The Aeration Zone: A liberal breath of fresh air

Contributors (otherwise known as "The Aerheads"):

Walldon in New Jersey ---- Marketingace in Pennsylvania ---- Simoneyezd in Ontario
ChiTom in Illinois -- KISSweb in Illinois -- HoundDog in Kansas City -- The Binger in Ohio

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Sunday, April 26, 2009

100 Days Report Card

Seems likely that Republicans are flooding the ballot box.

If you were grading Barack Obama on his performance as president, what would he get? (3100565 responses)

He gets an A-37%

He gets a B=7%

He gets a C-4.8%

He gets a D-13%

He gets an F-39%

Not a scientific survey.

Friday, April 24, 2009

U.S. Financial structure repair: Illusion of Progress?

The current banking situation is much worse than in the Great Depression. In the 113days ending Dec. 22, 2008 the monetary base increased 103.01%, an astonishing annual compound rate of 885%. The increase has had little apparent effect in solving the overall problem. Initially, we thought that if doubling the monetary base does not solve the problem, double it again, and again if necessary. The idea was that an ordinary liquidity trap (economy not responding to expansive monetary policy) can be overwhelmed by throwing money at it. But if Bank A fears that Bank B is insolvent (Bank B may not be insolvent but with an opaque balance sheet who knows?) it will not want to have interbank relations. Hence interbank relations freeze and dysfunctional zombie and vampire behavior, already experienced in the S&L crisis (Google: Mishkin and Eakins, p.488), poisons the system. The monetary base and excess reserves have been increased to an extraordinary degree but the increases have not solved the crisis. Apparently even a flood of money alone cannot eliminate a solvency trap. We suspect the only way to get rid of the problem is to clean out the rot as done by the RTC in the S&L crisis.

Pursuant to solving the banking crisis, it is hoped that some lessons have been learned from the S&L fiasco. Piecemeal certificate programs did not work. Regarding changing marking to market Michael Pento on CNBC mentioned about changing marking to market to marking to fantasy. Given how the CDO tranching models (and rating services) have failed who is going to trust new models? Finally, insolvent zombie banks should be seized by the equivalent of an RTC and dispatched. We question (along with Jeff Macke of CNBC’s Fast Money program) the “too big to fail” doctrine regarding Citi and/or Bank of America. Should we be held hostage forever by a so-called too big to fail zombie?

FDR's approach needs to be applied now: 1) identify the solvent banks and support their lending, 2) identify the insolvent banks and close them, 3) reorganize the marginal banks by stripping out the toxic assets even if temporary nationalization is required. The President of the Kansas City Fed has persuasively argued for this approach (Google: Thos. Hoenig, KC Fed) The current piecemeal approach, we suspect promolgated by bank and Wall Street lobbists which top eight spent 38.4 billion in 2008 on lobbying (Business Week 2/23/09. p.36) to buy time to position themselves to better profit from the 180 bil (and climbing) of TARP money received in 2008 (Ibid, p.36) is prolonging uncetainty and the credit drought. If this isn't sufficiently troublesome, top economists Stiglitz, Sachs, and the GAO Inspector General (Google: Barosky Report)have pointed to loopholes that permit banks to game the system, with the latter claiming incidents of fraud already occuring. The longer Washington plays footsie and fails to move with dispatch, the more impossible it is for the Treasury Secretary to implement a remedy that is effective and fair to taxpayers. As much as 50% of the hundreds of billions of bad debt in the banking system may with unsecured bond holders. When a bank is liquidated, common and preferred shareholders usually lose everything, and so should unsecured bondholders. Secured bondholders may recover 40%. We believe lobbying has slowed TARP implementation to a piecemeal rate in an effort to protect unsecured bondholders who don't deserve it, especially at the expense of speedy remedy.

Banana Republic-ans

Still more from that theater of the absurd which some still call the Republican Party:
On Tuesday, Karl Rove argued on Fox News [ed.: where else?] that accountability for Bush administration officials who broke the law would make United States "the moral equivalent of a Latin American country run by colonels in mirrored sunglasses."
This has of course been picked up by the Fox News agit-prop battalion, and then by Sen. Bond and even (OMG!) Sen. McCain.

