bank reform

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From The Mouths of The Elite …

I am a big fan of the Financial Times. One or two of its contributors seem to get things right. But, periodically we come across a column or letter that exposes the thinking of the financial world a little too bluntly. Plus it’s always fun to follow the discussion when someone in that elite group responds to a column written by another of the group. It’s like sitting in a very expensive dinner and listening to dueling millionaires bemoan the price of expensive houses. Things are so bad they simply will have to give up the European tour this year. Oh my: that bad? They don’t get it. They have no idea how odd they sound. Especially given the recent history of their industry and its total ineptitude and reliance on the little people for its continued existence.

In that vein we have two examples.

Weighing in on the plight of Ireland we have a certain Peter Sutherland whose article appears on the comments page. He launches us, with all the required language of a very serious person, into a discussion of the need to renegotiate the EU-Ireland deal that provided bail out funds for that beleaguered economy. That sounds very reasonable to me, especially when I am told that the interest rate on the deal is 5.8% while the cost of funds underlying the loan is only 2.9%. That sounds like a very wide risk premium.

Or is it a premium for something else?

After being told that the need for austerity is self evident – Sutherland says “there is no denying the austerity required” – it emerges that he endorses a slightly lower premium in order to signal that we disavow moral hazard.

There’s that phrase again.

How often have we been hammered with the moral hazard argument? For all the talk about it, we would think that the important folks who worry would have eliminated its threat. The poor Irish are certainly now aware of their foolish reliance on moral hazard. They have to be punished both by harsh austerity with its loss of wealth, and now this premium on the bail out loan provided by other Europeans.

Naughty Ireland. Thinking it could fall back on the old moral hazard trick. How, well, despicable to take advantage of such an evil device.

This all sounds terrific. I, for one, want to root out the risks associated with moral hazard wherever I find it. Especially in finance, where as we now all know, moral hazard was the underpinning that helped turn Wall Street into a casino where the lads at those trading desks could play on regardless of losses, and make fortunes on the basis of knowing nothing, but how to game a tilted system.

With all Sutherland’s obvious distaste for the evils of moral hazard, and his earnest embrace of the hair shirt of austerity as a remedy for the crisis that it contributed to, you might be a little surprised to learn he is the Chairman of Goldman Sachs.

Yes. That Goldman Sachs. The one sitting right at the casino table benefitting from the very moral hazard he now seems to want to cry foul about. He is quick to impose extra costs on the Irish taxpayers. Remember how naughty they all were. He seems less quick to accept a premium on Goldman Sach’s cost of funds which are lower than they might be because investors expect Goldman to be bailed out were it ever in trouble. That market expectation is what we call moral hazard. Perhaps Sutherland should look into it.

Now, I realize that the events and revelations of the crisis revealed the extent of Goldman’s double, triple, and sometimes quadruple dealings, and its almost pathological willingness to profit from customer information, but for someone who is listed as its Chairman to be so baldfaced as to argue for an imposition his company is unwilling to accept, is stretching things a bit too far for me.

If moral hazard is rotten and austerity the just deserts for the Irish taxpayer, then they should be so for Goldman Sachs.

Then again the Irish taxpayers don’t have the same clout as Goldman Sachs. Nor are they as important – vital even – to the safe workings of the world’s financial system. So, come to think of it, Sutherland is right: we should double the premiums on taxpayers everywhere so we have a pile of cash to bail the banks out again when the bust the casino next time.

Yes. Right. No moral hazard there.

Meanwhile, over on the letters page we are treated to the sober insights of another very important financial person. This time it is Michael Mulhall, who is listed as being a Managing Principal, whatever that it is, at Capco here in New York.

His concern is the evils, not of moral hazard, but of collective bargaining by public workers, who as we all know are entirely responsible for the collapse of state budgets across the US. Were it not for these awful bargains the yawning deficits we are struggling with would never appeared. Great Recession notwithstanding. Mulhall is particularly irate about the possibility of a heinous extra New York state tax on incomes over $200,000, which is being relied upon to raise $10 billion to help fill the gaping state budget hole. Such a tax, he assures us, would drive rich New Yorkers to flee the state en masse. Presumably we should look for a Grapes of Wrath style exodus as they all pack up their limos and head to their country homes in a huff.

One of the more interesting habits the elite have when commenting on such matters is that they describe advocates of higher taxes as “well-meaning”. Never has there been a more derogatory word hurled in the current class war. Those of us who try to articulate ideas on behalf of the less well off are constantly being referred to as well-meaning. But, the implication is, we just don’t understand the vagaries and rigors of the wider world. At least not in the way that these important people understand them. Perhaps when we grow up we will. But, as of yet, our silly little heads seem filled with idealistic nonsense about fairness.

