"Breaking up the Banks" becoming Mainstream?

A member of the Federal Reserve Bank, Richard Fisher, has said

A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system's stability -- the so-called too-big-to-fail [banks].

So, if anyone ever poo poos the intent to "break up the banks," inform them that a president of the Dallas, Texas Federal Reserve proposes doing just that. Referring to a more desirable international agreement to limit bank size, Fisher goes as far as to say

If we have to do this unilaterally, we should.

For Your Convenience:

• Contact the Broadcast Media
• Contact the US Senate
• Contact the House of Representatives

Sources:

Jim Hightower, Progressive Populist, May 1, 2010.

Americans for Finacial Reform

Rolling Stones writer, turned financial system truth-sayer, Matt Taibbi put it this way [1]:

There are about 1800 financial lobbyists wandering DC these days — I was physically bumping into these guys in DC this week in the halls of Hart and Dirksen — while the leading reform groups (like Americans for Financial Reform) have few if any. (AFR, as far as I understand, has no paid lobbyists and just a few dozen volunteers).

With the "Audit the Fed" legislation going to conference committee, where a one-time audit could be converted into a more routine process, now is a good time to support Americans for Financial Reform.

Sources:

1. Matt Taibbi blog post, "Balance in the Washington Post," May 8, 2010.

The Bernanke Challenge Continues

As former New York State governor Eliot Spitzer has said, George Bush's Federal Reserve Chairman Ben Bernanke wasn't only in a position of responsibility for overseeing Wall Street, Bernanke was "complicit" in the designs that allowed a textbook case of bubble expansion and collapse. Of course Alan Greenspan was complicit too.

Why is Obama re-nominating Bernanke to head the Fed? It's another outrage, and this time people need to act.

My most recent message to the White House:

Deeds not words. Withdraw Bernanke's nomination and nominate someone who has a record of siding with the interests of people over the corporate investment banks.

GLH Blog informs us that CREDO is calling for a no vote on Bernanke


For Your Convenience:

Sign CREDO petition, which urges the Senate to reject Ben Bernanke's nomination.

Contact the White House

• Contact the US Senate
  

Sources:

You Are What You Spend

Letter to the New York Times

A friend wrote the following letter.

To the editor:

W. Michael Cox and Richard Alm (“You Are What You Spend”, Feb. 10, 2008) do an admirable job of proving the very point they wish to skewer. Those of means, by the authors' very own measures, spend far less of their worth on what have come to be seen as life’s necessities. Moreover, using consumption as a surrogate for wealth is flawed logic; many of our society’s problems, whether related to health, economy, national security or environment, stem from our insatiable appetite. Equating consumption to wealth while ignoring savings and security is simply absurd.

I'm not sure what ticked off my friend, but it might have been this bizzare line:

Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

By their own measures, the rich are getting richer and the poor are getting poorer:

It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.

Cox and Alm go from bizzare to absurd. First they inform us that

The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year.

and ask "How could this be?" Most of us immediately think, "Debt" as in credit cards, and "No Money Down" sales. But NOoooo. Cox and Alm inform us these poor people are splurging via

sales of property, like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts.

Most poor people don't have cars. They don't have bank accounts. They live paycheck to paycheck, getting ripped of by check cashers and payday loan sharks.

Then based on the foundation of that logic, we are given the not so brilliant conclusion of Cox and Alm:

if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1.

The logic is sick. Besides, anyone who is familiar with comparisons of rich and poor know that "income" is not the correct measure to use. The more proper measure is "wealth." Rich individuals often don't have, or need, "incomes." They live off the returns on investments, capital gains, which Cox and Alm point out is not counted as "income" and which is taxed at a lower rate than income (can you say, "the system is rigged by the wealthy?"). Furthermore, the rich accumulate wealth over time. The poor are lucky to have a job and live paycheck to paycheck, no accumulated wealth.

Cox and Alm should be ashamed of themselves, but I doubt they have any clue what shame is. There is a time honored solution for this. It's called the guillotine; some heads are going to roll unless people like Cox and Alm wake up and do something to narrow the wealth gap.

