How the elites we are asking to solve all this caused all this:

28 04 2009

The Barricade had a great post today regarding the idiocy of the financial elite and how they directly misled us.  The MSM continues to buy this bilk.  AN these are the same guys we are asking to get us out of this mess?  My favorite part:

In 2000, Hank Paulson was the architect of changing the SEC rules regarding the leverage ratios and risk profiles of the investment banks.  Investment banks, prior to the Paulson SEC change, were only allowed to be levered $12 for every $1 of capital that they owned.  In that scenario, if a bank’s assets went down 8.3% then the bank would be technically insolvent.  Hank had the brilliant foresight to petition the SEC to allow for more self-regulation on Wall Street and allow his banks and others to lever $40 for every $1 of capital. In this scenario, a 2.5% decrease in assets wipes out the banks equity and the bank becomes insolvent.

So when you hear Paulson tell you that the reason for the problem we are in is housing, please realize he is lying to you.  He is not just mistaken.  He is lying to you. He knows better. Any investment can drop 20, 30, 40% without causing catastrophe. It is the leveraging up of these declining assets at 40 to 1 ratios that caused the problem.  Hank Paulson was the pointman in creating this leverage.  HE WUZ WRONG.


Robert Reich gives Obama an F on bailout

23 04 2009

Robert Reich in his blog;

The last grade is for the bank bailouts. I give them an F. I’m a big fan of this administration, but I’ve got to be honest. The bailouts are failing. So far American taxpayers have shoveled out almost $600 billion. Yet the banks are lending less money than they did five months ago. Bank executives are still taking home princely sums, their toxic assets and non-performing loans are growing, and the banks are still cooking their books. And now the Treasury is talking about converting taxpayer dollars into bank equity, which exposes taxpayers to even greater losses.

I would say thats pretty right on.  And if a Obama cheerleader like Reich is giving you an F on the bailout then you know you are doing something very very wrong.

The missing link of financial reform

20 04 2009

Throughout the entire financial crisis/meltdown the calls for reform are pretty spot on and uniform:  A more regulated less leveraged system to decrease volatility.  Fine.  Sign me up.  But something always bothered me about finance that never seems be addressed.  Its pretty clear that banks artificially raises the prices of key assets (like housing and tuition) through leverage.  In a pure market where loans are not allowed and you could only sell assets for whatever cash people had on hand, well guess how much that “million dollar” home down the street would really sell for?  The answer is likely for whatever the down payment would be – usually around 20% of the loan.  The problem is that in exchange for this artificial pricing there is no systemic payoff – only the banks realize a profit through the interest they charge.  Thats because the people who sell a million dollar home don’t share in the profit for the most part – they need to buy a new house to live in which, in turn, is also artificially inflated by the same system.  Think about the tuition rate over the last twenty tears.  Is it any coincidence that the cost of college has increased exponentially along with federally funded student loan programs?

What does all this lead to?  Well in times of crises all of this leverage makes the downturn exponentially worse and that much harder to get out of.   But how do we deal with this issue?  Is it just a necessary evil of a modern financial system?  Last week I read a very interesting NY Times piece by Eric Zencey entitled “Mr. Soddy’s Ecological Economy.”  In the aftermath of the Depression Frederick Soddy, a British nobel prize winning chemist who helped bring about the atomic age, decided to turn his attention to economics.  He was disgusted with the destructive powers of atomic energy and turned, rather brazenly, to trying to solve the inefficiencies of economics.  He was considered a kook – he used laws of thermodynamics and nature and applied them to economics.  He had 5 natural laws that he wanted to impose (see the article for a more in depth description).  He died pretty much discredited but guess what?  Four of the five are now considered mainstream regulatory necessities.  But it is the fifth, still marginalized, that I see as a possible answer of the leverage problem of finance:

Soddy’s fifth proposal, the only one that remains outside the bounds of conventional wisdom, was to stop banks from creating money (and debt) out of nothing. Banks do this by lending out most of their depositors’ money at interest — making loans that the borrower soon puts in a demand deposit (checking) account, where it will soon be lent out again to create more debt and demand deposits, and so on, almost ad infinitum.

One way to stop this cycle, suggests Herman Daly, an ecological economist, would be to gradually institute a 100-percent reserve requirement on demand deposits. This would begin to shrink what Professor Daly calls “the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash.”

