Quick follow up on RAs, the new regulatory regime, and its discontents

Felix guessed how this Structured Finance issue pipeline would get sorted out, for the moment.

Three not necessarily inconsistent takes on causes and effects:

A neat way to embarrass the government. The rating agency logjam and the GM deal announced yesterday are closely related: if there’s one thing GM will think it still needs for its IPO, now that it’s got a subprime lender, it’s a freely moving subprime auto loan pipeline. So I would guess that there might be a GM IPO sometime in the next six months, but possibly not right at the end of that time.

Or, this instant fracas just points to the likely result of the tortuous bill-drafting process – “unintended consequences”, a phrase we will see plenty more times in connection with regulatory change. Maybe that turns into organized push back by the business.

Or, perhaps it was an intended consequence, and the agencies’ letters to issuers, requesting that the rating not be registered, actually represent first drafts of  the ratings agencies’ suicide notes. If even they don’t trust their own ratings, why should anyone else? What is the formal point of the agencies now, apart from their niche in the regulations? Who is left to offer guarantees against rating agency risk, if not the agencies? Actually, one can see why they’re a bit windy. Pretty much everyone else who took that risk on has gone bust, or lost their job. But maybe it’s a business opportunity for someone if the price can be got right.

Oh, I see Disequilibria sort of agrees with me, plus a linked video.

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One comment

  1. run75441

    Hi Yves . . ( a C&P of an earlier post elsewhere)

    Late to the party as usual. I could only answer in brevity earlier due to other commitments. The costs of manufacturing can be broken out as follows and are approximations until measured. Direct Labor (actual labor to make the product) ~10%, Burden (bennies, legislation, utilities, etc.) ~30% and Materials ~60%. In a vertical manufacturing scheme, the average holds true unless you are in startup, etc.

    There are several things going on in the US economy today. I mentioned one of them earlier, Marquette National Bank versus First of Omaha (SCOTUS-1978) struck down state usury laws leading to the 30+% credit card limits we see today. Even the credit card laws activated February 2010 did not cap the limits at a miserly 24% because senators such as Stabenow felt it would limit credit to the lower income brackets. Instead, we promote usury and theft. It is more profitable to loan money than invest in labor intensive business with all of its bennies and restrictive legislation.

    1983(?) and Greenspan became the Fed Chairman and by a vote of 3-2 (Volcker voted no), began the demise of Section 20 of Glass-Stegall. Banks were allowed to place 5% of gross profits on to Wall Street in various forms. The percentage grew to 25% over time. The flood gates opened with the final repeal of Glass-Steagall under the 2001 Financial Modernization Act (Gramm). If anyone wonders the impact of those changes, 40% of corporate profits are associated with the financial services sector and 31% of GDP. BIS does a nice report on it here: http://www.bis.org/speeches/sp081119.htm “How might the Current Financial Crisis Shape Financial Sector Regulation” Our last hope of having any control on the derivative sector (CDS, Naked CDS, Synthetic CDS, etc.) disappeared with the hatchet job done on Brooksley Born by Summers, Greenspan, Levitt, etc. In effect, it is even more profitable to invest in the derivative market than to invest in Labor intensive business (redundant alert).

    2001/2003 and the biggest tax breaks ever passed were skewed towards 1% of the taxpaying population. At least during Hoover, everyone suffered. The 1 percenters lost a little money and recovered nicely, much of which is attributed to these two tax breaks. Here again, the direction was towards those who have no interest in investing in Labor intensive Service or Manufacturing. More money to be made elsewhere. To what degree has Productivity Gains been skewed away from Labor and towards Capital? Spencer at Angry Bear has a nice chart here: http://2.bp.blogspot.com/_Zh1bveXc8rA/SuddUhLWUaI/AAAAAAAAA7M/iU2gefk317M/s1600-h/Clipboard01.jpg “Labor’s Share” http://www.angrybearblog.com/2009/10/labors-share.html