For those who are serious about the subject of wealth inequality, I direct you to Edward N. Wolff, economics proffessor at New York University. According to Wolff

The bottom 20 percent basically have zero wealth. They either have no assets, or their debt equals or exceeds their assets. The bottom 20 percent has typically accumulated no savings.[2]

Whereas

The top 1 percent of families hold half of all non-home wealth. The richest 10 percent of families own about 85 percent of all outstanding stocks. They own about 85 percent of all financial securities, 90 percent of all business assets. These financial assets and business equity are even more concentrated than total wealth.

Mike, Dick: It's not about "income" or "consumption." It's about "wealth."

Let Cox and Alm, of the Dallas Federal Reserve, know how you feel by contacting the Community Affairs office:
Dal.CommunityAffairs@dal.frb.org

Let Cox and Alm know that you think they need remedial education in "economics" by contacting the Dallas Federal Reserve Director, Economic Education and Special Projects Sherry Kiser:
sherry.kiser@dal.frb.org

Let the New York Times know your views too:
letters@NYtimes.com

The Fellowship of the Pen lives.

Sources:

1. New York Times, Opinions, You are What you Spend, W. MICHAEL COX and RICHARD ALM
Published: February 10, 2008.

W. Michael Cox is the senior vice president and chief economist and Richard Alm is the senior economics writer at the Federal Reserve Bank of Dallas. With "chief" economists like Cox, it's no wonder the US is facing a financial sector melt down.

2. The Multinational Monitor, The Wealth Divide: The Growing Gap in the United States Between the Rich and the Rest, Interview with Edward N. Wolff, May 2003 - VOLUME 24 - NUMBER 5.

Who is Responsible for Subprime Mess?

First, I should say that some entities have broken laws. Their blame is beyond question. However, the entities on which I'm focusing are those that didn't technically break any laws. They still bear responsibility.

The case, in a nutshell, is that corporations are amoral profit-seeking machines, so it is expected that they will push the legal and ethical limits. As a consequence, you can't blame a dog for acting like a dog, and the same goes with Wall Street and loan originating corporations. Yet, if someone is bitten by a dog, the dog still shares in the blame, even if provoked.

Wall Street's blame is greater than the loan originators. By Wall Street I mean hedge funds, major banks, investment firms, bond raters and other enablers that kept moving bad investment bubble expanding. They helped create the bubble market, in part
by financing the local mortgage lenders. Wall Street should have known better. They were making wind fall profits, many knowing that investors in mortgage backed bonds were going to be left holding the bag. Some were stupid, but when you have your hands on major investments that can rock the nation's economy, being dumb isn't an excuse.

The loan originators were just operating day to day responding to the market created by Wall Street. Their reasoning, "The balloon is still expanding, I'll go originate another loan until I can't do so any more." Although many loan originators used unethical practices, so do car sales men.

The buyers share some of the blame, yet they are clearly price takers, many being forced to operate in a failing market. That is, if your job moved, and you had to move and buy a house, you were forced to do so, while Wall Street operators were profiting handsomely at your expense. When buyers wondered how they could afford the loans, the loan brokers reassured them. They were telling buyers, "this is just the way the market works now. It's been like this in California for decades. The rest of the Nation is just catching up. It's true that some buyers were speculating and flipping real estate, and they deserve more blame than typical buyers. Buyers were duped and forced to deal with a failing market.

And who let the market failure occur and perpetuate? The regulators. They are experts and should have known better than to let profit-seeking machines run amok with so much at stake. Even part-time hobbyists like me could see the disaster coming. Unfortunately, they profess knowledge, but were themselves duped by their own belief that the market is self-correcting. They're partly right. But they failed to consider that the self-correction could be like a plane self-correcting into the ground.

