Steve Waldman makes some bold claims in tonight’s post:
In two recent Surowiecki posts (here and here), Surowiecki points out that during the banking crises of the early eighties and early nineties, banks were arguably as insolvent as our banks are today, but hey, with a little time and without any radical changes, everything turned out great….
The fundamental difference between my perspective and Surowiecki’s is that I don’t think those previous recoveries were real. My view is that the crisis that we’re in now is precisely the same crisis we’ve been in since at least the S&L crisis. We’ve had a cancer, with some superficial remissions, but fundamentally, for the entire period from the 1980s to 2008, our financial system in general and our banks in particular have been broken. They have profited from allocating capital poorly, from funneling both domestic loans and an international deficit into poor investments (current consumption, luxury housing) rather than any objective that might justify arduous promises to repay. We all got a reprieve during the 1990s, because internet enthusiasm persuaded many investors to fund our consumption via equity investment, which we could wash away relatively painlessly in a stock market crash. Debt investors don’t go so quietly. Thanks to the cleverness of our banking system, we have a very great many lenders, both domestic and foreign, who’ve invested in trash but who demand to be made whole at threat of social and political upheaval. That is the failure of our banks. That they are insolvent provides us with an occasion to hold them accountable, and to reshape them, without corroding the rule of law or respect for private property…
There are profound economic problems in the United States and elsewhere that our financial system has proved adept at papering over rather than solving. Those of us who’ve played Cassandra over the years have been regularly ridiculed as just not getting it, as economic illiterates and trade atavists. Unfortunately, as Dean Baker frequently points out, the people who could never see the problems are the only ones invited to the table when the world cries out for solutions. The solutions on that table are those Surowiecki tentatively endorses, weather the storm, take some time to repair, the temple is structurally sound. But the temple is not sound. We either build a decent financial system, or suffer real consequences, in unnecessary toil and lost treasure, in war and conflict over false promises set down in golden ink.
The banking crisis and the high unemployment rate are not the crisis, they are symptoms. This is not “dynamo trouble”, it is a progressive disease, and what is failing is the morphine. Those of us who believe that financial capitalism is a good idea, that it could be the solution, not the problem, do their cause no favors by resisting radical changes to a corrupt and dysfunctional facsimile of the thing. We need to approach financial capitalism as engineers, and to largely rearchitect a crumbling design. If we don’t, we may be so unfortunate as to suffer yet another superficial remission. But error accumulates, and error on the scale now perpetrated by national and international financial institutions are unlikely to be without consequence.
I’d love him to tease this out further, and I am a bit too fried to give this a long form treatment, but let me volunteer a few thoughts:
A very short and grossly simplified history of banking in the last 40 years is banks used to be tightly controlled, profitable, and not (for the most part) able to do much damage. For instance, deposit rates were regulated. Nevertheless, very creative banks nevertheless managed to get themselves in lots of trouble (Citibank and its buddies in the sovereign lending crisis, for instance).
The inflation of the 1970s created a huge mess for this model. Even with regulated deposits (and depositors were very unhappy with negative real yields and aggressively sought other cash-stowage options), many banks also funded some of their balance sheet in the money markets. You had spectacles like banks bleeding on their credit card portfolios (and remember, those yielded a lot better than a lot of other types of loans) because short term rates shot up to 22%.
Various aspects of banking were deregulated (deposit rates, usury ceilings,interstate banking, the division between banking and securities was chipped away at over years, with the playing field pretty much open before Glass Steagall was formally abolished in the late 1990s).
But the interest rate volatility was and still is a real mess for banks. From what I can tell, the hedges (using product design to put more of the risk back on customers, explicit hedges, astute asset liability management) only partly remedy this problem. In an increasingly competitive environment, my impression is banks have not been able to extract enough additional margin for assuming this risk. Anyone know of any work in this area?
Second is that investment banks ate commericial banks lunches for a very long time. I read from time to time that the reason securitization became more prevalent was that banks felt it was less attractive to hold assets on their balance sheets, i.e., this was an opportunistic move.
While technically, that isn’t wrong, that isn’t how I’d frame it. I recall when I was at McKinsey in the mid 1980s and securitization was taking off that one of the standard charts showed banks that securitization was cheaper than on balance sheet intermediation due to the cost of bank equity and FDIC insurance. That was seen as a bad thing for banks back then because it meant they were losing market share big time to investment banks.
Third is bank consolidation proved to be a very bad idea, and I see NO ONE addressing this issue. It isn’t simply because it created huge concentration and too many too big to fail banks (a lot of countries have highly concentrated banking systems, such as Canada and Australia, but their banks are kept on shorter leashes).
The reason is that bank consolidation delivers NO economic benefits. The big lie is big banks are more efficient. They aren’t. Every study ever done of banks in the US has found that once banks reach a certain size threshold, they exhibit a slightly increasing cost curve, meaning they are more expensive to operate.
