is much worse for all types of lenders.

COMMERCIAL REAL ESTATE: The percentage of lenders tightening is up to 87% in this cycle compared to past peaks in the last two cycles at around 70% and 45%. Again in this cycle the tightening has gone further and demand has fallen of with ‘increased demand’ seen by -55% in this cycle compared to a low of -51% in 2001.

LENDING BY TYPE OF LENDER/MORTGAGE: Standards are tightening across all types of mortgages, Price Subprime and non-traditional and demand is falling across all of them as well.

CONSUMER LOANS: There is less willingness by banks to lend and less demand by consumers to borrow – both worse than in either of the past two cycles. Standards on credit card loans and other consumer loans have been tightened by 58% to 64% of respondents. These figures compared to a past cycle peak of 20% that tightened up, but 1996-97 50% of respondents tightened standards on credit cards and about 25% tightened on other loans. Increases in the tightness in this cycle seems much greater than in the past. At least standards for credit cards and other loans did not tighten beyond the levels of last quarter.

Sunday, November 2, 2008

Lost in the Bretton Woods

New Bretton Woods

NBW: New Bretton Woods or No Bretton Woods? – A number of articles are written on this idea launched in Europe and signed onto by Mr Bush in the aftermath of the financial chaos of having a New Bretton Woods meeting. But after reading any number of articles I am no closer to understanding what it is that world leaders are going to meet to discuss that when I had read none. The first Bretton Woods was a Post-war meeting set to try to restart international trading under a system of rules that would establish what is fair and what is not. A fixed exchange rate system was adopted with the dollar tied to gold (@$32/oz) and other currencies pegged to the dollar. It lasted until the early 1970s.

Post Bretton Woods: After that the collapse of Bretton Woods, a new system (often called a non-system) of fluctuating exchange rates was adopted. It functioned well enough for a while and has been flexible enough to deal with many economic shocks. But it has been marked by any number of exchange rate crises involving both developed and developing nation currencies.

Pending issues, building problems: Perhaps the biggest failing of the current system is that, under it’s auspices, a constellation of balance-of-payments excesses has emerged that has proved to be quite entrenched or resilient. Exchange rates as it turns out do NOT move to eradicate these imbalances. Large and growing imbalances simply persist in this system. This mixed system with some currencies fluctuating (with occasional official interventions in exchange markets) and others pegged (such as the yuan) has created a new set of tensions. The rapid movements in exchange rates have also exacerbated other problems at time as commodities are priced in dollars and their prices have been destabilized.

Then Vs Now: Until the current financial crisis, it has been in vogue to not worry about such festering problems. Faith has been – had been - that markets will deal with these issues in time. Well, Alan Greenspan applied that faith to the housing market by ignoring excesses that were brought to his attention and look what has happened. Not surprisingly some may think it is time to take a look at the world financial system and see what is going wrong and how it might be put back on track before gets too far out of hand.

There has been blood - We have in recent years seen an Asian debt crisis (1998), a hedge fund ‘unwind’ (2000) threaten the financial system, a stock market bubble collapse (2000) and a housing bubble that inflated and is now still deflating and still creating explosions in the financial markets as it has revealed other excesses (in judgment leverage and market practice) that had remained hidden. That bubble has exposed a number of financial practices that are/were ill conceived. And all the banks of all major trading countries as well as many banking groups from smaller countries have been caught in the net with the result that governments and central banks around the world are intervening in markets in various ways to prop up banks and stabilize markets. Through it all Canada has been named as having the safest banking system in the world.

Fix what? So now as a New Bretton Woods is being discussed different participants see different problems. They have differing objectives, just as they did in the post war period. But do they have enough in common to strike an agreement? That goal is not as clear as it was when the first Bretton Woods meeting was held. And that is the problem for anyone with high hopes.

What Europe wants - Europeans seem most upset that institutions such the credit rating agencies discharged their responsibilities so poorly. There is also a sense that US regulators were asleep at the switch or even purposely glued the switch open on the belief that markets know best. Europeans are looking for a uniform system of institutional of oversight, US authorities mostly feel that is unworkable.

