Paul Krugman: The Dilbert Strategy

The administration has a plan for financial market reform - a new "org chart":

The Dilbert Strategy, by Paul Krugman, Commentary, NY Times: Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes and lines that say who reports to whom.

You now understand the principle behind the Bush administration’s new proposal for financial reform...: it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive.

The financial events of the last seven months, and especially the past few weeks, have convinced all but a few diehards that the U.S. financial system needs major reform. Otherwise, we’ll lurch from crisis to crisis — and the crises will get bigger and bigger. ...

The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. In fact, the new plan was originally conceived of as “promoting a competitive financial services sector leading the world and supporting continued economic innovation.” That’s banker-speak for getting rid of regulations that annoy big financial operators.

To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology — and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake.

Thus, in a draft of a speech to be delivered on Monday, Henry Paulson, the Treasury secretary, declares, “I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil.”

And sure enough, according to the executive summary of the new administration plan, regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems. As for the rest, it blithely declares that “market discipline is the most effective tool to limit systemic risk.”

The administration, then, has learned nothing from the current crisis. Yet it needs, as a political matter, to pretend to be doing something.

So the Treasury has, with great fanfare, announced — you know what’s coming — its support for a rearrangement of the boxes on the org chart. OCC, OTS, and CFTC are out; PFRA and CBRA are in. Whatever.

Will rearranging these boxes make any difference? I’ve been disappointed to see some news outlets report as fact the administration’s cover story — the claim that lack of coordination among regulatory agencies was an important factor in our current problems.

The truth is that that’s not at all what happened. The various regulators actually did quite well at acting in a coordinated fashion. Unfortunately, they coordinated in the wrong direction.

For example, there was a 2003 photo-op in which officials from multiple agencies used pruning shears and chainsaws to chop up stacks of banking regulations. The occasion symbolized the shared determination of Bush appointees to suspend adult supervision just as the financial industry was starting to run wild.

Oh, and the Bush administration actively blocked state governments when they tried to protect families against predatory lending.

So, will the administration’s plan succeed? I’m not asking whether it will succeed in preventing future financial crises — that’s not its purpose. The question, instead, is whether it will succeed in confusing the issue sufficiently to stand in the way of real reform.

Let’s hope not. ... If we don’t reform the system this time, the next crisis could well be even bigger. And I, for one, really don’t want to live through a replay of the 1930s.

Comments

[Winslow R.]

Krugman has pointed out time and again that Bush uses a crisis to further their agenda. Forest fires for cutting trees etc.

This crisis is being used to further dismantle state oversight while appearing to do something.

Inside Paulson's Plan

"But he potentially dilutes the power of state regulators by emphasizing greater authority for a new federal deposit institution regulator. State power to regulate banks has been waning in the last decade as major institutions switched their licenses to federal charters to take advantage of less restrictive consumer privacy and other regulations at the federal level. "

http://www.forbes.com/business/2008/03/29/paulson-finance-reform-biz-wallst-cx_lm_0329paulson.html

[bp]

dilbert meetings
with the dim one

sir, this report says
they're planning to fly planes into buildings

i know that
don't waste the decider's time

sir, heckova brownie says
the levees failed in new orleans

i know that
don't waste the decider's time

sir, 1,000 scientists
said the climate is changing

i know that
don't waste the decider's time

sir, the chief economist
said house prices are falling

i know that
don't waste the decider's time

sir, is there anything
you haven't decided?

i'm still mulling over whether
i'm more like lincoln or washington

[hari]

The Fed will have to come out of its own woodwork and explain the impact of new regulatory controls and its policy imperative. BB is required to take the stage and own the responsibility under its statute.

If Paul is right, and Paulson is simply defying global market logic, the consequences will not only be serious but may be even fatal for hi fi markets.

[Lafayette]

Article: Oh, and the Bush administration actively blocked state governments when they tried to protect families against predatory lending.

Good article ... and to the point.

This present administration is the Walking Dead. The Dems should trash any legislation in the matter of financial regulation, and get it right whilst in office ... if that bit of magic happens.

That's a Big "If", however, from the looks of it, as the party snatches defeat from the jaws of victory.

[anne]

"The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. In fact, the new plan was originally conceived of as 'promoting a competitive financial services sector leading the world and supporting continued economic innovation.' That’s banker-speak for getting rid of regulations that annoy big financial operators."

Rrecisely what I am told by lawyers who follow commercial regulatory matters as a matter of course. The problem has not been a lack of regulatory mandates and tools, but a philosophy that has dictated turning away from oversight and regulation. I have been strongly told, turning away from regulatory mandates has been especially characteristic of this definitively conservative Aministration.

[anne]

The issue of regulation takes careful study simply to understand what is possible, let alone when is being done, and what has been possible would have protected us against the current financial crisis had regulation been considered an obligation rather than a problem to be oversome by conservatives in this Administration and through Alan Greenspan's Federal Reserve tenure.

[save_the_rustbelt]

I'm not certain increased regulation is what we need. See Sarbanes-Oxley.

I think vigorous prosectution of anyone who made fraudulent representations about any financial instrument, and of mortgage originators who filed intentionally flawed loan paperwork would be a good start.

Then in a year we reevaluate.

[anne]

"I'm not certain increased regulation is what we need. See Sarbanes-Oxley."

How about paying attention to language or not distorting the issue?

The issue is whether regulatory mandates that already exist are attended to. Please now, do show what the specific problems are with Sarbanes-Oxley, with references; not that I think Sarbanes-Oxley is relevant here.

[William Kidder]

The Good Citizen Fund: Proposal For Private Regulation Of The Financial Sector
These four 'instant reforms' could be implemented tomorrow morning by regulators of banks, GSE's, exchanges, and broker/dealers. At first, compliance with the reforms would be voluntary, but they will be made legal and binding as quickly as possible.

1) No credit extensions to entities which do not agree to reforms
2) Stricter minimum margin rules for credit extensions (sliding scale from 2%)
3) No new off-balance sheet items unless exchange-traded or very collateralized
4) No more netting of trades unless settlement date is within 30 calendar days.

How To Enforce The Reforms?
Banks, GSE's, exchanges and broker/dealers that agree to comply with the four reforms will be listed immediately on the Fed's public website. The website will include a warnings and notices as follows:

WARNING: AN UNLISTED FIRM MAY NOT BE ELIGIBLE FOR ACCESS TO THE FEDERAL RESERVE

The listed firms below have agreed not do business with unlisted banks, GSE's, exchanges and broker/dealers after April 30 and to implement certain reforms.