But you might protest, when those banks buy each other, they may big noises about cutting costs. Right. They could have taken those costs out without a merger. It just gave cover for measures that would be too painful to execute in stand-alone entities.
The real reason for bank mergers is CEO pay is highly correlated with a bank’s total assets (and the CEO of the acquired bank is enriched sufficiently to get his acquiescence).
And worse, big banks have completely abandoned the notion that the knowledge that local managers have by virtue of being in a community (in terms of improving lending decisions) has value and can be leveraged. Instead, they all went full bore for FICO and other faux-science credit scoring models, and have perilous little to fall back on now that those have proven to be badly flawed.
I do think Waldman is on to something here, and hope his post elicits further comment. I’d be particularly curious to see John Hempton pick this one up, since he keeps defending the native earning power of US banks.
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My father worked for the Coc during the 80’s. He couldn’t believe that anyone would want to BUY and securitized mortgage.
On selling them, he was also less than thrilled. Why, if you believe it was a good loan, would you sell it?
I heard about this when I was young. He spoke of banks that when they had to sell loans, sold the best they had, in order to maintain the reputation of the bank among its peers.
What happens when they don’t have peers? Or equity?
My favorite line from him I have repeated several times before here- Don’t buy bank stock, put your money in the bank, its much safer.
He also added that if you had enough money in the bank, soon enough you could end up as an owner of the bank anyway, at a much better price.
Buffet clearly seemed to subscribe to Surowiecki’s view during this marathon CNBC interview. Obviously, Buffet is talking his book. But Geithner et. al. seem to have embraced the idea that with interest rates so low and spreads so wide, banks will have tremendous earning opportunities in the next year or so (despite the McKinsey report to the contrary), and that if Treasury gives the banks enough capital to tide themselves over, they can earn their way out of their holes. Hoping your problems will go away is not a policy. And we do need to fundamentally reform the banking system. Hopefully Obama will start listening to Volcker (assuming Summers doesn’t completely marginalize him).
http://hedgedbet.blogspot.com/2009/03/buffet-hints-at-geithners-plan.html
Hempton won’t pick up on Waldman’s theme because he doesn’t see or care about the issue raised. Hempton’s (and Geithner’s, Summer’s, Bernancke’s) principle concern is restoring the financial system status quo, making sure all debt holders are kept whole even if it impoverishes the debtors, and profiting on the rising share prices of re-capitalized banks. It’s a great trade for folks with money.
Waldman, Simon Johnson, Chris Whalen and others are primarily concerned about something else – restoring integrity and transparency to the financial system and clearing the enormous moral hazard the Fed and Treasury have wrapped around the system. That is hard work – it can’t be fixed by printing money – and is either beyond the abilities of Geithner and Bernancke or, more likely, they are so captured by the kleptocracy they will resist any real reform.
I have to laugh when wing nuts complain that Obama is a socialist. He isn’t even a progressive – picking Geithner and Summers proved that. A progressive would have folks like Joe Stiglitz and Michael Hudson on his team.
«I have to laugh when wing nuts complain that Obama is a socialist.»
Well, Real Americans obviously know better: he is upholding what they see as a regime of Communist terror and extortion with holdups like the minimum wage, and letting taxes on the productive, deserving Real Americans go back up to the punitive levels they had under Clinton.
«He isn’t even a progressive – picking Geithner and Summers proved that. A progressive would have folks like Joe Stiglitz and Michael Hudson on his team.»
My hope is that he is playing a long game. He probably knows that the first 2 years will be hell, so he has nominated all his best enemies to take the heat of those and get burned out.
Would you appoint your best team to get their reputation shredded and their stamina stressed out by being pummeled by the aftermath of 8 years of unrelenting Bushness?
He may hope that containing trouble in the next 2 years will burn out Gates, Hillary, Geithner, Summers and the other culprits, and then he will bring out when there is hope for a rebound and a chance to fix things instead of just trying to contain the mess.
The roots of the banking crisis founded in events of the 1980s fits with another important event. Abandonment of the gold standard in 1972. “The inflation of the 1970s created a huge mess for this model.” Exactly – once the discipline of the gold-standard was completely abandoned – simple bread-and-butter banking became a broken model – leading to all the distortions still seen today.
The perceived “failure” of the gold-standard since the 1930s is really governments breaking out of the money supply structures of the gold-standard. A breakout which produced a multi-decade credit-bubble boom, doomed from the beginning.
The 80s S&L event, was a miami coke dream that, after the first years high, ran into the manic stage of addiction or SDOs and their party friends. I still look at the tall piles of coke..I mean buildings in down town miami, as the power of one drug that still echos in time or the opening bell on wall st.
Grosse pointe…damm my batt score and that little white paper I signed in the accustic tiled room FTA.
“Mr Welch argues that focusing solely on quarterly profit increases was “the dumbest idea in the world”. “Shareholder value is a result, not a strategy,” he says. “Your main constituencies are your employees, your customers and your products.”
