Are Derivatives the Real Problem? Roger Ehrenberg
Judge approves BofA settlement with SEC Financial Times
Greece threatens more than the euro Gideon Rachman, Financial Times
Greenspan, Friedman and Summers win Dynamite Prize in Economics Real World Economics (hat tip Richard Smith)
Banks Apply Pressure to Keep Fees Rolling In New York Times
COULD IT BE THAT THE BEST CHANCE TO SAVE A YOUNG FAMILY FROM FORECLOSURE IS A 28-YEAR-OLD PAKISTANI AMERICAN PLAYRIGHT-SLASH-ATTORNEY WHO LEARNED BANKRUPTCY LAW ON THE INTERNET? Timothy McSweeny (hat tip reader John L)
The doomsday cycle Peter Boone, Simon Johnson, VoxEU (hat tip reader John L). Today’s must read.
Antidote du jour:
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Re – “the doomsday cycle”: everyone keeps talking the same talk, but nobody is listening.
We’re all on the Titanic, and we’re all aware that there is a huge iceberg out there, we know how the movie will end, and still nobody cares.
I suppose everyone is hoping to be among the few survivors, floating on the surface of the ocean, but blissfully ignorant there will be no rescue team this time around.
I have been searhing for juice on the Pimco lawsuit – only dry holes.
Does anyone have anything worth reading?
Re: Doomsday Cycle
I almost wish something would happen, like NOW. I was warning my friends about the impending great meltdown months ago and now they are coming back to and saying stuff like, ” see? the economy is recovering”, “everything is getting back to normal”, “you should see a shrink and get something for those paranoid fantasies you have” etc. etc.
Fkn blow up already!!
The doomsday cycle
Messrs. Boone and Johnson
The post is informative but internally contradictory. While decrying the failure of regulators you turn around and call for more regulations. While decrying the value of state planned economies you turn around and call for more state regulations. While decrying the ability of our systems to handle hardship you call for even greater regulatory systems. Why can’t regulators stop regulating?
“Given the inability of our political and social systems to handle the hardship that would follow economic collapse, we rely on our central banks to cut interest rates and direct credits to bail out the loss-makers.”
Well, really who knows if our systems can handle the hardship? The PTB (powers that be) will not permit our systems to function out of a fear that economic failure will cost them their PTB status. When system options are routinely excluded it then appears that bailouts, zero interest rate policies, direct and indirect subsidies and more ineffective regulation are the only tools left.
“We need quite different and much more focused policies. These policies must be implemented across the G20, with international coordination and monitoring. Otherwise, financial services will move to the least regulated parts of the world, and it will be much more difficult for each country to maintain a tough stance.”
Geez, why stop with the G20? Why not impose them on the intergalactic banking system too? If the US and UK implement appropriate policies and require them to be followed by any foreign bank who wishes to participate in the US and UK economies then their policies will get implemented. Trying to create and impose a new regulatory scheme across the G20 would result in a regulatory scheme with the value of teats on a boar or dissolve in a storm of hubris and never see the light of day.
“Once shareholders have a serious amount of funds at risk, relative to the winnings they would make from gambling, they will be less likely to gamble. This will make the job of regulators far easier, and make it more likely our current regulatory system could work.”
Well, of course! And once that policy becomes clear because banks and financial institutions are permitted to fail we won’t need a new intergalactic financial regulatory scheme. We won’t even need one across the G20 or G7 or G2 for that matter. Let the damn institutions fail for crying out loud!
“Second, we need to make the individuals who are part of any failed system expect large losses when their gambles fail and public money is required to bail out the system. While many executives at bailed-out institutions lost large amounts of money, they remain very wealthy.”
Regulators never learn. DON’T BAIL THEM OUT! The system will survive and be stronger for it. Will there be serious pain getting there? Yeah, you betcha! But look at the title of this post: “The doomsday cycle”. Think there won’t be pain regardless?