Good Citizen Awards: If your employer is listed and you know of any violation which occurred after April 30, you should inform your immediate supervisor about your concerns. If the violation continues after another week after notifying your supervisor, please report the violation to the Federal Reserve Bank at 800-000-000. Your privacy will be protected.

If inspectors find the reported violation exists -- or that you had good reason to suspect one -- you will receive a $10,000 (or more) Good Citizen reward. If the inspectors find the suspected violation did not occur, no action will be taken against you or your firm. But always act in good faith.

If a firm incurs a second violation, it may pay a $1 million penalty in order to remain on the 'reformer list' or choose to delist and not pay the penalty.

Subsequent violations will carry a penalty of $5 million each. All violations, penalties paid, and voluntary delistings will be noted at the site.

If a firm does not agree to comply with the voluntary reforms by April 30, the Fed will consider a 'bad faith' market participant and may deny it access to repo, the discount window and other financial support. Further, if a firm fails to meet the April 30 listing deadline, it will not be added to the eligible 'reformer' list before June 1 (and on monthly dates thereafter).

Any firm with more than $10 billion in assets that elects not to be a 'reformer' will be listed separately with the following warning:

THESE FIRMS ARE UNSUITABLE COUNTERPARTIES FOR MEMBERS OF THE PRIVATE REFORM MOVEMENT

These firms with assets over $10 billion have elected not to join the voluntary reform movement of the financial sector. Therefore, members of the reformerer group will not conduct any business with the entities list below:

End of Federal Reserve Message.

To implement the plan, the Fed simply sets up
(1) a telephone number and recorder to take reports of suspected violations
(2) appointed approriate staff to handle the phones
(3) open a 'special purpose' account to handle Good Citizen income and expenses

Private Regulation Of The Financial Sector
The proposed new regulatory company will be a private company ('Good Citizen') authorized by Congress to oversee compliance of existing regulatory framework of the financial sector, propose new regulations and changes, and to provide 'bailout' insurance.

Good Citizen will be organized along the lines of a mutual insurance company and funded by tax-deductible premiums based on total employee compensation (especially bonus payments). We envision as much as 25% annually, but with a generous dividend after two years experience. The company will have a small staff to gather reports of possible infractions and coordinate remedies with existing regulators.

Participants in the financial sector must purchase an insurance policy and agree to comply with its conditions. Transactions with uninsured parties in the financial sector are not permitted.

The financial sector includes entities which conduct business in securities (securities will be very broadly defined) including banks, broker/dealers, exchanges, inter-dealer brokers, leveraged hedge funds and private entities, insurance companies offering credit enhancements for securities and counterparties. Affiliated companies or closely-tied entities which are at least 20% owned (actual, constructive or contingent) must also be insured. This includes all 'off-shore' and international subsidiaries and affliates.

There will a very generous reward system for Good Citizens, including payments for 'good-faith' false alarms. Good Citizens will be anonyomous and their privacy protected.

There will be incentives and dividends for faithful compliance and cooperation. There will also monetary penalties for infractions including the 'death penalty' cancellation of the policy.

Non-US Companies and Entities
Central banks and regulatory authorities outside the US will be asked to cooperate with the spirit of the Good Citizen program and not permit 'loophole' competition that disadvantages members of the reform movement. Reformers will be encourage to inform the Good Citizen company of foreign abuses and the company will follow through with Congress and other US regulators.

[kharris]

The former Treasury Secretary said he didn't hear much complaining about Sarbanes Oxley, and he is now the former Secretary.

This is rearranging the boxes, but for a bigger purpose, I think, than just to seem to be doing something. Paulson knows that lots of folks are looking at regulatory reform. By proposing changes that look sweeping on paper, Paulson has just put a horse in the race. Other regulatory efforts have to compete with this one. Time is growing short to do anything at all. By coming up with a proposal that steals headlines and can be argued to be an alternative to whatever else comes along, Paulson will use up lots of time.

[save_the_rustbelt]

Liberals tend to see regulation as a numerical game, if ten regulations are good, twenty regulations must be twice as good, and if twenty regulations are good, forty regulations are twice as good as twenty.

Never use a sledge hammer to do a job requiring a drill.

[dd]

As predicted Hank radios in the deckchair re-arrangements and the WSJ swoons over "sweeping changes" even as Housing Secretary Jackson, a "crucial" member of the Hope Alliance Now and a "crucial" Bush Katrina team player jumps ship. "Heck of a job and enjoy your swim!"

[kharris]

Though I generally have some regard for the comments rusty offers, this nonsense about attributing petty characteristics to those on the other side of a debate, rather than addressing the issues, is just too shallow to require real consideration.

It just doesn't freakin' matter who tosses out an idea. Ideas should be judged on their own merit, rather than by their source. Rusty wants to say that regulation is nothing more than a knee-jerk reaction from the ever-convenient stock villians in a right-wing morality play, the Liberals.

If we believe in the rule of law, and recognize that in our system, law often involves the promulgation of regulation, then we have accepted a role for regulation. The discussion is over what regulation is optimal, not conservative anti-regulatory manliness or liberal pro-regulatory nanniness. The latter discussion is a distraction. Let's have a real discussion.

[let_the_rustbelt_die]

save_the_rustbelt said:

"Liberals tend to see regulation as a numerical game, if ten regulations are good, twenty regulations must be twice as good, and if twenty regulations are good, forty regulations are twice as good as twenty."

What an unbelievably stupid comment.

[anne]

STR:

"Liberals tend to see regulation as a numerical game, if ten regulations are good, twenty regulations must be twice as good, and if twenty regulations are good, forty regulations are twice as good as twenty."

Agreed; balance is necessary, even minimalism is necessary in regulation, as long as there is intent to really carry on attending to mandates. I am convinced of the need for caution in regulation, but for attention to regulation.

[anne]

http://krugman.blogs.nytimes.com/2008/03/31/and-then-there-were-two/

March 31, 2008

And Then There Were Two
By Paul Krugman

Press release from the Clinton campaign — not on the web site yet, but presumably will be there soon. It says:

"Ensuring effective functioning of our financial markets is not solely an issue of how we rearrange the chairs that regulators sit in; or who the regulators report to. It’s also about what the regulators are mandated to do, and whether they act."

and, more specifically, says that we should

"at minimum, subject all institutions that are eligible to access the Federal Reserve’s credit to regulations equivalent to commercial banks."

Less eloquent than the Obama speech, but I’m now satisfied on this front: both Dem candidates are clearly committed to real financial reform, at least in principle.