In other words, stock price is not the ‘purpose’ of the business.
Business schools have been teaching that shareholder value comes first since the 1980s.
And, I believe, CFO responsibility to shareholder value became the law. (the excuse for perpetuating the university teaching against all common sense)
The debate for regulation of stock options for compensation and violation of insider rules has begun. That’s my hope. For without it, now that gov is in on it (Citi exec insider gains on leaked info openly), the destruction of trust of America and its markets can only gain momentum with consequences for everyone, not just shareholders.
Welch’s statement could also mean we can look forward to the end of Congressional posturing about caps on compensation and get on with real regulation of stock options to eliminate short term incentives at the expense of economic stability and real value to consumers and workers.
Stock options for executive compensation is a conflict of interest and incentive for the legal looting as well as the 500X disparity in executive pay that has taken place the last couple of decades.
LeeAnne
So this is somewhat related.
If there is such an opportunity in banking why isnt there private capital being put together to form a brand new bank that is unemcumbered by the past.
Shouldnt it be able to go around picking up some bad banks and working them out OR grow organically by picking off the customers of the nasty banks?
Just curious why this doesn’t seem to be happening if the at an industry level the opportunity is so attractive.
The point about bank mergers is an excellent one, and one that not enough people are talking about.
It’s not just bank mergers but PE, and LBOs, that have created most of the entities being bailed out these days. From that perspective the governments activity over the last year starts to look more and more like a rescue of the LBO industry. Why is hard to fathom, but methinks invidious comparison is at the root of it.
It is beyond hilarious that the ‘market always knows best’ has become ‘there really is a ‘true’ value not reflected in the price’ in the mouths of the very same people and economic/political actors. The clear implication is that what we are really going through is the attempt (for whatever reason) to prop up investment values, and in particular, stock prices.
That is to say, to make the world safe for those who would become billionaires by buying and selling little strips of white paper.
Waldman is talking forest, but Yves is responding tress. Bit of a disconnect….
Interesting post for its broader perspective, more like this are needed that are even broader in nature …
The very noticeable shift in the past forty plus years has been politically driven and willfully intentional. And if one looks carefully it is more global in nature and effects all sectors of all societies … it is a shift from plain old fashioned vanilla greed to a newer more vile gangrenous elite greed … a shift in the ruling class from the driving force of the profit motive to the driving force of the control motive …
It is that shift in the ruling class that has caused the attendant societal motivation to be changed from one of desire and opportunity as the norm of the world’s zeitgeist, to fear and anxiety being the norm. That very intentional zeitgeist shift has been, and is now, meant to create perpetual conflict in the masses so as to effect a ruler and ruled world societal model.
Unsustainability of consumption and the role of increased population was recognized long ago. Those now in control have very skillfully acted upon those insights by hijacking and co-opting key components of world governments and societal sectors through deception.
We need to “rearchitect” a new system. It begins with removing the controlling ruling elite. But first the deceptions need to be exposed and we must deprogram from those deceptions.
Even at this point it is still possible to have a sustainable and harmonious world. It won’t happen if scamericans occupy their valuable time watching the deflective antics of Cramer and Stewart …
Deception is the strongest political force on the planet.
I on the ball patriot
If the banking system is sick it seems to have infected everything else and that makes forecasting especially perilous.
Yes, the banks COULD make a lot of money based on their interest spreads but to whom do they make these loans? A year ago oil and gas
seemed to be a sure bet. Building a natural gas pipeline from Alaska
to the US would’ve have been a sure
thing? Until… now. A Toyota plant
in Mississippi? Can’t miss, er, oops don’t need it anymore.
We’ve seen every hot thing be it housing, commercial construction, LBO’s, mining, drilling, LBO’s, ethanol, bio-diesel, railroads,etc. etc. go from best bets to total write offs in months.
You can’t make loans with the world in such chaos and have any assurance, absent government guarantees, that the project you lend money to today will be viable by the time it is completed.
I think Waldman is making a fundamental point, and here’s an attempt at teasing it out.
The economic rationale for banks arises from information asymmetry and the agency problem. In a nutshell, borrowers have the knowledge (about their own risk) and incentive to game lenders. Banks exist to obtain enough information about borrower risk to eliminate this asymmetry. For this act, they earn a profit.
Of course, you can argue that banks long ago gave up their ability to assess credit risk. Sure they credit departments, but these arguably have been taken over by “blind” decision rules and models. Essentially, credit departments, in competition with securitization, decided that if you can’t beat them, join them.
The result was chronic mis-allocation of credit. The more that the growth in leverage pumped up the economy, the more mis-allocation occurred, the more systemic risk accumulated.
So Waldman implies that banks should go back to the business of assessing credit risk. This argues for smaller banks taking discrete (rather than pooled) risks at a higher cost (credit assessment and monitoring is expensive).
This brings to fore two of my pet issues: The demise of the small independent bank under a bank holding company and Paul Volcker’s role in the destruction of US industry.