“Third, we need our leading fiscal and monetary policymakers to admit their role in generating this doomsday cycle through successive bailouts. They need to develop solutions so that their institutions can credibly stop this cycle. The problem is simple: most financial institutions today have now proven too big to fail, as our policy-makers have bailed them all out. The rules need to change so that creditors do not expect another bailout when the next crisis happens.”
Ahem. To repeat, you cannot change the rules and hope for better behavior. We’ve had rules in place, the authors note how the regulators have failed – not the regulations. So changing the rules accomplishes absolutely nothing except giving taxpayer financed jobs to a few lucky regulators. Just let the damn institutions fail for crying out loud!
“There is no doubt that the regulatory environment is going to be tougher for the next few years. But nothing has changed to make us believe the regulatory system will succeed this time, when it has failed so enormously – and repeatedly – in the recent past.”
So why do the authors persist in calling for more and more regulations? Apparently the authors are no better than a carpenter who sees every problem as a nail to be struck with a hammer. Regulators see every problem as requiring more and more extensive regulations. Yet the whole gist of the post is to identify not only the regulatory failures but the failure of regulations period. The authors decry the expected failure of Basal 3 – just as Basal 1 and Basal 2 failed – yet then they proceed to call for more regulations and across the G20 to boot. When will regulators recognize they cannot regulate failure out of existence? Note that financial institutions are not too economically big to fail they are too politically valuable to fail. And you can change all the regulations in the world and nothing will come of that.
What is needed is an Occam’s’ Razor approach to financial regulation. Let the institutions fail. Cap their size. Any direct or indirect subsidy to a minimalist (take deposits, make loans) bank only. To implement this scheme with effect simply force one or more large institutions (C, GS, BA) into involuntary failure. That’ll get their attention.
It will? LEHMQ (formerly LEH = Lehman Brothers) was forced into involuntary bankruptcy. C, GS and BA’s only response was to double track their mineshaft tunnels into the Federal Reserve and Treasury vaults.
r.e. The Doomsday Cycle
Once shareholders have a serious amount of funds at risk, relative to the winnings they would make from gambling, they will be less likely to gamble. This will make the job of regulators far easier…Second, we need to make the individuals who are part of any failed system expect large losses when their gambles fail and public money is required to bail out the system. While many executives at bailed-out institutions lost large amounts of money, they remain very wealthy.
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These bank “employees” obviously need to be moved much closer to the partner status of the olde tyme Wall Street investment banking firms. Maybe it’s unnecessary to revert the companies to the old partnership form. Just require executives to maintain 90% of their net worth (above a very nominal figure) in the form of their company’s common stock.
Last night I was reminded that parents can only shield $44,000 in assets other than a primary residence under Federal student aid guidelines. That number sure works for me for bankster asset exclusion.
This should certainly be done with anybody exerting decision making authority over risk-bearing financial transactions.
We can copy some other pages from the past. i.e. bank holding companies could loan newly promoted and hired executives the money needed to purchase their stakes. The Old Tyme brokerage and investment bank partnerships did this. Just legally classify this debt the same as federal student loans. Make it lifetime and undischargeable in personal bankruptcy. If married require the spouses to co-sign and co-commit.
This should be done in conjunction with “tripling” core capital requirements. I think most other external “regulation” will be found unnecessary. People with these stakes on the table will regulate their business infinitely better than some disconnected federal bureaucrat.
p.s. Forcing executive level employees into major common stock positions will also focus their attention on long term equity values. The character of the most senior employees’ retirements will then become identical to non-employee stock holders’ current outcomes.
Prohibiting all discretionary cash distributions – a/k/a “bonuses” – other than common stock dividends will give them a leg up in taking care of the stock holders equitably.
Equity stakes are insufficient. Both Bear and Lehman had high executive and employee stock ownership. The average Lehman managing director had over two years’ of pay in holdings in restricted stock.
In partnerships, the owners have unlimited liability. That focuses the mind. Don’t see how we get to a situation that readily approximates that. The next best thing is changing the rules so criminal penalties apply for various types of fraud, and much bigger enforcement budgets.
In partnerships, the owners have unlimited liability. That focuses the mind.
If you re-read my two root posts you’ll see I intend to focus those minds even further.