Now the bailouts come, and guess who will pay for it? Not the Wall Street insiders who were spending their bonuses last year on upgrading their Manhattan real estate from a $3 million dollar flat to a bigger flat with a better view. Not the regulators, one of whom named Greenspan has just written his memoirs and re-written history. Not the loan originators. The industry pawns have already paid once by being laid off, and are likely to be paying again, with the rest of us, in direct bail outs of "too big to fail" firms, like Citigroup, and paying in the form of not having government programs that widely benefit the common people (expansion and maintenance of national parks and museums, financial aid for college, improved health care, etc.)

That's the gist of it. But for those who are interested, there's more.

Robert Kuttner points out a contradiction about "free markets" in explaining why regulators should not have allowed this unfolding disaster to happen:

There were regulations on the books that the federal reserve refused to enforce because the Fed claims to believe in free markets, except when they go nuts, then the Fed bails them out.

In other words, the markets are free when the inside crowd is vacuuming in profits from the commoners, but when the self-correction comes, the market is no longer free, and the inside-crowd gets bailed out... by the commoners.

Economist Paul Krugman, who specializes in global financial stability and crises, recently wrote a column for the New York Times entitled, "Innovating Our Way to Financial Crisis."

First, Krugman gives us a sense of the magnitude of the crisis:

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

This time, market players seem truly horrified — because they’ve suddenly realized that they don’t understand the complex financial system they created.

Others, whom I could quote if I was more diligent, have said this crisis is ten times worse than the Savings and Loan crisis of the 1980s. We tax payers are still paying for that bailout.

Krugman explains the regulator's blunder:

... the problem was ideological: policy makers, committed to the view that the market is always right, simply ignored the warning signs. We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis.

Krugman continues, indicating that the regulators have still not learned their lesson:

Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation — but added, “I don’t think we’d want it the other way around.” Is that your final answer, Mr. Secretary?

I noted that this essay focuses on legal operatives. A potentially valid criticism of this essay is to assume that the whole damn affair wasn't fraught with illegal activity. Some have surely crossed the legal line, particularly in the mortgage lending sector. One is particularly noteworthy.

On the same day that the White House announced that President Bush is nominating California billionaire Roland E. Arnall to be ambassador to the Netherlands, the company he controls said it would set aside $325 million for a possible settlement of allegations of predatory lending tactics.

Arnall's company, Ameriquest Mortgage Co., is being investigated by regulators in 30 states. A $325 million settlement would be one of the largest ever in a predatory lending case.

You can read more in the July 29, 2007 Washington Post.

Another case was the lender "Countrywide." I had a loan with them once. They might have been the one who, upon buying my loan, or maybe it was selling it to another lender, failed to pass along the home owners insurance information. I received a notice from the insurance company that my premium hadn't been paid, and was no longer covered (had the house burned down at that point, I'd have been one seriously fucked individual). It seemed like a scam, because when I went to buy insurance, I had to pay a lot more than before... everything has changed since 9/11, and I think the commoners are paying for it... again.

Everyone interested in this subject should read Inside the Countrywide Lending Spree.

Barowers are being scapegoated. This essay is an attempt to mitigate that misplaced blame. A lot of the innovated lending products were complicated and misrepresented by brokers who bore no risk because they either never owned the mortgage, or they sold it to be bundled with other loans as a mortgage-backed security (bond). This time around, we need to learn the lesson of the S&L scanals. That is, it was three scandals. The first was the Congressional deregulation scandal. The second was the corporate run amok scandal. The third was the Congressional bail out scandal. Lets bail out the duped home buyers, but not the profit reaping inside crowd this time around.

Sources:

This essay was inspired by an interview of Robert Kuttner by Robert McChesney,on the December 2, 2007 episode of the radio show Media Matters. Dr. Kuttner is a founder of the American Prospect Magazine and author of the recent book, "The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity" (Knopf, November 2007), which goes further into these issues.

Fed Bends Rules for Monopolistic Insiders

The bigger they are, the more monopolistic they are, and the more protection they get from the Federal Reserve. What's wrong with this picture in a competitive "free market" economy?