The small bank under a bank holding company was a result of a lot of abuses of large banks and their many branches during the period surrounding the Great Depression. Minnesota, Iowa and and a number of midwestern states banned branch banking as a result of the rapacious removal of wealth from farmers and small communities by large money center banks.
The result of the ban of branch banking, was a robust system of small banks that either had a correspondent relationship with a money center bank or partial ownership. These banks were not unlike today’s credit unions and were independent in their policies regarding loans and business relationship. They were very agile, as compared to today’s monster banks with rigid procedures, and hamstrung managers, or worse yet buccaneer managers that are bonused on next quarter’s loan production quotas.
The large branch banks are unmanageable and unable to deal with local needs and problems. They collapsed because of their detachment from risk, and inabilty to foster real local industrial and retail development instead of the faux housing and retail booms.
As for Volcker, he is completely responsible for the credit explosion. His push to higher interest rates, demise of usury bans, and rescue of the dollar in the face rising imports pushed wealth into money center monster banks, denuding the countryside of productivity and wealth.
I think that summarizes my regard for branch banking and Volcker.
«Of course, you can argue that banks long ago gave up their ability to assess credit risk. [ … ] credit departments, in competition with securitization, decided that if you can’t beat them, join them.»
That’s a fairly large misunderstanding of what went on. It is not that credit assessment became too expensive compared to securitization…
It is that it became too expensive compared to the cheap cost of money and the ability to buy AAA ratings for any loan. If you can borrow at 0% (Japan) or 1% (USA) before inflation, and your friendly rating agency gives AAA to any MBSes, how can you justify wasting money that could go to enrich your bonus on assessing borrowers?
Need to add one more point on the issue of branch banking.
One key point is that banning branch bank actually means less regulation of banking than more. By banning branch banking, banking excesses are self limiting to a small bank, and those failures can easily be covered by FDIC. With large branch banks, excesses require massive regulation and supervision, and massive insurance.
We can see that internal branch bank supervision is wholly inadequate. Federal supervision would need to be of such a massive scale, it would take the US Air Force and its personnel. Federal insurance is wiping out Federal finances today. Even all of FDIC is inadequate.
The only viable solution to managing bank excesses is not regulation, but limitation on banking reach, and overreach.
PS, two of the most profitable current large banks, Wells Fargo (formerly Northwest Bank), and US Bank (former First Bank) were bank holding companies in the Midwest.
«the rapacious removal of wealth from farmers and small communities by large money center banks.»
In Real America, losers’ money is there for the taking…
«buccaneer managers that are bonused on next quarter’s loan production quotas.»
…by the winners.
How does it feel for midwesterners to be the new Indians?
Those small farmers and communities have been in a depression for the past 20-30 years; the bonused managers are enjoying their early retirements in very comfortable wealth.
That comparison is all that matters in Real America. How many of those midwestern small farmers and communities have been voting steadfastly for the Republicans?
«By banning branch banking, banking excesses are self limiting to a small bank,»
Sure, and mortages losses are always uncorrelated! The whole of Texas never had a simultaneous slump, and so on.
The S&L crisis was a totally random event, and the large percentage of small thrifts that went all busts at the same time was a statistical oddity, not because they were run by a herd of greedy idiots responding to the same perverse incentives in the same way…
If there are good reasons to prefer small banks to large ones they are that they are more efficient, and usually they have less political power, and less market power.
Stephen:
“If there is such an opportunity in banking why isnt there private capital being put together to form a brand new bank that is unemcumbered by the past.”
This is happening currently. I know of several groups that are either raising capital for brand new (“de novo”) banks to purchase deposits of failed banks from the FDIC, or to inject additional capital into healthy banks so that these banks can purchase the deposits of failed institutions. This opportunity is not lost on the investment community. But it’s largely taking place at the community bank level – below the radar of CNBC and the WSJ – so you won’t read/hear much about it. The biggest banks… well… they’re going to have to work out their problems themselves, or fail – the equation involves too much capital for your typical investment group.
Regarding bank acquisitions, I’d say that roughly 15% make economic/strategic sense for the acquiror, another 15% are value-neutral, and the other 70% destroy value for the shareholders of acquiring firms. Because a premium over market value (and generally economic value) is offered to the seller, acquisitions almost always make economic sense for the seller’s shareholders. (If someone’s willing to overpay me for my shares, why shouldn’t I take it?) The only problem that arises for the seller is if it takes stock (as opposed to cash) in the transaction and the stock of the combined entity tanks. This generally happens eventually – after all, if the buyer routinely overpays for acquisitions, eventually its stock is going to suffer. Why would you want to hold the stock of an institution that’s willing to overpay for acquisitions?