[dd]

STR, please SOX was not about reform or regulation. It was about legitimizing Enron accounting including derivatives, off-balance sheet entities and market to fiction models. SOX complexity was by design and meant to obfuscate rather than elucidate. No doubt it has harmed legitimate corporations not engaged in financial fictions and if anything has forced them into the game; again this is by design. It has nothing to do with "liberal" or "conservative."

[anne]

http://krugman.blogs.nytimes.com/2008/03/31/the-north-atlantic-conspiracy/

March 31, 2008

The North Atlantic Conspiracy
By Paul Krugman

Is Iceland the victim of a financial conspiracy?

Such things really do happen. During the 1997-1998 financial crisis there was, almost certainly, a financial conspiracy against Hong Kong. * According to the Hong Kong Monetary Authority, several major hedge funds engaged in a “double play”, shorting both the city-state’s stock market and its currency. The alleged plan was to put the HKMA in a double bind: it would be forced either to raise interest rates to defend the Hong Kong dollar — driving stocks down — or to devalue the currency. Either way the hedge funds thought they’d make a killing. They were, however, caught in a bear trap when the HKMA did the unexpected and bought up a large fraction of the HK stock market.

There was also, according to Australian officials I talked to at the time, a deliberate effort to drive down the Aussie dollar.

Now, Iceland * is making similar allegations:

"The cost to protect the bonds of Iceland’s three biggest lenders from default rose after central bank Governor David Oddsson said “unscrupulous dealers'’ are trying to break the country’s financial system....

"Oddsson called for an international investigation into attempts to drive Iceland’s economy “to its knees,'’ in a speech on March 28. The central bank was forced to raise its benchmark rate to a record 15 percent last week to defend the krona after a 30 percent slump against the euro this year....

"Attacks on the country’s Reykjavik-based banks 'give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,' Oddsson said at the central bank’s annual meeting in Reykjavik. 'They will not get away with it.' "

One interesting point: it appears that the Icelandic authorities particularly suspect Bear Stearns.

I’ll be keeping an eye on this.

* http://money.cnn.com/magazines/fortune/fortune_archive/1998/12/21/252674/index.htm

** http://bloomberg.com/apps/news?pid=20601087&sid=aR1Zh_j.F83M&refer=home

[anne]

http://krugman.blogs.nytimes.com/2008/03/31/the-north-atlantic-conspiracy/

The North Atlantic Conspiracy
By Paul Krugman

During the 1997-1998 financial crisis there was, almost certainly, a financial conspiracy against Hong Kong. * According to the Hong Kong Monetary Authority, several major hedge funds engaged in a "double play," shorting both the city-state’s stock market and its currency. The alleged plan was to put the HKMA in a double bind: it would be forced either to raise interest rates to defend the Hong Kong dollar — driving stocks down — or to devalue the currency. Either way the hedge funds thought they’d make a killing. They were, however, caught in a bear trap when the HKMA did the unexpected and bought up a large fraction of the HK stock market.

[China handled this superbly, much to the consternation of Milton Friedman who faile to recognize the private market interference and objected to public market protection. My father immediately explained this to me.]

[anne]

Paul Krugman's reminder of the private attempt to manipulate Hong Kong's stock market and the Chinese countering, and the alert to what may be attempted private market manipulation in Iceland should show us what regulation must entail. But, such regulation is always available to alert and dedicated authorities.

Stunning!

[save_the_rustbelt]

dd:

Yours is an interesting spin on SOX, I haven't seen that spin even from the most enflamed opponents.

Do you have some experience or insights to share on this?

[anne]

I just love Paul Krugman, my Dad too.

[op]

does any one see this as indeed a comic strip

formula

laff tracked slap stick
cycle of bad boys of wall street

fill in the blank .....

after weeks of three panel hi jinx
the boys
prank # 17134
ends in massive caulk up

final panel

miss prim patented
wagging stifled smiled
indulgent hair bunned head
as she
once again
for the umpteenth time
exclaims her feel good last line
at those bad bad boys

"alright alright guys ...
i'll see to the clean up..
.... this one time ...but...no more of this
promise me "

the boysin chorus

"yessssss miss prim ...weeee promise "

the wacky further mishaps and
sanguinary adventures
of ....
the hi fi in' hazard brothers (llc)

[mike]

it is silly to claim this crisis as a free market failure when no free market calls for the government to create a bank and centrally plan the availability of credit.

incoming: gosbank, usa stylez?

[Turbo]

Iceland runs a current account deficit of 17% of gdp, and was the poster child country for the credit bubble, so in a world of credit contraction I don't think any conspiracy will be necessary to cause Iceland's financial system to go the way of Bear Stearns (who were never a big player in the ISK debt market). The evil speculators being alluded to here are actually going to take a bath on Iceland because the turnover in the market is so tiny compared to the offshore holdings that there's simply no way out. All the current account deficit, small open economy countries are going to be at risk in this credit contraction.

[anne]

Hong Kong's stock market came under attack in 1997-1998 uring the Asian currency crises. The currency of Hong Kong was linked to the dollar, but speculators knew they could not attack the currency directly because China had immense currency reserves and exchange limitations. So, the attempt was to attack the stock market. China countered by buying the Hong Kong stock index, much to the distress of analysts which please me immensely.

[op]

mike
is right you pinko wankers

there is no talking mister ed "free market"
but if a reification like that could talk
it surely wouldn't
call for

"...the government to create a bank
and centrally plan the availability of credit "

hey
come dah gosbank mickey me lad

i have a nice
salt mine job
all lined up for you
down shaft 13

[anne]

Me, I think Iceland has a wonderfully run economy as o the rest of the Nordics, and I think Iceland is and will be just fine.

Must find something to buy from Iceland at Whole Foods today. I am all Icelandic in spirit, remembering them sheltering the Irish in times gone by and the Irish never forgetting sheltering.

I need an Icelandic cheer now. Tra la.

[Turbo]

The HKMA drove short-term interest rates to over 1,000% at times in 1997/98 to save the HKD peg. They saved the peg, but over the next few years property prices fell a mere 40%. Part of this was due to uncertainty over the China handover, but part of it was due to the HKMA's actions. I'm actually in favor of very heavy regulation over the banking sector, but monetary authorities have a pronounced tendency to act only when boom turns to bust, and if they were at all enlightened they would act to curtail the boom phase, when regulation when regulation would actually prove useful.