An August 24 CNNMoney.com article, "Fed bends rules to help two big banks" reports:

August 20 letters from the Fed to Citigroup and Bank of America state that the Fed... has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates.

The Glass-Steagall Act, following the 1929 stock market crash, separated investment and commercial banking. It's claimed that Glass-Steagall worked for many years, but then became "anachronistic" as the financial sector modernized. "Commercial banks watched their market share of U.S. financial assets erode from nearly 50% to less than 32%." "Mutual fund assets grew 24% a year while [commercial bank] deposit growth has averaged just 3.4%." These comparisons in a March 1998 article by Nicole Olmstead Coulter are true, but one has to ask if the "modernization" was all healthy in the first place.

Experience suggests that the so-called "modernization" of laws is actually the rigging of arcane rules with the intent of making profits for the sector funding the lobbyists making the "modernization" pitch, and campaign donations, to the US Congress.

Coulter continues, "Through securitization, investment banks have taken away some of banks' traditional markets." "Increasingly, consumers demanded higher yields on their investments." Which could be followed by, "regardless of any underlying fundamentals." Who doesn't want more return? But should we do so if it is predicted to create boom/bust cycles? One can argue that, while in some ways securitization is beneficial, the greed-driven market is designed to drive "securitization" to the brink, as we are now witnessing the effects of runaway morgtage securitization. Cow manure has legitimate value as fertilizer and soil enhancement. Imagine warehouses of bullshit bundled and used as collateral for bonds (it probably exists).

The larger point is, however, that huge commercial banks can become huger if allowed to enter the brokerage business. In 1987, banking laws (Section 20) were changed to allow commercial banks to have subsidiaries that could offer investment services. By 1997, banks had successfully lobbied Congress, and Clinton, to allow banks to underwrite up to 25% of the subsidiaries' revenues. This "essentially wip[ed] out barriers toward bank acquisition of investment banks and securities firms," according to Coulter.

The merger and acquistion flood gates opened. The consolidation reduced diversity in the market place. The big banks accumulated more influence over the market, until ... they began influence the market, and that by text book definition is monopolistic. To help mitigate this, a limit on funding is still supposed to exist between commercial and brokerage operations. But, today's fiscal crisis is so bad, the Fed just bent the rules, proving my point. They can't let the big ones fail, because they too strongly influence the market.

The little ones? Too bad; the market isn't rigged to help the little guys. It isn't really a free market, and we all know it. A growing question is, given that the market is rigged, why don't we rig it to generate broader benefits rather than to enrich a few?

Sources:

CNNMoney.com article, "Fed bends rules to help two big banks", August 24, 2007.

Registered Rep, "Bank/Brokerage Marriages," Nicole Olmstead Coulter, March 1, 1998,

Main Street Economy vs Wall Street Economy

Oh, the economy is doing great. The Dow Jones Average just passed 13,000.

Another interpretation has it that the US Federal Reserve is facing a crisis, and that the Dow Jones is a reflection of that. Seems like a conundrum until one considers the following chain of events.

Back in 2002 the stock market took a dive. A lot of money ran out of stocks and into real estate, swelling a speculative bubble of historic proportions. Now, the real estate boom is deflating and is causing defaults among home owners, mortgage companies and global anxiety reflected in a worldwide stock plunge back in March 2007. The Federal Reserve stepped to buy bonds, thereby pumping money into the banks that sell the bonds, which in turn put some of this into stocks, and Voila! Wall Street economics look great. Unfortunately, it's artificial, and the people on Main Street aren't sharing in the so-called great economic situation.

Worse, the Fed is stuck between an rock and a liquidity hard place. This is a new version of "stagflation." The Fed wants to tighten money supply due to inflation concerns; however, it's forced to increase money supply for the reasons described above. In other words, the economic situation is out of control. Add on top of that the global imbalances in which the US has become a major debtor nation with a weak tax base by which to service its debt, and the Wall Street economic indicators start to look pretty hollow.

Update:

On May 6, 2007 we read the following in an Associated Press article:

Still, worries linger about stagflation — slowing growth amid soaring prices — and what the Federal Reserve would do about it.