Anyhow, when we talk about the “banking industry” it’s important to distinguish between three groups. Group 1 is the Big Uglies. This is the largest 20 banks in the country, which largely grew through acquisitions over the last 20 years and are now busy explaining the history of the egg on their faces. This group accounts for about 60% of all industry assets. Group 2 consists of “overly aggressive community bankers.” This group swung for the fences over the last decade mostly underwriting risky construction loans and funding with CDs. This amounts to several hundred banks (300-500) around the country, but maybe just 5%-10% of industry assets. Group 3 consists of the 90%+ of banks (by charter), with about 30%-35% of aggregate industry assets, that are in reasonably good shape because they were always run the “old-fashioned” way. So, by aggregate assets, we’ve got real problems in the banking industry. By charter, however, most banks are in pretty good shape. Even in this crappy economy.
Once a week or so a random sentence in the English language financial blogosphere scratches the real problem pointing to possible solutions.
We need to approach financial capitalism as engineers, and to largely rearchitect a crumbling design.
Steve Waldman wrote this week’s sentence. The underlying problem is simple. Real USA consumer incomes have been falling at least since Y2K. This is a mirror image of the macro-background since the start of the industrial revolution in the USA.
Read that as many times as it takes to “get it”. Until this concept is internalized all diagnoses and all Rx are doomed to designed failure. Once the idea is understood possible causes and solutions can be discussed.
FWIW – In the late ’90s the discussion was about the relevance of banks (or maybe the irrelevance of banks). This was at a time when insurance companies, investment companies and mutual funds encroached seriously on banks’ two main functions – taking deposits and lending. The banks had a hard time competing with basically unregulated markets that could diversify their sources of income, i.e. fees and interest. The discussion ended with the Gramm-Biley-Leach Act. But now it seems that the discussion was simply suspended.
«The underlying problem is simple. Real USA consumer incomes have been falling at least since Y2K.»
That is quite a misleading statement.
A Republican would explain to you that there has been a very robust growth in the incomes of Real Americans, the productive 20-2% of the USA. This has to be celebrated.
Sure, the incomes of the bottomost 80% have stagnated or decreased, but for a Republican that fewer resources have been wasted on worthless headcount (the middle 60%) or exploitative parasites (the lowest 20%) is another success to celebrate.
That the cattle (the 60%) and the vermin (the lowest 20%) produce more while earning less is wonderful for Republicans, as they admire and are sponsored by the top, productive, Real American citizens, who are still the victims of much injustice and exploitation.
«The banks had a hard time competing with basically unregulated markets that could diversify their sources of income, i.e. fees and interest. The discussion ended with the Gramm-Biley-Leach Act. But now it seems that the discussion was simply suspended.»
I just found some discussions in 1997 of some parts of that “reform” and reading them 12 years later is just too funny (or not):
http://www.derivativesstrategy.com/magazine/archive/1997/0597rtbl.asp
http://www.derivativesstrategy.com/magazine/archive/1997/0597qa.asp
«Futures exchanges, furthermore, have the highest possible self-interest in maintaining the integrity of their markets and preserving the public’s trust in the institution and the industry.»
«Alan Greenspan noted in his Coral Gables, Fla., speech, government must “enunciate clearly” the public policy objectives for the regulation of derivatives. These so-called “professionals” use OTC derivatives as an integral part of managing their firms’ financial business. They are subject only to the remedies imposed by contract law, which have apparently been sufficient since the number and size of derivatives-related defaults are statistically insignificant. Accordingly, it is not clear exactly what public policy purpose government regulation is serving.»
«Despite the unfounded doomsday predictions of some, self-regulation does not mean no regulation. Nobody has more at stake in the integrity of our markets than we do. Our professional markets would continue to offer customers many well-known safeguards already found in exchange markets, including open and competitive trading, transparent pricing, daily mark-to-market of positions, and unsurpassed financial integrity through clearing systems that eliminate counterparty risk.
Each of these safeguards was invented by exchanges, not the federal government, because the integrity of our markets is paramount to our success. Yet with all these safeguards in exchange markets, there are some who favor more regulation of exchanges. Nobody has yet explained to our satisfaction why the safer market should have more federal regulation.»
«Therefore, to the extent that excessive regulatory burdens impact the exchanges’ ability to offer cost-effective, innovative products, ISDA members are less able to use those products efficiently in connection with managing the risks of their own businesses, and less able to offer competitively priced, privately negotiated transactions for customers to manage their business risks.
While there are significant differences between exchange-traded products and privately negotiated products, we do support efforts to formulate a statutory exemption that would allow exchanges to offer products in a less-regulated environment. This would permit exchanges more flexibility to provide financial products that in turn can create opportunities for privately negotiated transactions.»
«At the same time, the professional market exchange would not be subject to audit trail, books and records, and other regulatory requirements that are essential in uncovering, and thereby deterring, fraud and manipulation and ensuring sound operations. Problems of the magnitude seen in recent trading scandals involving professional traders such as Barings and Sumitomo show too clearly the limitations of relying only on exchange self-oversight. Such events also demonstrate that institutional participants in exchange markets can pose potential systemic problems. Moreover, an unregulated professional exchange could profoundly affect clearinghouse integrity in the event that a firm cannot honor its trades. Problems at the professional market or clearinghouse could easily spill over to the broader financial markets.»