I'd been thinking about writing up the blinding irony of this myself, but Steve Benen said all that needs to be said, in Washington Monthly:

One of the distinguishing characteristics of a "Banana Republic" is an unaccountable chief executive who ignores the rule of law when it suits his/her purposes. The ruling junta in a "Banana Republic" eschews accountability, commits heinous acts in secret, tolerates widespread corruption, and generally embraces a totalitarian attitude in which the leader can break laws whenever he/she feels it's justified to protect the state.

Does any of this sound familiar?

How do they live with themselves?

Wednesday, April 08, 2009

Big media get religion when Democrats take over

Now that Democrats are in charge, mainstream journalism, after 8 years of adhering slavishly to the official unemployment rate that fails to consider labor-force drop-outs and those forced against their wishes into part-time jobs, suddenly discovers the broader U-6 measure that includes such data. Now, it's 15.6 per cent. You can bet that the press will try to use it to paint a bleak picture even when things are improving, pretending that it was not GW Bush, on their watch, who saw that number sky between March 2001 through March 2009 from 7.4% to 15.6 %. Before the election, it had ballooned to 12 %, but even though that 5 percentage point increase in U-12 meant about 7-8 million more Americans were out of work or grossly underemployed, you never heard that piece of bad news from AP, NBC, ABC, CBS or CNN that might further drag down the McCain campaign.

Remember last year when Chris Matthews, the clueless one, was so puzzled why Americans weren't happier because the official unemployment rate was still under 5%? That's because ordinary Americans in their bones were a hell of a lot smarter than Chris Matthews. Their bones were telling them what the U-6 figure was telling us: that we were hemorrhaging jobs much faster than the more sanguine official rate seemed to say.

That, of course, was on top of hundreds of thousands of temps without benefits being hired instead of permanent employees, millions losing health insurance entirely, tens of millions more seeing their health insurance deductibles and premiums escalating, pension programs that had been a mainstay feature of American industry for five decades, America losing manufacturing jobs to China and elsewhere. We got it. The multi-million dollar “journalist” hired by right-wing multi-billionaire Jack Welch for the Nantucket Broadcasting Corporation just didn't understand.

Will we ever get a better electronic press than this? Not until it's broken up into independent pieces again.

No contest: it's Bernie

Who did more real damage, the German extreme left Baader-Meinhof gang or Bernie Madoff?

Thursday, April 02, 2009

A week's interest? Not interested.

"Blessed are you who are poor. . . .
"Woe to you who are rich."
A certain revolutionary,
justly crucified.

From today's NYT Op-Ed by Nick Kristof:

Oxfam has calculated that financial firms around the world have already received or been promised $8.4 trillion in bailouts. Just a week’s worth of interest on that sum while it’s waiting to be deployed would be enough to save most of the half-million women who die in childbirth each year in poor countries.

The 500 richest people in the world, according to a U.N. calculation a few years ago, earned more than the 416 million poorest people. It’s worth bearing in mind that the first group bears a measure of responsibility for the global economic mess but will get by just fine, while the latter group has no responsibility and will suffer the worst consequences.
Don't you just hate statistics?

Wednesday, April 01, 2009

The Price Is Not Right

Published NYT:: March 31, 2009

I don’t expect much from the G-20 meeting this week, but if I had my wish, the leaders of the world’s 20 top economies would commit themselves to a new standard of accounting — call it “Market to Mother Nature” accounting. Why? Because it’s now obvious that the reason we’re experiencing a simultaneous meltdown in the financial system and the climate system is because we have been mispricing risk in both arenas — producing a huge excess of both toxic assets and toxic air that now threatens the stability of the whole planet.

Just as A.I.G. sold insurance derivatives at prices that did not reflect the real costs and the real risks of massive defaults (for which we the taxpayers ended up paying the difference), oil companies, coal companies and electric utilities today are selling energy products at prices that do not reflect the real costs to the environment and real risks of disruptive climate change (so future taxpayers will end up paying the difference).