We also read the following, which reflects the disconnect between the Main Street Economy and Wall Street Economy:

Recently, it has seemed as if nothing can derail the stock market's climb....on Friday, reports that Microsoft Corp. might be mulling a buy of Yahoo Inc. nudged stocks higher despite lackluster jobs data.

~

Is Stagflation Making a Come Back?

"Analysts said the central bank (Fed) appeared to acknowledge it is in a bind, caught between an economy being dragged down by troubles in the housing industry and stubbornly high inflationary pressures." - A recent AP article.

Although many people view the U.S. Federal Reserve as being at the center of power, its power has waned over time. What happens when the Fed "turns the knob" to control the economy and nothing happens? Well, first, the mythic power of the Fed is shown to be.... er, mythic. Second, people and institutions get nervous about the economy. And third, these same people and institutions quickly forget about their nervousness and continue to exhibit signs of "irrational exuberance;" they continue to move money around in speculative activities that are disconnected from reality as described in John McMurtry's The Cancer Stage of Capitalism.

It isn't really news that the Fed's breaks and accelerator have gotten mushy lately. In addition to the phrase "irrational exuberance," coined by former Fed Chairman Alan Greenspan, is the word "conundrum," which has meaning in this context. It's a fairly simple concept. (Conundrum1)

When someone invests money to make a profit, say on bonds that pay back at a certain interest rate, their money will be locked up for a period of time (unless they back out and pay a penalty). A thirty-day bond locks up the money for thirty days, and a ten-year bond locks it up for ten years. The longer a person is willing to bear the inconvenience of having their money locked up, the higher the interest needs to be to entice them into such an investment. That is, longer term bonds (10-yr) should pay a higher interest than short term bonds (30-day). The "conundrum" voiced by Greenspan is that the bond yields were reversed fairly often during 2006 (long-period bonds were paying lower interest than short-period bonds). This is also known as an inverted bond yield curve (here's a good site that shows the yield curve changing over time). Despite trying to control this, the Fed seemed powerless.

Now the Fed has another conundrum (Conundrum2). Usually, the Fed "controls" the economy by adding or removing dollars; more available dollars means more economic activity, which in a healthy economy translates into more jobs (but more potential for price inflation, AKA an over-heated economy). If the Fed provides fewer available dollars, it helps to bring down price inflation, but this reduces economic activity. In simple terms, the Fed strives to control interest rates at which money is borrowed; lower interest rates means more money is likely to be borrowed and thus fuel the economy (and inflation); higher interest rates means less money available, and prices should come down.

What happens when the economy is not doing well, but at the same time price inflation is going up? The Fed might be tempted to pull dollars out of the economy (increase interest rates) to control the inflation, but this will also further dampen the economy and put more people out of work. If the Fed tries to do the opposite, put dollars into the economy to stimulate the economy, inflation will go up. This situation is known as "stagflation;" the economy is stagnant, but at the same time there's inflation. It's a counter-intuitive situation in which the Fed has lost control in terms of Conundrum2, even assuming Conundrum1 isn't in effect.

Today, both conundrums seem to be in effect: We are facing stagflation (Conundrum2), and when the Fed turns its control knobs, nothing happens (Conundrum1).

The reason for all of this, I believe, is simple. The economic system isn't healthy, which is different than saying the economy isn't healthy. Our corporate free market system has allowed obscene amounts of wealth to be concentrated into a few hands, and the money is stuck there. In a healthy economy, the money moves around, in and out of every one's hands, even the little people who are not part of the inside crowd. We are witnessing the failure of trickle-down economic theory, or worse, outright corruption among the wealthy political elite. Either way, the signs of failure are emerging.

There's much more to this story, and we will watch it unfold in terms of an unraveling economy starting with subprime mortgage defaults that bring down corporations and institutions that have invested in real estate financial instruments. The challenge of this time will be for society to rise to the occasion and re-define the economic system so that it becomes a healthy one.
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