Let’s take everyone’s favorite investment bank, GS, as a practical example here. 36,200 employees, 514 million shares outstanding, current price 158.45 = $81 billion market cap. The top 5% of employees can be reasonably described as really “responsible”, or 1,800 employees.
Require this gang of 1,800 to hold at least 25% of the company equity. That’s an average of $10 million of equity each at current prices. And do not allow them to put their personal wealth into other diversified forms of equity. For them G/S is “it”. If GS goes under they (and the trophy spouses frequently egging these people on) go with it to lifetime pauperdom.
In the old daze when you and I were kids (late 1960s and before) the old tyme brokerage and investment bank partnerships frequently had to “loan” newly promoted partners enough to buy their partnerships. We can resurrect this practice to provide newly promoted executives enough to buy a miniumum required equity stake in common stock. Make these “internal” loans undischargeable in personal bankruptcy, same as federal student loans.
Personal pain has to be reconnected to risk taking enterprise that fails.
The next best thing is changing the rules so criminal penalties apply for various types of fraud, and much bigger enforcement budgets.
All I see in this is a vast and paralyzed GOSPLAN reemerging. I disagree that external Federal regulators can possibly improve anything in the absence of personal interest by the regulated. They will simply constitute another layer of irresponsible bureaucracy. It’s a myth that federal regulators remain neutral. The more common experience is they develop their own agendas.
Your call for enhanced budgets reads good. I can say it won’t happen because it already isn’t happening. There is immediate return available in investigating and prosecuting real estate and mortgage fraud in the major disaster areas, such as South Florida and SW Florida. Unfortunately the US District Attorneys in Florida, and the local FBI offices, lack resources. Neither Mukasey or Holder have displayed any genuine interest in this area in terms of resourcing.
Why? I think it’s because the few major cases so far taken before federal grand juries all resulted in indictments of attorneys along with developers, real estate agents, mortgage brokers and bankers.
I agree with your points. I think we forget that it is a “Profit AND LOSS” system. If I get other forms of wealth (bonuses) that are not tied to the survival of the company (or the company survives no matter what)…well, what should we expect. Being greedy, I would behave just as GS executives have behaved.
But the question is: how is it that we have come to a world in which Fresno Dan ethics predominate? (FULL DISCLOSURE – Fresno Dan fervently believes pole dancing should be an olympic sport).
Re: Doomsday Cycle
Boone and Johnson were very weak on one point. This was identifying mechanisms for making corporate bankster managements truly responsive to the “shareholders”. Motors Liquidation Company (ie the “old” GM Incorporated) and the episodes of Carl Icahn and E. Ross Perot show how deeply entrenched and resistant corporate managements can become, despite obvious dire conditions.
Put simply, bankster managements’ total financial lives have to be chained to the corporate ship, just like Ben Hur and the other galley rowers before battle.
Ian Welsh, who got the current crisis right, foresees a very unpleasant future for the U.S. and, while we can change it, he doubts we will. Unfortunately, I think he’s right.
Thanks for the link to the Rachman piece
It’s sobering to be reminded of the fragility and complexities of the Euro and the EU.
In the 70s, the long-term demographic curve began its natural deceleration, and, instead of adapting the structural demographic acceleration economy, capital jumped the safeties, as it always had within the sub-periods, to force continuation of the status quo, this time employing its new tool, the computer, to both ensure maladaptive demographic acceleration and subsidize supply-side economics to feed it.
As the deviation between human behavior and planetary expectations grew out of control, humanity’s options for corrective action were rapidly eliminated, from the low-cost middle of the distribution out, leaving the two tails, as it always does, to capital’s constant surprise.
The half-life of human cultures grew shorter and shorter as demographic acceleration approached the tipping point. The computer accelerated deviation at the tipping point, creating a bimodal distribution, a large population that complied with capital supply, and a smaller population that complied with evolutionary demand.
Humanity has once again converted the ac wave into a dc switch, just as evolution designed; it can either develop a quantum solution to deliver the expected results, a bridge, which it has done every single time in History, or the bimodal distribution will cleave, speciation will begin, and humanity will perish, quite rapidly due to its large relative effect on planetary economics.