Banks would support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They would still make loans and still be able to lend at interest “the real money of real depositors,” in Professor Daly’s phrase, people who forgo consumption today by taking money out of their checking accounts and putting it in time deposits — CDs, passbook savings, 401(k)’s. In return, these savers receive a slightly larger claim on the real wealth of the community in the future.

In such a system, every increase in spending by borrowers would have to be matched by an act of saving or abstinence on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth.

Wall Street wankers complaining – unbelievable

20 04 2009

Great story in New York Magazine titled “The Wail of the 1%.”  Just amazing quotes.  Here’s one genius:

“People just don’t get it,” she says. “I’m attached to my BlackBerry. I was at my doctor the other day, and my doctor said to me, ‘You know, I like that when I leave the office, I leave.’ I get calls at two in the morning, when the market moves. That costs money. If they keep compensation capped, I don’t know how the deals get done. They’re taking Wall Street and throwing it in the East River.”

How did all these people make so much money?  The lack of intelligence or rationality is amazing.  Just morons.  Don’t you get it?  Your value was based on how much Wall Street made…Wall Street HAS CRASHED.  Without tax payer money none of you are getting anything.  And, believe me, the most basic job that involves manual labor is a million times tougher than yours.

Reading their crap truly embarrasses me to be a fellow American, let alone a fellow human being.  Shut the fuck up, grow up and grow a brain.  Whiny babies.

Goldman, go suck it!

17 04 2009

Great article in the FT by John Gapper on why Goldman Sachs is trying to pay back the TARP money (so they could be free to pay their employees what the want and take advantage of the current disaaray in the market) and why Geithner shouldn’t allow it (see above and the fact that they are now too large too fail).

Why the shadow economy needs to be fully regulated

12 04 2009

Hernando De Soto, in this LA Times Article, describes how the shadow banking industry has infected the developing world, and limited its development, and how it did the same for the west:

By not counting and identifying derivatives one by one and drawing a legal boundary around each by means of the rules of property law (things such as registration, traceability and standardized identification), we are unable to protect every asset and every particular interest on that asset from contamination. The longer we wait to do the math, the worse it will get. And the more likely the anarchy of this shadow economy will spread.

In the world where I come from, it is the typical state of affairs. In fact, apart from the elite Westernized minority, most people’s assets are covered by paper that is endemically toxic: not recorded, not standardized, difficult to identify, hard to locate, its real value so opaque that ordinary people cannot build trust in each other or be trusted in global markets. In short, for shadow economies outside the U.S. and Europe, “credit crunch” and “meltdown” are chronic conditions. You don’t want to go there: It will wipe out your middle class, nurturing radical politics, class confrontation, violence, crime and massive drug production and narco-trafficking. (North Americans only know drug consumption; just wait until you see the supply side of the deal.)

Simon Johnson for Treasure Secretary…..

10 04 2009

…..hell, Simon Johnson for President.  I waited awhile to read Johnson’s soon to be seminal article on the financial sector and its total blame for the financial collapse because, from what I had heard, it was a doozey.  It did not disappoint.  Perfectly captures the creeping kleptocracy that formed over the last 25 years.  He even goes into the larger sociological aspects that most economists ignore (my two cents: what the hell happened to America’s rugged individualism? To the influence of the transcendentalists?  How did we let these fuckers do this?).  The sad thing is that Obama’s administration, filled with the guilty, now are midwifing the slow leeching of what resources we have left to save their buddies.  Do you hear that sucking sound?  Its your grand-kid’s taxes going into the pockets of today’s oligarchs.

This is not alarmist.  This is not wacked-out man on the grassy knoll conspiracy theory.  This is real and it makes me ill.  Enough of listening to the chattering class and the media elite rationalize away the actions of the financiers who  they are in bed with.  Enough of letting these idiots telling us that the bonuses given to AIG executives is no big deal and a hyped up populist story because, well, its only 165 million and its the billions we should be worried about.  Thats supposed to make me feel better?

The elites leeched out a huge chunk of the profits over the last 25 years and now leave us with overvalued assets and a soon to be frighteningly devalued dollar.  That is not a very good combination.  And everyone just keeps sitting on their asses buying all of it.  And the few that dare to protest are marginalized as “populists” and engaging in “class warfare” (here is a fine example of that tactic).  And people just buy it:

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

At what point do people fight back?  There is an old french saying, “Cet animal est tres mechant; quand on l’attaque, il se defend.” Translation: “What a wicked animal; when attacked, he defends himself.” Is that what we’re afraid of?  Looking bad? Angry when defending ourselves?  Is that it?