[Cynthia]

Not only are the Bushies ruthlessly using the Dilbert Strategy to create smoke and mirrors, they're recklessly conflating "tear down this wall" with "tear up those books", too. But this just goes to show that Reagan Repubs are high on ideology and fantasy and low on reason and reality!

[anne]

http://www.machaon.ru/pooh/chap1.html

How sweet to be a Cloud
Floating in the Blue!
Every little cloud
Always sings aloud.
"How sweet to be a Cloud
Floating in the Blue!"
It makes him very proud
To be a little cloud.

Sort of "O'Iceland" but not quite.

[save_the_rustbelt]

Paulson on at 11:00 am EDT, for those with an interest in facts. Have seen various reports about what will be said.

Grab the popcorn!

[Turbo]

Iceland exports cod and bananas (yes, bananas - geothermal powered greenhouses). If you're feeling really adventurous, you can fry up some salted cod for breakfast. Don't let your love for the nordic social/economic model blind your judgement here - Iceland's financial system is in serious jeopardy. The ECB is going to have to step in fairly soon. Then again, we're talking about 3 banks servicing 300,000 people.

[save_the_rustbelt]

The text of the speech is at www.CNBC.com.

I'm not certain when he has or will actually deliver the speech.

[Anthony K. Wikrent]

The financial markets are in crises exactly because they have grown so much bigger than the real economy has - the point made two weeks ago by Eric Zencey in The roots of the subprime crisis
http://www.eurotrib.com/story/2008/3/11/122016/316

The point is, to use an old adage, you can't eat bonds or other paper (well, you could, but the nutritional value is questionable, and it would certainly be far too much roughage). It is the real economy that provides what we need to live - the food, clothing, shelter, transportation, medical services, education, and so. How then do we ensure that the financial system is first and foremost serving the needs and interests of the real economy?

The problem is not just that the financial system has been allowed to grow faster than the real economy, but also that the real economy has been neglected, nay looted. There is a $1.6 trillion (tr not b) shortfall in maintenance of physical infrastructure. That is just to get already existing infrastructure up to a proper level of safety, reliability, and function. Then there is overwhelming need for the U.S. to build new infrastructure to begin moving the country away from fossil fuel dependency: urban rail mass transit systems, high-speed rail lines between cities, an almost wholesale replacement of the electricity generation and distribution system.

The folly of the present financial arrangements is clear when you consider that entrepreneurs who have devised cares like the Aptera which can get 240 miles per gallon (yes – two four zero) are begging to get financing, while hedge funds can routinely raise tens of billions of dollars to arbitrage currencies or bond markets.

It all boils down to a fight over political sovereignty over the credit mechanism of the economy. Neo-liberal “free market” fundamentalism posited that allowing financial and capital markets to operate relatively unhindered would result in the most efficient creation of the greatest possible social good. It should not have taken the current financial crises to force us to realize neo-liberal “free market” fundamentalism as a fundamentally flawed theory. Removing hindrances to the financial and capital markets required the surrender of national political sovereignty over the credit mechanism of the economy, giving private actors such as hedge funds and banks free reign in amassing, allocating and distributing credit. When we found that vital social goals, such as moving off of fossil fuel dependency, or (I would argue) preserving the 1960s levels of income of the working class, were not being met, the return of national political sovereignty over the credit mechanism should have been demanded.

Now, fixing these infrastructure problems will require enormous amounts of money. Where shall such amounts be obtained? Under our present financial arrangements, they cannot. Yet, the equivalent of three to five trillion dollars or more are traded each and every day in various financial markets around the world. I would venture to guess that some 99 percent of those financial flows do nothing at all to help the real economy; certainly they do nothing to help solve the problems we face in resource depletion and misuse. Thus, the major problem I see that needs to be solved is how to compel those flows of money and credit into helping solve the real economic problems that we face.

Thus the foremost question we should be asking is: how do we ensure that the credit mechanism of the economy is not being misused for private gain? How do we ensure that the credit mechanism of the economy is instead being used for to advance the public good?

It will be of no use to save the financial system in its present form and allow the credit mechanism to continue being mis-used for private gain. A radical re-assertion of national political sovereignty over the financial system is what is required. An essential element is going to be the imposition of a Tobin tax on all financial transaction, not just foreign exchange, to hamper speculation and make capital flows more stable and patient. A Tobin tax is the absolute minimum for restructuring the financial system at this point.

[anne]

Turbo:

"The HKMA drove short-term interest rates to over 1,000% at times in 1997/98 to save the HKD peg. They saved the peg, but over the next few years property prices fell a mere 40%."

The nature of the Hong Kong currency peg means that domestic monetary policy is always and automatically subjugated to pressure on currency, speculative changes in Hong Kong property prices are commonplace and smoothed because the government controls the supply of land. There was relatively little concern of property prices by residents, but the economy was weakened by the Asian weakness. Hong Kong-Chinese administrators choose however to continue to peg.

Interesting case, that we should think through carefully again.

Thank you for the helpful argument, Turbo.

[save_the_rustbelt]

Speech delivered at 10:00am, video also on CNBC website.

[ECONOMISTA NON GRATA]

"If we don’t reform the system this time, the next crisis could well be even bigger. And I, for one, really don’t want to live through a replay of the 1930s."

What has been proposed is to leave the barn door open (just) in case, that some of the horses that got out happen to find their way back in. Never mind that half the horses are still in the barn. Dubai is looking better and better by the minute for some of these guys.

Econolicious

[op]

got to laff

the great larry summers strikes again

his marching orders to the spec fundees

" u free corps in free fall
gotta
add to your equity caps "

that Rx applied
by larry and bondage bobby
at the level of sovereign reserves
led to the savings glut
the massive trade imbalance
and more precisely
the lot bubbles we got a-poppin today

its sort of more of the same
applied elsewhere
that implies
dreams
"this time instead ...
it will make all things better
not worse "

[dd]

STR,
insight developed via experience as SEC senior trial attorney specializing in complex litigation way back in the '80's. The game was afoot then too but the SEC was more decentralized, regions had more autonomy and were dedicated to investor protection. As for SOX it is the logical extension of Gramm-Leach and CFMA; just as Paulson's "regulatory" charade is about a centralized structure dedicated to consolidating power and protecting institutional "financial stability."

[op]

paradox of griffffft

"The financial markets are in crises exactly because they have grown so much bigger than the real economy has"

bigger here
must have
a nice complex function like generator
where n-m of the roots conjugate to zero

[save_the_rustbelt]

Paulson's plan has been characterised so far as Dilbert and it has been characterised as radical.

I suspect the truth lies somewhere in between.