The mythology circuit, then, is two curves, separated by a psychological bridge, a special type of transformer, a vortex; the circuits remain physically separated, which is why capital doesn’t see the bridge. All capital ever sees is stupid little small labor, constantly building curves to nowhere, until a population on the margin takes the curve and disappears. Capital doesn’t understand the process, but it knows enough to build a physical bridge to capitalize the process.
From the perspective of small labor, it spends very little “time” in the capital circuit, prototyping curve building block components. Big Capital employs a self-fulfilling, linear array, education process; small labor does not.
A general PLC, specialized for the application at hand, with parallel circuitry for both external and process control, with the required feedback adaptations to reach resonance, is best. Sell the stripped specialized PLC to capital after use. (small labor lets capital steal it).
The mythology circuit has three components, two curves and a bridge. Once you have a source of gravity, you can get from A to B much faster than direct transport, making distance / time relevant, and the universe is literally littered with gravitational masses.
(The big secret to Big Capital mythology lies in that black box. Whatever you do, do not open that black box. Pay an agency expert on black boxes to give you a suitable opinion. That way no one is liable. Start with … A global synthetic economy, run by global cartels, with no recognized counter-parties, cannot, technically, default and end with the disclaimer … not responsible for acts of God. Gotta love the irony in unenforceable contract law.)
Talk about noise in the circuit!
Obscurantism seems to be alive and well.
Brevity is not just the soul of wit, it also ought to be the goal of blog posts – I mean authorship.
And kevin, I am afraid that you are not on Truth Mountain, which is the last peak of clarity’s chain, IIRC.
the more I learn, the less I know.
Please then desist from attempting to instruct us.
are you bound to a chair, with toothpicks opening your eyelids?
ask Yves to delete my post, or simply skip past it.
A lot of people, who have never experienced a rip current, are just starting to feel the undertow of the approaching tsunami.
It’s tough time to learn how to surf, especially with a ‘tude, but you’re in the right place, and that’s half the battle.
Maybe you will think better of me when you get a really good look at that wave.
Maybe not.
Apologies, kevin: that was too harsh.
By way of a make-up, here’s some pre-science wisdom from one who had been an actual factual slave, and which may serve to fortify you against similar off-the-cuff comments in future:
“Be not diverted from your duty by any idle reflections the silly world may make upon you, for their censures are not in your power, and consequently should not be any part of your concern.” – Epictetus
Who dat? For more:
http://en.wikipedia.org/wiki/Epictetus
Big Capital is adapted to steal ideas from the individual, run the idea up to flag, and destroy the individual, before capitalizing the idea. Big Capital will stand in one place, all day if it must, to catch a taxi, to go one block. Provide it with a taxi that will take it to a location where a gravitational mass will be useful.
Its response is an attempt to eliminate all such taxis, which drops its voltage to 0. The practical process is like that cartoon with the coyote and the sheepdog.
If money is an issue, build tool components for small sharks, which the big sharks will subsequently eat, and collect trump, until funding is no longer an issue. Monetary requirement determines layer, unique capability determines location, and traversal depends on personal preferences over time.
By far, most customers are randomly jumping, looking for an isolated tool to complete an isolated task. The next level of customer is traversing the circles, and crossing the bridges, to collect a set of tools to complete many tasks in a general area of interest.
The top-level customer rotates the circles to add extensions to primary tools, to generate sufficient power to drive an entire economy, on some scale. You want your tool to be interoperable. That’s two dimensions. There are actually many dimensions, parallel helices.
The Internet is a simple prototype bridge, initially designed to reduce the cost of mobility, which is rapidly being capitalized into another cartel tollbooth. That’s the nature of the process.
The problems at Toyota have been reproduced, by executives no less.
Now, we await to see if the problems with GM are brought into this, along with the trains and airplanes, etc.etc.etc.
… or did Toyota just get thrown under the bus as a scapegoat?
It gets ugly in a dead pool.