At the end of his little elitist homily Mulhall answers his own question.

The question: “What type of country will the US become should Wisconsin governor Scott Walker succeed in eliminating collective bargaining from municipal unions?”

His answer: “A fiscally more solvent, responsible, and affordable one.”

So there you have it. The elite speaks.

The conclusion appears to be that we need to hammer workers with austerity measures in order induce them to behave.

Behave more responsibly.

Once those workers are firmly underfoot the elite will be able to collect its rents, play at the casinos, and otherwise frolic safe in the knowledge that they can continue to afford their luxuries. Safe from having to flee New York. Safe from the risk that their investments might drop in value. And safe from having to concern themselves with the consequences of their own excesses. After all they will always have the workers to clean things up for them.

Above all, the financial system will be preserved for them to play within. And the preservation of that system of systems is the be all and the end all of sound policy. Sound policy, you see, must always focus on securing the safety and soundness of the things that worry the elite. No matter how unequal the national incomes have become. And no matter how indifferent the elite is to the plight of the rest of us.

You may not have known that. But now you do.

Addendum:

As I write this I am watching the devastation in Japan. Those poor people. Their troubles puts the rest we worry about into true perspective.

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Parenthetically

I am tired of all this nonsense about “banker bashing”.

What a bunch of losers.

What is wrong with beating up on the group who single handedly undermined the world economy? Nothing. They deserve all the opprobrium they get. And more. In fact they don’t get anywhere near enough.

The temerity of this self regarding and cosseted little group is astounding. Not content with destroying lives, countries, and families around the globe, they now want to be left alone to get back on with their alchemy as if nothing happened.

Frankly if someone argued for a return to the medieval punishment of a few days in the stocks I would be all for it. I can think of a few bankers – Jamie – that deserve a few rotten eggs across the beam. That is if any of us can afford to buy the rotten eggs.

And all this silly talk about quitting London or New York for more friendly locations is just ludicrous. Where would they go? And would they still want to shop in the West End or down Madison Avenue? It’s a long way from the Bahamas to the Hamptons, or those wonderful old houses in the Cotswolds. The whole point of being an elitist is that you can flaunt it and have access to the world’s best stuff. That isn’t in the odd little Caribbean island. It’s here in New York. Or it’s there in London. Plus, and this makes me wonder about their common sense, just where will they do business? It isn’t their great personages we are concerned with so much as their outrageous and dangerous activities. Last I looked that is all electronic. Which means it can be taxed here anyway. Come to think of it: they can all move, that way we don’t have to suffer their insufferable attitudes and swagger. Meanwhile we just double the tax on whatever they do. Wherever they do it.

Good riddance children.

Good grief. Grow up.

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Fact Based Thoughts

For all you worriers out there, and I know there’s quite a few, calm down. It helps to keep the facts in front of you and push those more vivid opinions to one side.

Take, for example, our debt. If you listen only to the opinions, you’d think we lived in a version of the Weimar Republic replete with wheelbarrows needed to move around the useless hyper-inflated currency that we all now own. Or, as Speaker John Boehner in Washington, and Governor Walker of Wisconsin put it: “we are broke”. Really? I wonder why the rates on US bonds are going down? Could it be that those hard headed folks out there who buy and sell our debt, and who stand to lose their shirts if they are wrong, don’t see something that Boehner and Walker do?

No it isn’t possible.

The fact is that the cost of US debt is going down at the moment because world uncertainty is driving investors towards US bonds. The rise in demand for our paper is driving down rates. No one, except for some rabid Republicans with an axe to grind, thinks we face an imminent debt crisis. No one.

Our debt problem is strictly a medium term issue and is caused by the deliberate reduction in government revenues resulting from the infamous Bush tax cuts that are now so hard to undo, and from our awful health care system that is on a trajectory to destroy us whether it is publicly or privately financed. The current crisis is cyclical and so any addition to our debt stemming from it will be contained as we start to grow again. Which is why getting people back to work, and thus paying taxes again, is so important. There is no advantage in getting corporate profits pumped up: big business avoids taxes like the plague. We need honest tax paying citizens back at work. Then our deficit will start to drop.

Muddling the two problems, short term and medium term, will inevitably mean we screw up the former and forget the latter. Unfortunately that’s where our opinion leaders are headed.