Keep in mind this is Krugman the columnist not Krugman the economist, this is not objective commentary by any means.

There is danger in underregulating, danger in overregulating, and danger in misregulating.

[Lafayette]

AKW: Neo-liberal “free market” fundamentalism posited that allowing financial and capital markets to operate relatively unhindered would result in the most efficient creation of the greatest possible social good.

Off course they would say that, wouldn't they? They always have spun measures that are intended to make the rich more rich in terms of bettering the proletariat (working class).

The market is free enough without having to make it ridiculously dangerous. Even before the deregulation of finance under the Clinton administration, it was working just fine. Perhaps not making as many Golden Boy millionaires, but it did meet its requirements.

This whole mess reduces to one inescapable word. And, that word is greed. Too many people were allowed to become greedy by having opened the financial spigots far larger than was economically prudent.

And these Newly Rich have become adulated as heroes of the American Success Story. Nobody praises the losers in that tale, however. These unsung heroes don't strut about the nightly talk shows, do they? They don't write/sell books telling the rest of us How To Get Rich! that we, like fools, buy in the forlorn hope of joining the select club.

It shows a distinct lack of cultural values. We are all created equal? Perhaps, but the game rules dictate final outcomes otherwise.

[anne]

http://krugman.blogs.nytimes.com/2008/03/31/virtuous-circle/

March 31, 2008

Virtuous Circle?
By Paul Krugman

Larry Summers is feeling optimistic: *

"For the first time since last August, I believe it is not unreasonable to hope that in the US, at least, the financial crisis will remain in remission....

"Just as cascading liquidations have contributed to a vicious cycle of both real and financial contraction, it is possible that recovery can be a virtuous circle in which improved financial and real economic performance are mutually reinforcing."

Personally, I’m not unskeptical of any argument that uses the “not un-” construction. (Orwell: “One can cure oneself of the not un- formation by memorizing this sentence: A not unblack dog was chasing a not unsmall rabbit across a not ungreen field.”)

OK, snark aside: I’ve been watching for signs of a just such a virtuous circle. So far, I’ve been disappointed. The TED spread ** dropped substantially after the announcement of TSLF, super-TAF, Bear Stearns and all that made it clear that the Fed was determined to rescue banks — but it seems to have bottomed out well above its levels of early this year, and far above “normal” levels. The flight to safety has abated, so that T-bills are no longer flirting with the zero bound — but they’re still paying way less than the Fed funds rate. Mortgage rates fell, but not back to their lows of earlier this year, and they’ve been creeping up again.(I’ve been finding FNMA coupons *** a useful quick indicator.)

So far, in other words, the Fed’s intervention seems to have moved markets in the right direction, but not generated a self-reinforcing cycle of improvement.

* http://www.ft.com/cms/s/0/073802f2-fe6c-11dc-9e04-000077b07658.html

** http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

*** http://www.bloomberg.com/apps/quote?ticker=MTGEFNCL%3AIND

[mike]

March 28, 2008

Bail me out Bennie

Now that the Fed and the Treasury Department have clumsily come to the rescue of the financial titans of Wall Street, it is now politically dangerous to resist similar pleas from just about everybody else. Populism is emerging as a dominant theme is this election year, and with so much largesse showered on Bear Stearns and JP Morgan Chase, politicians are demanding even more generous terms for consumers. In Washington, it seems that two wrongs apparently make a right. Another downside to corporate bailouts is that they provide the critics of free market capitalism with plenty of excuses to weigh down American economic vitality with even more unnecessary regulation.

In the first place, the current mess did not result from a failure of the free market, but from too much government interference. The real estate bubble, and the shaky securitized products it spawned, resulted from the Fed artificially setting interest rates too low. Had interest rates been allowed to find their market levels, rather than be set by government decree, the real estate bubble never would have been inflated in the first place.

In a nation short on savings and heavy with debt, the free market would naturally set interest rates quite high. With lots of demand for credit, but a limited supply of savings, the risk of lending and therefore the price of credit (interest rates) would be high. Although onerous to borrowers, high rates would have both encouraged saving and discouraged borrowing. In the end, these market forces would reduce interest rates and produce a more stable balance between savings and consumption. However, the Fed did not want American consumers to be subjected to free market discipline that might otherwise reign in their non-stop spending. After all, reckless consumption was falsely believed to be the engine of our prosperity.

So the Fed fixed the price of credit (interest rates) well below the rate that would have been set by the free market. This sent false economic signals to the market that more savings were available than actually existed, leading to an over-investment in housing. Also, by keeping the rate of interest below the rate of inflation, rampant speculation was encouraged, and the foundation was laid for the very type of mortgage financing that has now come back to bite us.

In the second place, no one on Wall Street should be bailed out. The effects of the bursting of the housing bubble should be dealt with by the market, despite the fact that the underlying bubble itself was a byproduct of government intervention.

Apart from the problems created by interfering with the market’s attempts to restore balance and reallocate resources, bailouts create all sorts of moral hazards. After all, why should bailouts be limited to investment banks or overstretched homeowners? What about renters who also borrowed too much money? What about those behind on their credit cards, auto or student loans? Why shouldn’t they get bailed out? How about small entrepreneurs whose start-up businesses failed -- should they get bailed out as well?

In market economies all sorts of people lose money, sometimes as a result of circumstances entirely beyond their control. While this is clearly not the case for most homeowners and mortgage lenders, some would obviously fall within that category. However, it is not up to government to rescue them. Even if some borrowers and lenders were lead astray by the false economic signals sent by the Fed, they are never-the-less responsible for any losses they might have incurred as a result of following them. The real danger is that while government interference is actually at fault, it’s the free-market that ends up taking the blame.

[Bruce Wilder]

s-t-r: "I suspect the truth lies somewhere in between."

You always think that. And, it makes it remarkably easy for the unscrupulous Right to manipulate you.

[mike]

or maybe he's just balancing his views out with the unscrupulous left?

[ScentOfViolets]

It's also a matter of empiricism; the people who criticised the regulatory 'reforms', who predicted that thae sort of mess we are in now , deserve to have their say and their turn at bat.

But - just like the people who called for a little more prudence before invading Iraq, who suggested thay maybe we should let the weapons inspectors do their job before committing to a course of action - they are still shut out of policy-making dialogue.

Apparently because, just like the anti-war people, while they may have been right in their predictions, they were right for the wrong reasons.

And the Masters of the Universe? The finacial titans, the qhiz-kid quants? The ones who've been proven massively, completely wrong? The line there is the same as it ever was: even when they're wrong, they're right.