The fundamental problem with those PLCs is that it is not possible to pre-program all possible conditions. There is no mechanism to return manual control once an unknown condition occurs, the necessary equipment is no longer there regardless, and each vertical organization has its own non-interchangable system, with arbitrary access codes, to maximize proprietary profit.
As a result, anything with a PLC is a loaded gun pointed at the consumer, and most everything has a PLC in it now.
“Drive by Wire” irony everywhere.
And dat be why me studie it…lol.
Skippy…try telling your Capt whilst the Brigade General is standing next to him that the 120mm dragon ATW is showing pink on the humidity indicator and firing it could get interesting….and it did…ROFL.
Fire that weapon!!! whee!!!
placing the plc in series creates many to many relationships. circuit boards also have heat dissipation problems in the best of circumstances, and with specialization, the programmers have no idea how the execution of the program affects heat dissipation.
I walked into an elevator once that was trying to go up, down, and change speeds, before the door had closed.
A few months back, an elevator took a call up and left the doors open, and a humanoid walked in. It wasn’t pretty.
We live in a world of experts, and expert systems have only one possible ending. Whatcha gonna do?
I bet you could slap a $1 million consulting fee on that and sell it to somebody’s strategic planning group. Wouldn’t be the first time. :)
no. it would not be the first time.
I don’t mean to be snide, just good humored. There are interestingly creative images and insights in the stuff you write here.
I second that, as I did the other night. Good work.
Thrice
We are in the midst of a 21st Century Breakdown
http://theburningplatform.com/economy/21st-century-breakdown
I am still so pedestrian. When I read an essay like the one from VoxEU and it says something like ‘Raise capital requirements to 25% or 30%’ – I still wonder: WHERE is that kept? IN WHAT is that kept? Not in a mattress, so then, in what? So that it’s available to be lost/sacrificed/surrendered when the entity owning the capital goes belly up? If you go belly up and you owe me money, I don’t want your building or land or machinery, and I don’t want some paper asset that I have to find a buyer for – I want cash, currency, funds. So, where is THAT at?
exactly.
in another expression:
It’s all just numbers in a computer, verified by “authorities”, which makes it a perception.
Others here would know better, but I think last count was 3% of money in actual currency. It’s much easier to manipulate computer accounts, which is why the problem got so far out of hand so fast.
It was the ultimate too-big-to-fail, irresistable-to-pass-up, once-in-a-History opportunity.
Now, we mop.
what color has Greece chosen for its next currency?
IMHO we’re getting all wrapped up in a bunch of mostly meaningless esoteric crap. We’re just nibbling around the edges of our banking problem.
When all we have is a group of people using OPM, (depositors & investors) to take money from other investors & keeping much of it for themselves (bonuses) in the process. CDO’s, CDS’s, etc are simply used to facilitate this process. When all this money they’re taking from investors using other investors money, OIM, should be mediated into the real economy to improve standards of living for all instead of just bonuses for the plutocrat, fat cat bankers.
So what’s the solution? Take the money away from the fat cat bankers.
http://www.globalresearch.ca/index.php?context=va&aid=17732
Create 50 state banks. Does ND need or use the Fed? Probably not. They’ve got a $1 billion surplus. What’s the Fed got? Some national debt & MBS?
Then most importantly – GET RID OF THE FED!
I know it ain’t going to be easy, but neither was getting on the Mayflower with all your stuff & leaving England on a treacherous journey to God knows where. It all depends on how tired you are of putting up with the King’s $hit.
Until we get rid of the Fed & open 50 state banks, we’re pi$$ing in the wind.
Were is Andrew Jackson?
At the republican party party, Ron Paul won the straw vote to be their next presidential candidate. Wasn’t the establishment happy.
Those pesky kids again.
bbc is reporting on how gordon brown orchestrated a briefing campaign against his own finance minister after alistair darling predicted the “worst recession in 60 years” in the summer of 2008. i have a lot of respect for darling – one of the few politicians more interested in doing a good job than in promoting himself:
http://news.bbc.co.uk/1/hi/uk_politics/8533168.stm