    I am sure there are other points to be made both pro and con to the ones I have made. Joel Garreau in “300 million and Counting” points out the 300 million US Citizens are living on 5% of the US land mass, the locations of which does not make sense. We could go back to an agricultural economy; but, I suspect we would have a large training issue and it doesn’t make sense. Tom Walker points out the need to reduce the number of hours work so more people are employed in a shorter work week scenario at the same pay. There are productivity arguments to support his contention the 40 hour work week is dead. Martin Ford in the “The Lights in The Tunnel” gives a sound argument to the increasing impact of automation and computerization. Textiles and other labor intensive industries have moved overseas leaving thousands of people unemployed. Tariffs to protect the Textile industry and allowing industry to be profitable ended up in shareholder dividends and owner equity. The companies never reinvested in the industry to improve its efficiency. The cost of manufacturing direct Labor input has not changed much and the impact of the labor cost reduction is minute when compared to the reduction in Burden cost.

    What we are witnessing today is a decreasing Participation Rate or that percentage of the Civilian Non-Institutional Population in the Civilian Labor Force. 65% last month, it has been decreasing since 2001 when it was 66.7%, and reversing an ~40 year trend upwards. Elizabeth Warren in “The Coming Collapse of the Middle Class” argues effectively, we as a people are not doing better and we have been on the decline since the seventies. The High School education and a good work ethic no longer can guarantee a person a job and entry to the Middle Class in a nation that is shedding those jobs that require high school diplomas and has increasingly shed those jobs requiring college degrees. People not working and being productive is a huge cost to the economy superseding Unemployment Benefits.

    Job creation is still the issue in the US and has been since 2001 and we can’t all be a Wall Street broker, which appears to be the fastest growing part of the economy today. The Wall Street reform bill is a joke, does little to reduce the profit driven risks Wall Street has grown accustom to having, and would do nothing to change the paradigm of creating good paying Labor intensive jobs. The creation of Labor intensive jobs more profitable than the derivative driven Financial Services (not tellers) should to be the goal. It is still more profitable to invest in capital appreciation than labor intensive industry or services. Change the paradigm.

    There was a time when automation was looked upon as providing Labor greater leisure, higher pay, and a healthier work place. The result of automation has not impacted salary that much for the remaining worker, leisure has not increased, and I don’t know about you but I still do 50 hour work weeks and more. We are just doing it with fewer workers. The gains resulting from automation are going elsewhere rather than into Labor. Make it more attractive to create Labor intensive industry than investing in credit card business and derivatives.

    Globalization has moved many jobs overseas and some rightfully so. Many companies have jumped on the band wagon not realizing the cost of the 4-5 week supply chains by doing such. Inventory is the larger cost of manufacturing and distribution. Much of this cost can be negated by avoiding Social Security, Unemployment Compensation, Workman’s Compensation, Child Labor Laws, Overtime Laws, OSHA, etc. In itself, this is the reason for movement overseas with jobs as labor is not more efficient than US Labor. The resulting Labor tradeoff is small. We just have greater Burden to Labor and operations.

    The US is still the largest economy in the world and many of these companies from the other parts of the world, and those who have taken there manufacturing and service portions overseas, still want to and need to sell in the US. Some countries when signing WTO treaties also wrote into there treaties exemptions for industry. The US didn’t. The cost of an unproductive Labor is a drag on the economy. It makes perfect sense to collect from those companies who have moved overseas a tax to compensate. Why should they be able to avoid these costs?

    As far as agricultural? ~50% of our food is already imported. While there should be a push to drive subsidies to smaller farms, I am not so sure abandoning all subsidies ans becoming dependent upon foreign sources for food is desireable. I would rather have my food source close to home.

    You are going to find that spencer and other will disagree with me while the “stormys” of the world will side with me. I work in manufacuring, electonics in the US right now, and am watching the Mosfets cartels limit capacity and drive demand and consequently prices.

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