Category Archives: Credit markets

Satyajit Das: Economic Dystopia – The “Stick Shaker Moment”

Yves here. Note I beg to differ with Das in his comments on government debt levels for countries that control their own currency. As we’ve noted, a country can always repay debts in its own currency, and the funding of federal deficits by borrowing is a political constraint and a holdover from the gold standard era. Moreover, there is a great deal of evidence that the solution implicit in that view, of cutting government spending in the aftermath of a demand-depressing, private balance sheet wrecking global financial crisis only makes matters worse. This is a case where you need to steer into the skid to get the car back on course. But this section is not core to Das’s discussion.

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk

Powered flight requires air to flow smoothly over the wing at a certain speed. Erratic or slow air flow can cause a plane to stall. Most modern aircraft are fitted with a “stick shaker” – a mechanical device that rapidly and noisily vibrates the control yoke or “stick” of an aircraft to warn the pilot of an imminent stall.

The global economy too needs air flow -smooth, steady and strong growth. Unfortunately, the global economy’s stick shaker is vibrating violently.

Warning: Greece Can Break Glass and Leave the Eurozone

One of the things that has been intriguing about the handwringing among European policy-makers has been the general refusal to consider the idea that one of the countries being wrung dry by doomed-to-fail austerity programs might just pack up and quit the Eurozone. The assumptions have been three fold. One is a knee-jerk assumption that the costs of exiting are prohibitive (this argument comes from Serious Economists in Europe, but they never compare it to the hard costs of austerity and the less readily measured but no less real cost of loss of sovereignity). Second is that an exit would come via a country being expelled, since the Eurozone treaties prohibit unilateral departure. Third is that it would be too much of an operational mess to revive a defunct currency.

A very good piece by Floyd Norris in the New York Times fills this gap by describing that Greece has the motivation and the means to leave.

Quelle Surprise! Servicer Consent Orders Producing Expected Whitewash

We were far from alone in criticizing the servicer consent orders issued earlier this year. They were yet another whitewash masquerading as regulatory action, orchestrated by the banking industry toady, the OCC. As we wrote:

The current end run is apparently led by the Ministry of Bank Boosterism more generally known as the OCC and comes via consent decrees that were issued Wednesday (we’ve made that inference given the fact that John Walsh of the OCC presented the findings of the so-called Foreclosure Task Force, an 8 week son-of-stress-test exercise designed to give the banks a pretty clean bill of health, as well as media reports that the OCC was not participating in the joint state-Federal settlement effort).

This initiative is regulatory theater, a new variant of the ongoing coddle the banks strategy. It has become a bit more difficult for the officialdom to finesse that, given the extent and visibility of bank abuses. Accordingly, the final consent decrees are more sternly worded and more detailed than the drafts we saw last week, and also talk about imposing fines. But reading them reveals that there is much less here than meets the eye.

Bernanke Scraps Bold Congress Testimony for Lukewarm Version

By Gal Noir, an undercover investigator of hijacked economic truths and an occasional blogger at New Economic Perspectives

In his Congressional testimony on October 4th, Federal Reserve Chairman Bernanke uncharacteristically praised the benefits of fiscal policy, calling it “of critical importance” and conveying concerns with the looming deficit reductions. He cautioned: “an important objective is to avoid fiscal actions that could impede the ongoing economic recovery.”

Many economists expressed worry that such advocacy of fiscal policy will erode America’s (already) wavering confidence in the Fed and will further weaken their support for austerity measures. More troubling still, the economists said, was the possibility that the public may follow suit and start demanding from Congress bolder government action on the jobs front.

A few dissenting scholars thought that it was high time for Bernanke to put his money where his mouth was, so to speak.

Stuart Zechman: The Beatings Will Continue Until All Not-Yet-Right-Thinking Lefties Support the Infrastructure Bank Scam

Yves here. Stuart Zechman is a keen observer of how corporatist policies are peddled through various Rubinite/Hamilton Project organizations and other mouthpieces and skillfully messaged so as to snooker or co-opt bona fide progressives who ought to know better.

His article mentions Third Way. For benefit of those who have been so fortune as to have limited contact with the netherworld inside the Beltway, here is a brief description from an earlier post:

And make no mistake about the role of Third Way. Third Way runs the policy apparatus of the Democratic Party. In Congress, staffers attend regular Third Way policy briefings, where the group hands out pre-packaged legislative amendments in legal form, generic press releases, polling around those policy ideas, and talking points. It’s a soup-to-nuts policy apparatus. Most of these ideas are harmless – like increased volunteerism – but some are not, like various tax proposals.

The group has enormous juice.

Marshall Auerback and Warren Mosler: Core Europe Sitting Pretty in their PIIGS Drawn Chariot

By Marshall Auerback, a portfolio strategist and hedge fund manager, and Warren Mosler, an investment manager and creator of the mortgage swap and the current Eurofutures swap contract. Cross posted from New Economic Perspectives

The refusal to countenance a Greek default is now said to be dragging the euro zone toward even greater crisis. Implicit in this view, of course, is the idea that the current “bailout” proposals are operationally unsustainable and will lead to a broader contagion which will ultimately afflict the pristine credit ratings of core countries such as Germany and France.

Well, we see a very different view emerging: The “solution” currently on offer – i.e. the talk surrounding the European Financial Stability Fund (EFSF) now includes suggestions of ECB backing. This makes eminent sense. Let’s be honest: the EFSF is a political fig-leaf. If 440 billion euros proves insufficient, as many now contend, the fund would have to be expanded and the money ultimately has to come from the ECB — the only entity that can create new net financial euro denominated assets — which means that Germany need no longer fret about being asked for ongoing lump sums to fund the EFSF in a way that would ultimately damage its triple AAA credit rating.