Keep in mind that this is the tack these people are going to take, no matter what. For reasons I'll leave the rest of you to speculate upon.

[ddt]

Never mind guys, courtesy of new research by a buddy of Kevin Hassett (McCain's advisor), via Fox News:

The 'Recession' Is a Media Myth
Monday, March 31, 2008
http://www.foxnews.com/story/0,2933,343671,00.html

"The media’s focus on the negative side of everything surely helps explain people’s pessimism. In a recent interview Fox’s Neil Cavuto claimed this bias “is all part of the media’s plan to get a Democrat in the White House.”

Indeed, research has indicated that media bias is real. Kevin Hassett and I looked at 12,620 newspaper and wire service headlines from 1985 through 2004 for stories on the release of official government releasing numbers on the unemployment rate, number of people employed, gross domestic product (GDP), retail sales, and durable goods.

...

The news media have generated a lot of fear. Ben Stein has a point when he says “The actual economic conditions are not that bad. I think if we have a recession, if we have a serious recession, a great deal will lie at the media’s feet.” Hopefully a little perspective will enter the picture before even more harm is done.

John Lott is the author of Freedomnomics and a senior research scientist at the University of Maryland."

[mike]

i was under the impression that a poorer economy led people to lean more towards republicans.

mccain sucks at economics. and this guy must think the media magically turned good paper into bad at the banks.

[ddt]

Barry Ritholtz via Barron's:

"Truthiness" Instead of Truth
Big Picture by Fusion IQ

"March 24: Whether overstating job creation [or growth, or] understating inflation, a shocking amount of debate about the economic expansion has been primarily spin....[as] a parade of sycophants, despite knowing better, continued to cheer-lead punk data....First, they denied what was happening; then we got the whole "contained" thingie; then they blamed da Bears. Now they've unwittingly embraced Marx, and successfully pled for the central planners to rescue them from their own stupidity...Has "truthiness" replaced truth? [Will we] be saddled forever with these hallucinatory hacks?"

[save_the_rustbelt]

"You always think that. And, it makes it remarkably easy for the unscrupulous Right to manipulate you."

That is really funny.

Given that I barely agree with the right on much anymore, that is really, really funny.

My main ideology is common sense, a commodity in short supply.

[save_the_rustbelt]

"You always think that. And, it makes it remarkably easy for the unscrupulous Right to manipulate you."

That is really funny.

Given that I barely agree with the right on much anymore, that is really, really funny.

My main ideology is common sense, a commodity in short supply.

[ChamberPost]

Krugman is correct in stating that the blueprint does nothing to alleviate the current crisis; because that is NOT what it is designed to do.

Business leaders have been talking about our screwed-up financial regulatory system for years and no one was listening. You want to really address a rapid, global financial system -- look at transparency, prudential regulation and the ability to flexibly respond to systemic risks. Inflexible, rules-based approaches will never keep up with innovation. SOX 404 costs about $50 billion a year and it did nothing to stop this crises.

Instead of piecemeal solutions such as simply layering on new regulation upon a duplicative, creaky old system won't do. We must establish a modern 21st century regulatory framework to ensure our nation has the most efficient, innovative, fair, and well-regulated capital markets.

[anne]

"SOX 404 costs about $50 billion a year and it did nothing to stop this crises."

Care to document this, since I find this complete nonsense.

[anne]

Sarbanes-Oxley that is, to all those business leaders who have for years been complaining of our financial regulatory syustem. Who were these leaders and what were they complaining about, precisely?

[Lafayette]

CP: We must establish a modern 21st century regulatory framework to ensure our nation has the most efficient, innovative, fair, and well-regulated capital markets.

Oh, really?

The above is what they said to justify the last deregulation of the finance industry. Of course, the meant "well-enough regulated capital markets". They got that wrong, didn't they.

Why not increase the highway speed limits to 100 mph, so people can get to and from work "more efficiently". Because accidents happen and in a direct proportion to speed.

(I find, btw, that analogy spot on.)

There was a fundamentally good reason for the Glass-Steagall Act. We forgot what it was and viral greed, both corporate and personal, has taught us that lesson once again ... at great expense to the world at large (as much as half a point of GDP in developed countries).

What, pray tell, was the "advantage earned" by tearing down the wall between commercial and investment banking? (Aside from having the Finance Industry profits balloon to about 40% of total profits?) Compared to the havoc wreaked by the Toxic Waste Subprime Mess, was it worth it? It bettered the lives of how many? At the expense of how many others?

Awaiting your answers with breathless anticipation ...

[ddt]

yes! finally finally finally the Fed is listening to some voices of reason. it's time to get off the Japanista express.

Fed eyes Nordic-style nationalisation of US banks
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/31/cnfed131.xml

The US Federal Reserve is examining the Nordic bank nationalisations of the 1990s as a possible interim solution to the US financial crisis.

The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers

The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region's economy to its knees.

It is understood that Fed vice-chairman Don Kohn remains very concerned by the depth of the US crisis and is eyeing the Nordic approach for contingency options.

Scandinavia's bank rescue proved successful and is now a model for central bankers, unlike Japan's drawn-out response, where ailing banks were propped up in a half-public limbo for years.

While the responses varied in each Nordic country, there a was major effort to avoid the sort of "moral hazard" that has bedevilled efforts by the Fed and the Bank of England in trying to stabilise their banking systems.

Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country's top four banks - Christiania Bank and Fokus - were seized by force majeure.

"We were determined not to get caught in the game we've seen with Bear Stearns where shareholders make money out of the rescue," said one Norwegian adviser.

"The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial," he said.

Stefan Ingves, governor of Sweden's Riksbank, said his country passed an act so it could seize banks where the capital adequacy ratio had fallen below 2pc. Efforts were also made to protect against "blackmail" by shareholders.

Mr Ingves said there were parallels with the US crisis, citing the use of off-balance sheet vehicles to speculate on property. All the Nordic banks were nursed back to health and refloated or merged.

The tough policies contrast with the Fed's bail-out of Bear Stearns, where shareholders forced JP Morgan to increase its Fed-led rescue offer from $2 to $10 a share. Christopher Wood, chief strategist at brokers CLSA, says the Fed's piecemeal approach has led to "appalling moral hazard".

"Shareholders have been able to lobby for a higher share price only because the Fed took over the credit risk on $30bn of the investment bank's dubious paper. The whole affair also amounts to a colossal subsidy for JP Morgan," he said.