Whenever products are mispriced and do not reflect the real costs and risks associated with their usage, people go to excess. And that is exactly what happened in the financial marketplace and in the energy/environmental marketplace during the credit bubble.

Our biggest financial-services companies, some of which came to be seen as too big to fail, engaged in complex financial trading schemes that did not adequately price in the costs and risks of a market reversal. A.I.G., for instance, was selling insurance for all kinds of financial instruments and did not have anywhere near adequate reserves to cover claims if things went badly wrong, as they did. And our biggest energy companies, utilities and auto companies became dependent on cheap hydrocarbons that spin off climate-changing greenhouse gases, and we clearly have not forced them, through a carbon tax, to price in the true risks and costs to society from these climate-changing fuels.

“When the balance sheet of a company does not capture the true costs and risks of its business activities,” and when that company is too big to fail, “you end up with them privatizing their gains and socializing their losses,” Nandan Nilekani, the co-chairman of the Indian technology company Infosys, remarked to me. That is, everyone gets to rack up their private profits today and pay them out in current bonuses and dividends. But any catastrophic losses — if the company is too big to fail — “get socialized and paid off by taxpayers.”

This is why we need new banking regulation that reins in the leverage and speculative trading that big banks and insurance companies can undertake so they never again become simultaneously too reckless to regulate but too big fail and taxpayers are forced to pay off the toxic assets they accumulate. And this is also why we need a tax on carbon — so we and our power utilities don’t become permanently addicted to cheap coal that makes for lower electricity prices today but spits out toxic greenhouse gases that have to be paid for by future generations tomorrow.
That’s what “Market to Mother Nature” accounting is all about. It begins with the premise that the distinction between the G-20 and the Copenhagen climate change negotiations is totally artificial. They are just flip sides of the same global problem — how we as a world keep raising standards of living for more and more people in ways that will not, as byproduct, have both the Market and Mother Nature producing huge amounts of toxic assets.

The old system, which has reached its financial and environmental limits, worked like this: We built more and more stores in America to sell more and more stuff, which was made in more and more Chinese factories powered by more and more coal that earned more and more dollars to buy more and more U.S. T-bills that got recycled back to America in the form of cheap credit to build more and more stores and more and more houses that gave rise to more and more Chinese factories. ...
This system was a powerful engine of wealth creation and lifted millions out of poverty, but it relied upon the risks to the Market and to Mother Nature being underpriced and to profits being privatized in good times and losses socialized in bad times. This capitalist engine doesn’t need to be discarded; it needs some fixes. For starters, we need to get back to basics — accountable lending, prudent saving, reasonable leverage and, most important, more engineering of goods than just financial products.

Some of our biggest financial firms got away from their original purpose — to fund innovation and to finance the process of “creative destruction,” whereby new technologies that improve people’s lives replace old ones, said the Columbia University economist Jagdish Bhagwati, in an interview in The American Interest. Instead, he added, too many banks got involved in exotic and incomprehensible financial innovations — to simply make money out of money — which ended up as “destructive creation.”
“Destructive creation” has wounded both the Market and Mother Nature. Smart regulation and carbon taxation can heal both

Obama’s Ersatz Capitalism

Published: NYT March 31, 2009

THE Obama administration’s $500 billion or more proposal to deal with America’s ailing banks has been described by some in the financial markets as a win-win-win proposal. Actually, it is a win-win-lose proposal: the banks win, investors win — and taxpayers lose.

The Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency.

Let’s take a moment to remember what caused this mess in the first place. Banks got themselves, and our economy, into trouble by overleveraging — that is, using relatively little capital of their own, they borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations.

The prospect of high compensation gave managers incentives to be shortsighted and undertake excessive risk, rather than lend money prudently. Banks made all these mistakes without anyone knowing, partly because so much of what they were doing was “off balance sheet” financing.

In theory, the administration’s plan is based on letting the market determine the prices of the banks’ “toxic assets” — including outstanding house loans and securities based on those loans. The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.
The two have little to do with each other. The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option. Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership! Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.

If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.
Even in an imperfect market, one shouldn’t confuse the value of an asset with the value of the upside option on that asset.