Despite public protestations to the contrary, it is beginning to look like the elders of the euro zone have begun to embrace the reality that, when push comes to shove, it is the ECB that must write the check, and that it can continue to do so indefinitely.

Stocks Hammered by EuroCrisis Worries; Bank of America, Citi Down Nearly 10%

It’s becoming increasingly obvious to Mr. Market that the officialdom in Europe is not on a path to resolving its burgeoning sovereign/bank crisis. It is insisting on imposing austerity on debt burdened countries, which will only shrink their GDPs, making their debt hangovers even worse.

And Germany wants to have its cake and eat it too

Satyajit Das: Euro-Zone’s Leveraged Solution to Leverage

Yves here. This is as concise, accessible, and not surprisingly, not at all encouraging assessment of the latest Eurorescue ~~ruse~~ mechanism.

By Satyajit Das, the author of Extreme Money: The Masters of the Universe and the Cult of Risk

If as Albert Einstein observed insanity is “doing the same thing over and over again and expecting different results”, then the latest proposal for resolving the Euro-zone debt crisis requires psychiatric rather than financial assessment.

Citi Joins Bank of America in Finding New Ways to Bleed Customers

As readers know all too well, the very short story of the financial crisis was consumers and banks went on big borrowing party and it all ended really badly, except for the banks.

However, banks built their businesses with the expectation that consumers would continue to rack up debt. But consumers aren’t too keen about that any more. Moreover, banks have also gotten a bit of religion and are more careful with extending loans. Since they aren’t making as much money on consumer lending, their natural impulse is to find other ways to ~~fleece~~ obtain more revenue from consumers.

Quelle Surprise! SIGTARP Report Finds Citi, Bank of America Allowed to Leave TARP Prematurely

We said at the time it was inexcusable for the Treasury to allow banks to repay the TARP as early as they did (US banks are still below the capital levels many experts consider to be desirable; Andrew Haldane of the Bank of England has made a well-substantiated case that higher capital levels cannot remedy the problem, since the social costs of a major bank blow up are so great, and you therefore need very tough restrictions on their activities).

And why were the bank so eager slip the TARP leash? To escape some pretty minor restrictions on executive compensation. This had NOTHING to do with the health of the enterprise and everything to do with executive greed. And not surprisingly, Treasury indulged it.

Randy Wray: Euro Toast, Anyone? The Meltdown Picks Up Speed

Yves here. Readers may note that Wray cites the cost of the US bailout of the financial crisis as $29 trillion. I’ve never seen a figure like that (the highest estimate I’ve seen was from SIGTARP, which set the “theoretical maximum” at $23 trillion, and that figure was widely criticized. Barry Ritholtz has kept tab over time, and his tally has been in the $10-$11 trillion range). But this estimate is not core to his argument.

By L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City and Senior Scholar at the Levy Economics Institute of Bard College. Cross posted from EconoMonitor

Greece’s Finance Minister reportedly said that his nation cannot continue to service its debt and hinted that a fifty percent write-down is likely. Greece’s sovereign debt is 350 billion euros—so losses to holders would be 175 billion euros. That would just be the beginning, however.

Michael Hudson: Debt Deflation in America

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. Edited Interview by Bonnie Faulkner September 2, 2011 (first aired on Pacifica, September 14, 2011).

“Without consumption, markets are going to shrink. Companies won’t invest, stores will close, “for rent” signs will spread on the main streets and local tax revenues will fall. Companies will lay off their employees and the economy will shrink more. Why aren’t economists talking about these effects of debt deflation, which are becoming the distinguishing phenomenon of our time? They advocate giving more money to the banks, hoping that somehow everything will be okay, as if the banks would lend out the money to fund new production and employment. Mainstream economics and political leaders in both parties are failing to ask why the banks are using these giveaways to speculate abroad, pay their managers bonuses and high salaries or to pay dividends rather than to lend to small businesses or do other things to actually get the economy moving again. This phenomenon cannot be explained without seeing that debt service is siphoning off revenue into the financial sector, which is not recycling it back into the production-and-consumption economy.”

Is the SEC Finally Taking Serious Aim at the Ratings Agencies?

If the grumblings in the comments section are any guide, quite a few citizens are perplexed and frustrated that the ratings agencies have suffered virtually no pain despite being one of the major points of failure that helped precipitate the global financial crisis. If there were no such thing as ratings agencies (i.e., investors had to make their own judgments) or the ratings agencies had managed not to be so recklessly incompetent, it’s pretty unlikely that highly leveraged financial institutions would have loaded up on manufactured AAA CDOs for bonus gaming purposes.

But the assumption has been that the ratings agencies are bullet proof. Their role is enshrined in numerous regulations and products that make ratings part of an investment decision. And they get a free pass on mistakes, no matter how egregious. (Note that there have been rulings that have taken issue with the ratings agencies reliance on the invocation of the First Amendment defense, but to date they have been on procedural matters. To my knowledge, no party has been awarded damages against a ratings agency based on a judge deciding that a First Amendment defense was inapplicable)

So why, pray tell, has the SEC sent a Wells notice to Standard and Poors, which is a heads up that the regulator may file civil charges, which could result in penalties and disgorgement of fees, on a 2007 Magnetar CDO called Delphinius?