[Patricia Shannon]

Winslow R.
How do you get your eye-catching bold text? I know that "b" doesn't do as well as what you use. I suppose it's "font"
I'd appreciate specifics, as what you do is both easy to read and readily identifies areas of emphasis

[Patricia Shannon]

I just looked at Winslow's source, and he's using the bold tag. But somehow it looks bolder than when I use it :)

[Mark Thoma]

There is bold (with a b tag) and strong (with a strong tag) There is also emphasize (with the em tag) and italic (with the i tag)

[Patricia Shannon]

Thanks Mark. And thank you for fixing my accident.

says...

"This whole mess reduces to one inescapable word. And, that word is greed"

who's greed laffriotte

the guy paid to seek return max ?
the guy building the hoodwinking abrahcadabrah risk shucker algorithm ?
the regster with averted eyes

greeds constant hi fi melt downs fairly rare

greed casts too big a net

u sound like a kitchen
jeremiah chastising
a kingdom of cheese eating mice

[wjd123]

What are "aspirational intentions"? Is that Paulson's special tune for whistling past the grave yard?

[Dickeylee]

George Will, on ABC's This Week w/George Stephanopolis, along with Paul Krugman, Donna Braizle and Robert Reich, said that a proposal that he thought everyone could agree with as such; that no employee of any firm that goes to the discount window, or in any way draws any funds from the Federal Reserve, for any reason, could not have ANY employee making more than a gov't GS-15. No options, no bonuses, no golden parachutes, nothing!
So I ask, just when will we ask JPM for our money back?

[paine]

"And I, for one, really don’t want to live through a replay of the 1930s."

live thru

odd participant observer
point of view
if that were
all there needed to be to my view

i'd say

bring it on
for the midst of it would be a life time
of economic muggery fulfilled

let the market tempests roar
the finacial ocean blast and bust
these feeble arcs

let the economy like a sky
fall in apon us
and bury us in protracted misery .....

we deserve it

we filthy humans

i'd suggest

"we " econ con's ---from august u the clark winner
with the nyt column bine
to me the mini-ex-maoite
simmering in a teacup ----
all of us
stick to another point of view

the point of view of ... our science ..
yes yes my dear paul
our dismal algebra spotted science !!!!!

[paine]

a bunch of
norskophiliacs you all be

u anne
worse then shameless
what are they 17 million ??
23 million ???

why give me their locations and facilities
and i could fashion a better scanland
out of the people of greater new york

[BJ Feng]

We have to weigh the costs and benefits of any proposed solution. Sometimes the cure is worse than the disease, as evidenced with the new travel laws on airplanes. I question if any of the new procedures of screening and disallowing liquids, plastic knives, etc., are worth the cost of delays to the traveler and the burden of paying for thousands of talentless goons (TSA) at the airports. It seems to me additional equipment and a secure cockpit door would be enough.

Of course, if simple, yet effective changes were proposed, you know the shills would scream that "not enough is being done". Therefore one has to present a plan that seems complicated, but in reality does very little. The most important thing is to do only enough to "solve" the problem without creating additional problems or costs.

Dickeylee, the proposal to limit executive pay if financial companies borrow from the FED sounds very reasonable. Executives should not benefit from steering their firms out of danger using taxpayer money, with taxpayers on the hook. I have to think more about the potential costs, perhaps executives will be so hesitant to use the FED that it will defeat the purpose (they rather allow the firm to be destroyed than not collecting their bonuses, there are few executives with that mentality, if any because bonuses depend on stock price and the firm surviving). Or that they will delay borrowing until they collect a huge bonus, and then borrow a huge sum to tide them over, delaying fixing he problem until it becomes much much worse. Other potential loopholes are that they will just make up for the bonuses in later years, but that will face shareholder opposition. The company could also just raise the base pay and have the executives pay the income taxes over $1 million themselves. Overall, a combination of these loopholes will be used, but I expect the distortion will be minor, and executive pay will be reduced if they borrow from the FED. The question is if we want that kind of disincentive, could it amplify the risk to the entire financial market if executives delay borrowing?

[kthomas]

BJ, you are too kind.

Any CEO that requires tax-payer money to bail out their company should be fired and.....well, fired.

[BJ Feng]

Another thing I forgot to mention is that executives are likely to seek more expensive sources of financing that will allow them to collect their bonuses at the determent of stockholders. They might be willing to float a 7% convertible bond with generous equity conversion ratios rather than borrow from the FED at 2.5%. Such a move will be immediately obvious to stockholders and analysts, who would probably call for management's dismissal. I don't know how the dynamic would work out in reality, if management would be reined in by the threat of a shareholder revolt.

[Dickeylee]

BJ, did you just make a funny at Lehmans expense? But I'm guessing that Lehmans is floating 7% bonds AND borrowing from the fed window @2.5%, so ha ha ha, Lehmans gets the last laugh!

[dd]

anne, Full Text of SOX here:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=107_cong_billsdocid=f:h3763enr.txt.pdf
In exchange for CEOs and CFOs certifying financial statements and internal controls corporations retained favored financial transactions: off-balance sheet transactions, pro forma earnings and special purpose entities (Section 401). So rather than banning outright the underpinnings of the Enron fraud; the process and vehicles were incorporated with the caveat that internal controls would provide sufficient oversight to prevent fraud.
Congress did rouse itself to order a variety of studies (http://richardawhite.com/SelectedGAOandSECStudiesandReports.pdf) including a GAO study on the impact of the above financial transactions and derivatives and whether IBs "assisted" corporations in the manipulation of financials. z9http://www.gao.gov/new.items/d03511.pdf)
fun excerpt:
"Federal financial regulators noted that exams prior to Enron’s collapse did not identify structured transactions as a high-risk area that required attention because risk assessments did not show that such deals posed a material risk of financial loss. In the wake of Enron’s collapse, some regulatory officials said they are refining their approach to supervising certain aspects of a financial institution’s operations that may cause reputation, litigation, and other operational risks in the area of complex structured transactions. For example, bank regulators plan to more extensively sample transactions in their future exams. Also, federal financial regulators are in the process of performing targeted reviews of the few large investment banks that are
active in complex structured transactions and are planning to develop guidance or best practices on ways to ensure the transactions are appropriate."
Obviously that was a stunning success that prevented the current meltdown.

[Dickeylee]

The FT reporting that UBS will write down another $18B, on top of the $18B it wrote down last year. At this rate, it'll have written off the entire worth of Switzerland by 2010! Those secret swiss accounts sure aren't what they used to be!

http://www.ft.com/cms/s/0/Sbc18e5c-ff-11dc-b556-000077b07658.html

Do the swiss have a Ben window?