«We know that there is a strong relationship between trading in derivatives and related case markets. We know that there is, at best, incomplete information on the extent or nature of trading in these markets. We also know that a market in which regulators have no legal ability to require trading reports, to impose “circuit breakers,” position limits, trading halts or margin requirements if they should prove necessary, to obtain the information required to monitor the markets, or to mandate fair competition among participants, is a market that could present great potential dangers for the nation’s regulated securities markets. Actions that would preclude regulators from addressing systemic risk should not be taken unless it can be concluded that such action would be safe and in the public interest, and would have no adverse effect on the proper functioning of and competitive balance in securities.»
«DS: So is it conceivable that state gaming laws would become applicable to trading on the CBOT or Merc?
BB: I think that’s an issue that probably would be explored.»
«A very short and grossly simplified history of banking in the last 40 years is banks used to be tightly controlled, profitable, and not (for the most part) able to do much damage. [ … ] Various aspects of banking were deregulated (deposit rates, usury ceilings,interstate banking, [ … ] But the interest rate volatility was and still is a real mess for banks.»
As to that I just discovered a delightful revelation in an old Waldman post:
http://www.interfluidity.com/posts/1160447599.shtml
in which it is discovered that in 1991 Greenspan fixed the prime rate (used to set retail interest rates) delta at double its historical level to ensure that banks could make large profits.
Another point that confirms the impression that the “free market” in the USA is just propaganda — what matters (the income of large campaign donors) is rigged.
Oh please!!!!
When did Surowiecki realize that banks might have been sick since the S&L? When did he first develop this thought? This year?
Man, that's ridiculous Monday morning quarter backing. First, even he is correct, he sheds more light on he being about 20 years last, or that it took that long think this up.
Banks have NOT been sick since the S&L? "Sick" companies, by definition, do not make profits. They don't employ people. The don't innovate. All of which the banking has done.
There are many sources of this financial crisis, and some of them are intertwined. But to highlight the S&L as banks since being sick, that's like me saying that banks have been sick since the Great Depression, or some other dated event. It doesn't work that way. It's a cascade of related and seemingly unrelated events, and their unintended consequences and raltionships that result into something wonderful or devastating.
I write about the causes of the financial crisis on my blog and it's a much different approach than this head-lining character.
http://monoki.wordpress.com
Keep pressing,
Chris Monoki
“Third is bank consolidation proved to be a very bad idea, and I see NO ONE addressing this issue. It isn’t simply because it created huge concentration and too many too big to fail banks (a lot of countries have highly concentrated banking systems, such as Canada and Australia, but their banks are kept on shorter leashes).
The reason is that bank consolidation delivers NO economic benefits. The big lie is big banks are more efficient. They aren’t. Every study ever done of banks in the US has found that once banks reach a certain size threshold, they exhibit a slightly increasing cost curve, meaning they are more expensive to operate.”
Thank you very much for calling attention to the gigantic ‘Sacred Cow’ in the middle of the economic mess.
You forgot to add the ell effects of ossified ‘herd’ management that has clearly infected all the mega- banks simultaneously.
Not only are the banks too expensive to operate – under non- stress conditions such as ‘normal’ (above zero percent) and relatively stable interest rate environments, they are bottomless sinks for liquidity when stress levels increase. One reason the 1990’s and 2001 banking seizures ended without collapse is the investment banks were less consolidated than today and commercial banks were not so involved with derivatives.
I can go on and on, but … thanks.
I’m responding to the penultimate paragraph:
“And worse, big banks have completely abandoned the notion that the knowledge that local managers have by virtue of being in a community (in terms of improving lending decisions) has value and can be leveraged. Instead, they all went full bore for FICO and other faux-science credit scoring models, and have perilous little to fall back on now that those have proven to be badly flawed.”
My only credit card, which I’ve had through many incarnations since 1978, is going defunct, and I had to apply for a new credit card last week. I had only ever missed one payment deadline, in 1979. Otherwise I paid in full and on time each month, until I stopped using it four years ago. I decided to pay by cash or check.
Last month I received notice that I must apply for a new card, because my current card would cease as of 3/23/09. I also read online that one cannot get hospital care without either insurance or a credit card. I don’t have insurance. So I decided it would be prudent to be sure to have a credit card, even if I didn’t plan to charge purchases.
My application was denied due to the following on my credit report (some of which I don’t understand):
– charged off account on credit bureau file
– serious delinquency
– recent delinquency
– lack of recent installment info
I assume the last item refers not using the credit card.
The first count I don’t understand at all, unless it also relates to what I describe in the next paragraph. I don’t owe any money, not on my houses or my car. I’m current on taxes and utilities.