Likewise the banks. The fact is that they are not fixed. We are headed back into bubble land. The opinion leaders mostly voted against any hard-nosed fixes for the banks. Now they are all for debt reduction and austerity. Yet the need for austerity is a result of the bank’s foolhardy attempt to destroy themselves by engaging in anti-social and juvenile activities they didn’t understand. The facts tell us that we should never again allow Jamie Dimon and his confreres to play with matches. They are likely to blow us all up. The poor dears cannot help themselves. The taxpayer bail out of the banks may not end up costing us a lot directly, and the opinion makers like Tim Geithner keep harping on that as evidence we should all be pleased. But the facts say something else: the crisis and its enormous social cost is an indirect result of banker lunacy, greed, and regulatory capture. So the fact that we did not fix the banking system is the result of wrong opinions holding sway.

Similarly inflation. The more dramatic of our opinion leaders are almost apoplectic about an imminent burst of inflation. This, they say, is the inevitable result of the Fed’s easy money policy. But look at the facts. Core inflation, which is our best guide for the trend in inflation, is moving down, not up. Short term factors have masked that. Some problems are no doubt out there as worldwide demand rises rapidly to squeeze raw material and commodity prices. But nowhere is that a result of US monetary policy. And, besides, food prices are being driven by shortages due to weather. That’s not a medium term policy issue. It is a short term meteorological issue. But our opinion leaders want us to think we need to tighten and possibly risk our recovery, based on their opinion. No thank you. The facts support continued easy money until we get the economy beyond its current jobless phase. When wages start to jump, that’s when we tighten.

Judging by recent history, another awkward fact, that may be never.

Of course this all just my opinion.

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The Budget and Other Fiction

Rule one of US budget watching: the President’s budget is never, never, worth the paper it is printed on. It is more of a suggestion. It is a helpful guideline to lay down the boundaries within which the President tries to negotiate with Congress. If that Congress is intransigent, as it is an a big way right now, then even that limited goal becomes futile.

So, with that grim preamble, what do we make of the Obama budget released this morning?

Well it’s full of austerity moves. It has a few fairly lightweight and unnecessary so-called investments. And it will be forgotten as soon as the Republicans resume their attempt to use the debt limit as a bargaining chip with which to attack social programs.

And therein, as the bard once said, lies the tale.

From my perspective the Obama budget is lamentable simply because he has decided, once again, to play on the Republican party’s home turf. Rather than make the case for prolonging support for the economy, he has acquiesced to the idea that the economy is now sufficiently buoyant that we can start to set the government in reverse. We can, he argues, begin the retreat from the emergency measures and allow the market to dictate the next few years.

I have no idea what statistics he is using in this calculation, for I don’t see one strong enough to justify the shift.

Moreover, given that this budget document is useless, my suspicion is that the administration will now get down and dirty with the Republicans as they argue over precisely which domestic spending programs should be cut. Inevitably this implies hammering away at the sick, the young, or the poor. Call me cynical, but I doubt the Tea Party extremists who now boss the Republicans will settle for big cuts in offense spending, security, or anything else affecting guns.

And we already know that they are looking for a show down over that debt ceiling. For those who missed what this means: the US Treasury issues and maintains the US national debt within an upper bound set by Congressional vote. Normally raising this limit is not controversial. As the economy grows it is no surprise that the amount of debt also grows, so the debt ceiling has crept up over time. Add in the enormous jolt given to the debt by the recent crisis, and we have nearly reached that limit. This, of course, offers the Republicans a great opportunity to express their new found fiscal conservatism. New found because at no time during the Bush era when we were plunged into red ink by those infamous tax cuts, did anyone of any prominence on the right whisper a word about the debt ceiling.

That was then this is now. Right wing leopards do chan ge their spots.

Debt panic is a good vote catcher, and the Tea Party has rolled into town along with its ragtag mix of libertarians and general trouble makers. They smell blood. They hope to force the US government to shut down. That this would be a disaster for the economy – imagine the spike in interest rates – is apparently of no consequence. After all as their tactical mentor, Lenin, argued more than once: sometimes you have to burn the village to save the village.

Yes we are at that point.

And, no, I am not making this up.

We have now entered the first of what promises to be many confrontations that will extend all the way to the next presidential election. We are playing with fire. We might well muck up the recovery.

It is in this context that I evaluate Obama. He fails any test I can come up with.

His decision to move the game onto enemy territory and away from a defense of the weak is a shameful signal of his inability to conceive of an alternative economic strategy. His emphasis on investment in such things as alternative energy and so on is laudable. Or rather it would be were it not so business oriented. Yes he wants to cut out some goodies now flowing into the oil and gas industries – who patently don’t need our help – but the outcome from his approach is a long way off. He does little to produce help immediately for anyone who might have been called within his constituency.

Having muffed bank reform he is, essentially, punting on making headway on the real causes of our structural deficits: those Bush tax cuts, our over extended military, and health care.

