Category Archives: Credit markets

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?

Europe Readying Yet Another “This Really Will Do the Trick” Bailout Package

Well, we are clearly in crisis mode. We are back to weekends being a period when you need to watch the news in a serious way.

And in another bit of deja vu all over again, the powers that be in Europe are readying yet another bailout plan, this one supposedly big enough to do the trick once and for all.

Top Bankruptcy Lawyer Harvey Miller on the Possibility of a Countrywide BK

Bloomberg interviewed Harvey Miller, who is regularly described as the dean of the bankruptcy bar in the US. Miller handled the Lehman bankruptcy and is thus well positioned to opine on whether Bank of America might put Countrywide into bankruptcy.

Europe Must Choose

By Delusional Economics, who is unhappy with the current dumbed-down vested interest economic reporting the Australian public is force fed on a daily basis, and takes pleasure in re-reporting the news with “bad” parts removed, and a bit of contrarian balance thrown in. Cross posted from MacroBusiness

The big news from Europe last night was the “surprising” PMI numbers. But as usual the news also goes behind the headline.

Marshall Auerback: The ECB v. Germany

By Marshall Auerback, a portfolio strategist and hedge fund manager

I’ve been in Amsterdam and met some people very well connected with the ECB. The topic de jour is the apparent split between the Germans and the ECB, especially in light of the resignation of Jürgen Stark last week from the ECB executive board. This has been a move hailed as a German protest of the errant ways of the ECB, andStark is now touting his conservative ideas around Europe in a hope to undermine the central bank’s current interventions. That’s the public line.

But the people to whom I’ve spoken here contend that Stark’s resignation does reflect the reality that the Germans are losing out as far as the ECB goes. The profound objections to what the ECB is becoming on the part of Germany is also accompanied by a realisation that it is the only supranational game in town and has little choice but to take on this quasi-fiscal function that it is now undertaking.

How markets interpreted the Fed’s Operation Twist as a sign of double dip

Edward here again. I just posted this up on Credit Writedowns. I am not in the right frame of mind here to give this topic the well-developed attention it requires, but, with things unravelling in global stock markets, I feel that I have to take it on. By the way, feel free to ping me […]

Jim Chanos on China’s Contingent Liabilities

Edward here. The overall gist of Jim Chanos’ comments on Bloomberg the other day were that China has off-balance sheet contingent liabilities due to its implicit commitment to state-owned enterprises which are knee-deep in land and property speculation. This speculative excess will lead to credit writedowns. Chanos repeated his contention from CNBC last week that […]

The Fed Twists in the Breeze

Mr. Market so far is not at all impressed with the announcement today that the Fed will be changing the composition of its portfolio by selling $400 billion of near-dated Treasuries and buying the same amount of longer maturity Treasuries. Since the Fed will maintain the same Fed funds target rate, the Fed’s intent is to keep short term rates low and also reduce longer term rates.

The fallacy with the Fed approach, as our Marshall Auerback has pointed out repeatedly, is that targeting a quantity means the central bank has no idea what result it will achieve.

Bill Black: Why do Banking Regulators bother to Conduct Faux Stress Tests?

Yves here. This is a subject near and dear to my heart. There is one bit that Black is missing, however. McKinsey advised the Treasury on the stress tests. They discussed it openly at a presentation at an alumni meeting.

By Bill Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator, and the author of The Best Way to Rob a Bank is to Own One. Cross posted from New Economic Perspectives

One of the many proofs that banking regulators do not believe that financial markets are even remotely efficient is their continued use of faux stress tests to reassure markets. But why do markets need reassurance? If markets do need reassurance that banks can survive stressful conditions, why are they reassured by government-designed stress tests designed to be non-stressful?

The Very Important and of Course Blacklisted BIS Paper About the Crisis

Admittedly, my RSS reader is hardly a definitive check, but it does cover a pretty large number of financial and economics websites, including those of academics. And from what I can tell, an extremely important paper by Claudio Borio and Piti Disyatat of the BIS, “Global imbalances and the financial crisis: Link or no link?” has been relegated to the netherworld. The Economist’s blog (not the magazine) mentioned it in passing, and a VoxEU post on the article then led the WSJ economics blog to take notice. But from the major economics publications and blogs, silence.

Why would that be? One might surmise that this is a case of censorship.

Richard Alford: The (Re)Education of Ben Bernanke and the FOMC

By Richard Alford, a former New York Fed economist. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

When you compare Bernanke’s “Deflation: Making Sure It Doesn’t Happen Here” speech of 2002 with his recent Jackson Hole speech, you cannot help but notice changes in his view of the economy and the financial system as well as a significant decline in his confidence in the ability of monetary policy to insure full employment,. The changes between the speeches and the possible explanations for the changes have implication for the course of Fed policy in the near and medium terms as well as the long-run health of the US economy. They suggest that the FOMC sees less upside to further stimulative policy actions and at the same time sees possible downsides where it had not seen them before. This, in turn, suggests that the FOMC will be more tentative in adopting further nonconventional stimulative measures than past behavior would indicate.

Satyajit Das: The Financial Compass

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

Roddy Boyd (2011) Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide; John Wiley & Sons Inc, New Jersey

Justin Cartwright (2010) Other People’s Money; Bloomsbury, London

Nicholas Dunbar (2011) The Devil’s Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street…And Are Ready To Do It Again; Harvard Business Press, Boston, Massachusetts

Barry Eichengreen (2011) Exorbitant Privilege: The Rise and Fall of the Dollar; Oxford University Press, Oxford

Diana B. Henriques (2011) The Wizard of Lies: Bernie Madoff and the Death of Trust; Times Books/ Henry Holt & Company & Scribe Publications, Melbourne

Graeme Maxton (2011) The End of Progress: How Modern Economics Has Failed Us; John Wiley, Singapore

In his novel, Justin Cartwright writes that: “There are beginning and there are ends, and there are also many ways of telling the same story.” The problem is that the great 2007 financial crisis shows no signs of ending. Far from ending, the crisis has shown a virus’ capacity to reconstitute itself. Given the literary difficulty of an uncertain end, publishers and editors have improvised in telling the story – a multiple points of the compass approach to “credit lit”.