The middle two counts probably are due to being wrongfully charged for trash pickup service on my FL vacation home the last two summers, when I was up north. I disputed the charges for ‘services not rendered’, then paid in full upon returning south to the vacation home both winters. This was done in protest. Last September I received a bill from a collection agency for the ‘unpaid debt’ (how can I owe money for a service not rendered? I wasn’t setting out garbage at the curb. Canceling service for the summer was not permitted.) Instead of paying the collection agency, I merely paid the most recent bill from the waste collection company. Being charged year-round for a service I only need for a fraction of the year (and the total extorted charges were under $200) caused me to be denied a credit card, despite an otherwise unblemished record, which includes paying off several mortgages over the years.
Thus, it all devolves down to not using my credit card for four years, and three separate ‘counts’ relating to my civil disobedience against being wrongfully billed by a giant corporation.
All of this despite having a checking account with said bank (for the past 15 years), from which automatic utility, telephone, water, etc. payments are paid monthly.
So much for FICO, and I’ll be moving that checking account to a local bank.
That the cattle (the 60%) and the vermin (the lowest 20%) produce more while earning less is wonderful for Republicans, as they admire and are sponsored by the top, productive, Real American citizens, who are still the victims of much injustice and exploitation.
Blissex,
First I’m a registered political independent. Second, could you stop foaming at the mouth long enough to explain something? Why did hyper-rich billionaires like Soros and Buffett support Obama rather than McCain? According to your ranting they should have been solidly behind him. Instead they had lots of company in the billionaire boys club supporting Barrack. Eric Schmidt of Google, for instance.
OK, you can start foaming rabidly again. Let me help you out: “What’s needed is social justice to tax the bejesus out of evil white racist Republicans and send checks to oppressed people of color. Then we can go back to our grand economy of opening containers loaded in China and paid for with debt.”
You can dress that up however seems best and spam wildly.
I work in IT (as a technical peon) for one of the Zombie banks. We are now furiously trying to merge with our recently purchased bigger Zombie. Once these IT organizations get intertwined there NO turning back.
I’m much more interested in watchimg which of the Zombie IT organizations wins the management battle. The slightly more decentralized one, or the totally brain-dead centralized one. My bets are on the brain-dead one, as THEY know how to levelset the tablestakes and orchestrate the core-competencies while syngergizing in a going-forward space, and – as this is America – bullshit is all that counts now.
A Republican would explain to you that there has been a very robust growth in the incomes of Real Americans, the productive 20-2% of the USA. This has to be celebrated.
Blissex, are you still there?
Here’s a great site. http://www.fec.gov
Search for “Bernard Madoff” under individuals. Another solid Democrat.
The truth, Blissex, is you are cattle. And the Bernie Madoffs of the world know it. And they know how to scientifically herd you using simple emotions to actuate your very simple mind.
9:30, not a good example. Madoff was redistributing income within the top 20% (more like 1%).
10:34, this is 9:30, over.
Madoff was redistributing income within the top 20% (more like 1%).
I think it will turn out he was redistributing from the top 0.5% to the top 0.1%.
All the more reason that Bernanke et al. will try with all their might to blow yet another financial bubble. Real estate, check. Stocks, check. Real estate again, check. Government bonds, check. Green technology, anyone?? Anyone?
with any merger half of the head office costs go. With a bank the IT costs are a serious issue. How long does it take to move one entity on to the others’ platform. And can it be done without reinventing the wheel? Do you have to reinvent the wheel to integrate the 2 entities?
Blissex,
http://finance.yahoo.com/real-estate/article/106725/Homes-of-the-Billionaires
Four of the five billionaires listed first are American citizens. Four of those four are heavy Democratic contributors. Don’t take my word for it. Check President Obama’s FEC records.
Blissex, are you being paid to dribble your “rich Republicans” drivel around the blogosphere? I hope so because if you’re doing it for free from conviction you’re just stupid.
11:21
4 people out of the top .001% is not a representative sample. Get some real data about party affiliation in the top 1% or 10%, then you may have something to talk about. Your factoid means nothing.
«Get some real data about party affiliation in the top 1% or 10%, then you may have something to talk about.»
Curiously enough, statistics say that billionaires tend to be democrats — I can imagine that people like Buffett or Soros can afford to be a bit detached from their wealth, and have an attitude which is not just spite against the exploitative parasites, the welfare queens and the strapping young bucks. As to financial magnates, they are totally non ideological; they have been buying or trying to buy *everybody*, even if course their main sponsorship is for the Republicans.
The bedrock of Republican movement support is in the top 10% to 1%, the newly rich, the quasi millionaries or millionaires who seethe with spite for what they see as the undeserving losers (bulk headcount, subhuman mob) they have left behind (cfr. Santelli), and by which they feel victimized and exploited, with the ever present threat of violence.
Fortunately a large part of the bulk headcount/worhtless cattle stratum fancy themselves future winners, and think they will join soon the ranks of the rich, and support their policies; or perhaps they recognize that winners in the USA are oppressed by malign parasites, and join the Republican in outrage at such injustice.