But Americans are likely to lose even more than these calculations suggest, because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets that they think the market overestimates (and thus is willing to pay too much for). But the market is likely to recognize this, which will drive down the price that it is willing to pay. Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. With the government absorbing the losses, the market doesn’t care if the banks are “cheating” them by selling their lousiest assets, because the government bears the cost.

Joseph E. Stiglitz, a professor of economics at Columbia who was chairman of the Council of Economic Advisers from 1995 to 1997, was awarded the Nobel prize in economics in 2001.

Clean up banking by cleaning house

Obama should pay special heed to Roosevelt's words on America's bankers, who then as now had plunged the nation into an economic abyss.

"The money-changers have fled from their high seats in the temple of our civilization," Roosevelt proclaimed. "We may now restore that temple to ancient truths."

The quote, of course, is an allusion to Matthew's story of Jesus driving the money-changers from the temple. But "money-changing" is also a pretty fair description of what Wall Street has been about for the past several decades. As the real income of Americans stagnated and their debt mounted, the wizards of Wall Street grew rich by collecting commissions on derivatives of derivatives of derivatives. By 2007, when Wall Street's profits amounted to an astonishing 40 percent of all American profits, the business of American finance was no longer American business -- providing loans for domestic production, technological innovation -- but swapping bets and hedges on bets and hedges, all for hefty commissions.

Save for devising more ways for Americans to go into debt, Wall Street had basically decoupled itself from the economy in which Americans live and work. While the nattering nitwits of CNBC hailed the stock market increases of the first seven years of George W. Bush's presidency as evidence that the U.S. economy had never done better, every other economic index made clear that the economy was in dismal shape. The rate of job creation and GDP growth during Bush's tenure is the lowest of any president of the post-World War II period. Somehow, our financial geniuses managed to miss this and built a vast financial edifice on the backs of consumers who eventually could consume no more.

Yet even after their recklessness propelled their nation into an economic crisis, America's bankers remain the coddled children of economic policy under the Obama administration. The panel that Congress appointed to oversee the Treasury's Troubled Assets Relief Program (TARP), which administers the $350 billion bailout to banks, reported that the Treasury has not monitored what the banks have done with the funds they received and that despite the language in the bailout legislation "to maximize assistance for homeowners" none of the bailout has been put to that purpose.

If the Treasury had set out to design a system to demonstrate once and for all that trickle-down economics doesn't work, it could not have done better than TARP. The Treasury Secretary has thrown money at the banks, which resolutely refuse to lend it to businesses and homeowners, no matter how creditworthy they may be.

A bill that Barney Frank is promoting in the House, which would direct banks that choose to take bailout funds to start lending to creditworthy borrowers and designate no less than $40 billion for mortgage relief, is necessary if Congress is to authorize the Treasury to spend another $350 billion on TARP.

If Obama's appointees inspired sufficient trust that they would be willing to take on the banks, such legislation would be unnecessary. Unfortunately, they don't.
Obama's appointee to head the Securities and Exchange Commission, Mary Schapiro, led the finance industry's own regulatory body, which, unsurprisingly, did nothing to rein in Wall Street's speculative orgy. Obama's appointee to head the Commodity Futures Trading Commission, Gary Gensler, drafted the legislation in 2000 that exempted derivatives, including credit-default swaps, from regulation.

These appointments are notable in the ways they deviate from Obama's other appointments. The people he appointed, say, to environmental positions have clear records of championing the environment. His CIA pick, Leon Panetta, has spoken forcefully against the agency's use of torture. But to regulate banks, Obama has chosen people who have sided with banks against the public interest. They may be exemplary public servants once in office, but for now, they need to be viewed with the same wariness we'd extend to environmental appointees who voted against stricter fuel-economy standards or intelligence appointees who championed torture. That's why Frank's bill must be enacted.

"The rulers of the exchange of mankind's goods," FDR said in his inaugural address, "have failed, through their own stubbornness and their own incompetence, have admitted their failure and abdicated." Today, those rulers' failures are no less obvious, but far from abdicating, they're receiving tax dollars and doing nothing with them. It's time to hurl them from the temple.