What is the POINT? Fixing this sort of regulatory lapse that occurred is important. But Bretton Woods was about the trading/currency system. It was about exchange rate regimes and certainly the system now in place shows all the signs of building new and threatening excesses due to the lack of adjustment mechanisms in the monetary system that is in use. Foreign exchange reserves pile up in China, in Japan and elsewhere. Accumulating these reserves undermines the rule of the game that surplus countries should let their currency rise to choke off the surplus. It also keeps the deficit country currency from falling and thereby from restoring the balance to trade. It leaves a system far more interlinked by capital flows that it becomes structurally dependent upon. That must be viewed as an Achilles Heel of this system; an accident waiting to happen. But is there a will to find a remedy? We must conclude that the answer is ‘no.’ Like the earlier Betton Woods meeting that occurred when competitive devaluations that were the problem, chronically undervalued exchange rates are a similar modern counterpart. One additional interesting aspect today is that countries like China with MASSIVE reserves are shuttling them over into sovereign wealth funds so the ‘reserves’ can accumulate a broader class of assets. This may raise questions of fairness since the reserves were accumulated by eschewing the usual rules of the game and seemed to have accumulated with the idea they would reinvest in monetary assets.

The IMF and the China Conundrum - The IMF is the usual arbiter of FX rules and their ‘enforcement’… But as an enforcing agency it is pretty toothless. Moreover China is a bit of a special case since developing countries long have been allowed to peg their currency to one of their choice. Still, China is special case because it is huge, its development has been tremendous and even so its underdevelopment remains colossal. China is a conundrum. But there were other ‘surplus’ hogs before China overtook them to steal the limelight for itself. It may seem odd to brand China and other Asian countries as countries that consume too little and save too much. But if they did not do these things their surpluses would be much more manageable and would not push excesses off on their trading partners as they do now. China, a country that needs economic development needs to spend more, to consumer more. Faced with tremendous poverty and under development it is accumulating reserves instead of spending them on development.

And China does not want to make any of these changes.

Room to Horse Trade? But China may be wiling to trade its current policy tilt for a larger say-so in world organizations. It has already made a call for a new synthetic world currency but again who knows that that means? A global currency hardly seems viable at the moment.

Many have called the dollar dead but one thing is clear and that is in this crisis period while many things are coming unglued the dollar is NOT ONE OF THEM. The dollar has risen in value and has been sought out above nearly all other currencies and competing ‘stores of value’ (yen-excepted) including gold, silver and other precious metals.

Mixed incentives and conflicts - China is in the WTO but the US has not used WTO claims against China (as an unfair trader using as the basis for a claim its pegging its FX rate to the dollar at too low a level). That is probably because China and the US have a complex relationship. US multinational corporations (MNCs) located there benefit from the current arrangement although the US balance of payments suffers. These MNCs have been opposed to any anti-trade action by the US Vs China. From the standpoint of the US giving up more authority to China in world organizations, it may not be as costly as it seems since the US itself confronts mixed interests due to the spread of the US multinational corporation. But this issue may be evolving and the US may come to see its interests as more aligned with its balance of payments than with its MNCs’ overseas operations given time. Right now the US BOP deficit and the US is where the dangers seem to be looming the largest.

Bretton Woods Bartering: This is the sort of to and fro bartering that is talked about in connection with the New Bretton Woods. But none of this has been talk aimed at a new financial architecture. Is there any plan? Are the authorities ready to endorse some rules regarding fluctuating exchange rates- including rules about allowing ‘developing countries’ to peg their currencies? Are they willing to adopt some interim ranges to LIMIT FX movements? What are they willing to do? Is there a New Bretton Woods being planned or are we being led into the woods with the intent of being abandoned?

G—20: Progress unlikely

On balance I am a skeptical about progress. It’s hard to get agreement on such abstract topics. The financial crisis should be a motivator, but I still don’t think its enough. The reason is that the Fed’s actions have already been meted out and its assistance provided without any quid pro quo. Thus the US cannot use that assistance as leverage. For now there is too much on the table and too-poor a record of cooperation among these varied participants. Regions are not simply seeking different things from the current system but are aiming at different areas of reform altogether. This is not like the first Bretton Woods where world trade was seizing up and countries were looking for a way to reignite trade - a solution for a definable problem. This time around, some are looking for more and better regulation, some are looking for a global regulator, some are looking for some sort of currency reform, some are focused on their own development and some simply have an anti-America agenda. There is no consensus going into the meeting on WHAT THE CONFERENCE IS REALLY ABOUT let alone what the problem is that needs to be solved or what the solution might be. The financial crisis has been a motivator but it has not helped to focus attention on any one issue. Instead, it has opened a grab bag of competing wish lists that almost guarantees there will be no resolution.