This is by the way something that I think liberals/progressives in the USA fail to acknowledge: that many of the affluent and wealthy genuinely feel persecuted and exploited, and that many Republicans think that protecting them from the malice of the lower orders is a deeply moral task; some of them truly believe that every hour a minimum wage loser gets paid $5.75 instead say $4 or $3, because of an exploitative law, she is extorting money that rightfully belongs to her betters, who have to yield before the bullying power of the government.
Then there are exceptions either way, but opinion polls, voting statistics and policy statements show clearly who the Republicans are and what they want.
Of course the Blue Dog and “triangulating” centrist Democrats, and those bought by Wall Street, are just Republican-lite; but to some extent the Clintonistas have the excuse that they are just trying to be electable by appealing to a vast number of Republican-lite voters in the suburbs.
Then of course there is the Republican mainstream from Bush (“my base is the haves and have-mores”) to Rush Limbaugh and Prof. Gramm, all nicely supported by Grover Norquist.
As to Gramm:
http://online.wsj.com/article/SB121460589609712025.html
«Most of his former colleagues probably can't fathom why Wall Street bankers make tens of millions of dollars in salaries and bonuses each year. How would he justify these fat pay days? "It's simple," he lectures, sounding very much like the Texas A&M economics professor that he was in the 1970s: "In economics, we define labor exploitation as paying people less than their marginal value product.
I recently told Ed Whitacre [former CEO of AT&T, who retired with a $158 million pay package] he was probably the most exploited worker in American history because he took Southwestern Bell, which was the smallest of the former Bell companies, and he turned it into the dominant phone company on earth. His severance package should have been billions."»
And to see what Norquist is aiming at:
http://WWW.Amazon.com/dp/038551672X
«Continetti cites Abramoff’s and Norquist’s efforts supporting the Commonwealth of the Marianas as an example of Republican utopia. It is exempt from U.S. immigration, labor, workplace safety, etc. laws – allowing almost 40,000 immigrants (vs. about 16,000 natives) on temporary visas to pay up to $7,000 for transportation, work up to 14 hours/day – in some cases locked inside fences, for about $3.15/hour with no overtime, at mostly foreign-owned factories allowed to claim their goods are “Made in U.S.A.,” with most government expenses paid by U.S. taxpayers.»
The same taxpayers that have been happily refilling (with more than a trillion dollars) the bonus-generating accounts at major banks, perhaps as a form of compensation for the vicious tax extortion by which the best and brightest have been victimized.
«Banks have NOT been sick since the S&L? "Sick" companies, by definition, do not make profits. They don't employ people. The don't innovate. All of which the banking has done.»
In which country? Because in the USA they have not been making profits for at least twenty years.
They have been booking profits by booking income early and costs late (underproviding against risks), and over the cycle their net income tends to be negative. For a ludicrous example, consider Citigroup, whose losses have been so consistent over the decades that it has been bailed out three times by the government (while distributing immense amounts of cash to insiders during the good years).
Perhaps the thesis that the USA have never gotten over the S&L is not strong enough: in recent decades major USA banks, S&L or not, have never been profitable across the cycle, a bit like the airlines, and exist only thanks to government subsidy (including that splendid trick of a 3% fixed prime rate, never mind being able to borrow from the fed at 0-1% and to use rubbish as collateral for discount).
As to innovation major banks have just created new less transparent way to perform the oldest scam, underdepreciation, recognizing overestimated revenue early and underestimated costs as late as possible.
«There are many sources of this financial crisis, and some of them are intertwined.»
I think that the three nexi are the 1966 Civil Rights Act and the fall into Republican hands of a large chunk of Dixie, the 1984 election of deficit-loving Reagan, and the 1994 election of Gingrich with his Contract On America and the policies to foster an asset price boom that followed, and the 1995 ZIRP by the bank of Japan.
«But to highlight the S&L as banks since being sick, that's like me saying that banks have been sick since the Great Depression, or some other dated event. It doesn't work that way. It's a cascade of related and seemingly unrelated events, and their unintended consequences and raltionships that result into something wonderful or devastating.»
The economic policy of the Republican Congress and Presidents since 1994 have not been quite unintended, and neither the ZIRP in Japan.
«I write about the causes of the financial crisis on my blog and it’s a much different approach than this head-lining character. http://monoki.wordpress.com»
Many of the points made in that page are important, but the very first one is a giveaway of a particularly objectionable propaganda oriented mindset:
«1977. Community Reinvestment Act and its enhancements that began in the 1990s. Its purpose was to make housing affordable to those that couldn’t obtain conforming mortgages. This might have resulted in the surge in subprime mortgages, aided by future financial innovation and lax lending standards.»
As several people have published the numbers, and they do not support any implication of the CRA (which in its various updates was mostly an ineffectual showpiece) in any kind of mess.
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Sarah
http://www.lyricsdigs.com