So today’s kick off is not benign, it is malign. It gives away much of the game before the bargaining has begun.

Add in the almost complete lack of public support for substantial cuts in domestic spending and we are forced to conclude that all this huffing and puffing over the impending debt disaster only exists within the minds of our elite. It is their wealth under attack. They are, after all, the primary creditors of the nation. They are also the very group who rode the economy over the cliff. That they are now clamoring for cuts to the programs that don’t affect them is shameful, and would be inflammatory were the public more informed about where the budget money really goes. But, alas, the public is terribly ill-informed. A majority think that foreign aid is a major program. It isn’t. In fact the US is a derisory aid giver. A near majority don’t even know that Medicare is a government program. In survey after survey the voters respond that they would tolerate higher taxes in exchange for the protection of the major social programs, especially Social Security. In no survey I am aware of has there been a hint of support fro austerity.

So austerity is being forced on us all by the “experts”. Those in the know. Those who thought bank deregulation and a vast derivatives business would grease the wheels of commerce.

Yes those experts.

Worse: there is little or no evidence that the credit markets are running for the hills. Inflation fears are supposed to be a harbinger of credit market dangers.Much is being made of the rising spreads between inflation proofed and non-inflation proofed bond rates. That spread gives us a clear indication of inflationary expectations. And, yes, they’ve gone up over their low points of last year. In fact they have shot all the way back … to normal levels. For the US that spread was 2.4% a year ago, and is now 2.3%. Where in that trend is a panic over debt? Nowhere. But that doesn’t stop the hawks from banging the austerity drum.

So, instead of initiating a debate about our budget priorities, and instead of preparing us to have an adult discussion about why we continue to spend seven times anyone else on military stuff – is our military so bad that twice as much couldn’t do? -Obama has hurled us into a debate about which particular disadvantaged group should bear the brunt of the cuts.

Take your pick: children? The sick? The poor?

One of those has to carry the can for the banks.

Which one would you go after?

The Republicans say all three.

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All Change In Real Estate?

Lost amid the euphoric scenes coming to us from the Egypt was today’s release by the government of its suggestions for change in the structure of US housing policy. It seems that big changes lie ahead for the US housing market, with many of the results of those changes very uncertain.

The primary basic thrust is to reduce the roll of government in the market while beefing up regulation and setting standards for securitization, foreclosure, and underwriting to limit future recurrences of the recent debacle. The headline in all this is the the government is proposing to eliminate the twin towers of the old regime: Fannie Mae, and Freddie Mac are to go. These two organizations are now massive players in the market for mortgages so their reduction and then elimination will have to play out over a decade or more. Nonetheless the goal is to privatize the mortgage market. Depending on which of the three options proposed in the report that market will be almost entirely handed over to private capital, with only the original low income support function of the FHA remaining intact.

Another key goal of the changes is to limit the possibility of huge future taxpayer involvement in the mortgage market. The report makes clear that private capital should bear the brunt of any repeat of the recent crisis. Each of the three options has a different backstop roll for the government, but in all three there is a concerted effort to reduce the moral hazard embedded in the existing policy set up.

But perhaps the most radical change is the implicit shift in thinking: housing policy is no longer simply a question of encouraging maximum home ownership, the rental market needs sprucing up and support as well. Indeed the report devotes some space to the need to attract moire capital into multi-family rental housing to provide better options for the low income families who were teased into home ownership and who are most deeply affected by the shenanigans of the unscrupulous lenders behind the bubble. There’s even talk of getting rid of the mortgage interest tax credit to reduce the skew in national investment that long standing government support of home ownership has induced. This shift away from public support and encouragement of home ownership is a complete sea change in US policy and runs counter to the post war premiss that home ownership is the ultimate goal for the average family. Renting is now to be an equal partner.

What all this means is unclear. Plus there will no doubt be contentious debates ahead. Already some conservatives have waded in and called the report a fudge. They advocate, naturally, an even more restricted roll for government. Plus, given the ongoing fragility of the housing market no one wants to rush – except the libertarian wing of the GOP – but one thing is clear: the US housing market, the construction industry, the lenders, and its regulators are going to be put through a dramatic change.

My guess?

More expensive mortgages, especially for higher priced homes. Lower house prices, than otherwise, so gains from current levels will be limited. A shift towards renting rather than owning, or rather, a better mix of the two. Wall Street domination of the mortgage market. The abolition of the tax credit -which is really only welfare for the middle class. And more options for financing. Oh, and much, much, more fine print to wade through. That means higher legal and other transaction fees.

None of this is soon. But it’s on its way.

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