[dd]

Fun part of SOX that will never be enforced in the current mess:
Section 304 -- Forfeiture of Certain Bonuses and Profits
a. Additional Compensation Prior to Noncompliance With Commission Financial Reporting Requirements. If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for--
1. any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and
2. any profits realized from the sale of securities of the issuer during that 12-month period.
b. Commission Exemption Authority. The Commission may exempt any person from the application of subsection (a), as it deems necessary and appropriate.

Thank goodness for that SEC exemption. Nice.

[don]

"Another downside to corporate bailouts is that they provide the critics of free market capitalism with plenty of excuses to weigh down American economic vitality with even more unnecessary regulation."

But the bailouts prove the need for regulations, as they demonstrate that the free market solution cannot be tolerated. This conclusion is reinforced by the current bailouts, as they are being conducted under a rabidly pro-free-market-capitalism administration. Of course, if you are prepared to let the market discipline work, with no bailouts whatsoever, I might have more sympathy for your position.

[Lafayette]

BJF: Of course, if simple, yet effective changes were proposed, you know the shills would scream that "not enough is being done".

One glaring fact refutes the above: From the early 1930s, when the Glass-Steagall Act was passed separating Commercial Banking from the machinations of Investment Banking, not one SubPrime Mess occurred.

That separation of businesses suited us nicely for almost three-quarters of a century. Within ten years of having been repealed, we've had the worst Financial Crisis since the 1929 Crash that gave birth to the Act.

It took the Golden Boys only a 8 years to pull it off. You wanna see a shill? Look in the mirror.

[BJ Feng]

The definition of subprime didn't exist back then. FICO scores and credit history are relatively new, but bank failures have always existed. During the early 1990's S&Ls and banks failed because they made large loans for speculative acquisitions of overpriced property. Sound familiar? Glass-Steagall was still around, but it couldn't prevent the S&L crisis. There has yet to be a law made or regulator formed that can stop periodic bank failures

[anne]

"The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry. In fact, the new plan was originally conceived of as 'promoting a competitive financial services sector leading the world and supporting continued economic innovation.' That’s banker-speak for getting rid of regulations that annoy big financial operators.

"To reverse course now, and seek expanded regulation, the administration would have to back down on its free-market ideology — and it would also have to face up to the fact that it was wrong. And this administration never, ever, admits that it made a mistake."

Precisely; there has been no meaningful plan offered by the Aministration to deal with the current crisis, and there is is no reason to believe that more than attention to already existing regulatory authority was needed to have prevented the crisis.

[anne]

This Administration has done all that was possible to undermine regulation of business, an with a Federal Reserve anti-oversight an anti-regulatory philosophy that was cultivated for 25 years, a financial crisis was sure to develop. The Fed has done much to diffuse the market effects of the crisis, though selective interest rates show how much of a problem credit flow still is.

Nothing of significance came from the Administration yesterday, since there will be no change in philosophy by this Administration that slants all initiatives further to business interests.

[anne]

Looking forward, there is definite need to actually insure that there is regulation when there is supposed to be under present law and present law covers all traditional banking companies. There is need to develop a regulatory mandate for companies acting as banks though not regulated as banks, but that will almost certainly take another President and Congress.

As for the complaints about the cost and difficulties adhering to Sarbanes-Oxley regulations I am still waiting for any documentation, but conservatives prefer sham warnings and complaints.

[anne]

The question for now becomes not even so much a credit crisis, which the Federal Reserve has been dealing with and dealing with well from a market perspective, but how slow growth will be from here and for how long. Will employment hold, for unless employment holds we are in for a most difficult sustained slowing of growth?

[anne]

http://www.nytimes.com/2008/04/02/business/worldbusiness/02ubs.html

April 1, 2008

UBS to Write Down $19 Billion; Chair Will Depart
By DAVID JOLLY

The largest Swiss bank said that the write-down was related to “U.S. real estate and related structured credit positions.”

[anne]

A question that I am thinking about is why European banks were so easily caught up in credit problems by having long bought suspect American mortgage packages. Why was it so easy to sell suspect American mortgage packages to Swiss or German or British banks, even when it was completely clear the dollar would long be weakening? What of European banking regulators? What of Japanese or Chinese banks? Which banks bought, and which avoided buying and why? What of country by country regulation?

[reason]

Anne,
I suspect the dollar weakness is irrelevant in this case. All the banks affected almost certainly had US subsidiaries, probably acting semi-automimously.

[anne]

http://www.nytimes.com/2006/04/18/business/worldbusiness/18iceland.html?ex=1303012800&en=4aa3f80443300fac&ei=5090&partner=rssuserland&emc=rss

April 18, 2006

Iceland's Fizzy Economy Faces a Test
By HEATHER TIMMONS

REYKJAVIK, Iceland — It didn't take long for the 300,000 residents on this windswept fishing island to adjust to their mini-titan economy, where boutiques now sell Dior cosmetics and Gucci handbags and the flow of international money has been fueling a red-hot housing market and a crop of wealthy entrepreneurs.

Now, some of their new-found growth may be ebbing. It is a familiar situation to Icelanders, who have often experienced cycles of feast or famine in their fishing economy. But the downturn has caught the attention of critics from outside the country who argue that Iceland faces a financial disruption that could have repercussions far beyond its 40,000 square miles .

Iceland has undergone one of the fastest, fizziest economic transformations in the world in recent years. For the four years before last year, it was the best-performing Western stock market, and its growth rates had soared. Its large business interests have spread throughout Scandinavia.

But Iceland is facing fresh challenges. Some hedge funds and other global investors in the last several months have been concerned that the economy has overheated, and so they have withdrawn money from Icelandic markets. This pullback has caused the main stock index, the Icex 15, to fall 18 percent, and the currency, the krona, to weaken by about the same amount.

These declines, some analysts say, run the risk of driving away other investors, who had been lured by Iceland's attractive interest rates. This could prompt a downward spiral with larger repercussions. If nothing else, the analysts say, Iceland's own economy could be in for a rough patch, serving as a cautionary tale for other emerging markets....

http://www.bloomberg.com/apps/news?pid=20601087&sid=aseu2yzwmJ5U&refer=home

March 31, 2008

Iceland's Biggest Banks Targeted by `Unscrupulous' Speculators
By Abigail Moses and Tasneem Brogger

Iceland's lenders are under attack from what its central bank called ``unscrupulous dealers.''

[mike]

"But the bailouts prove the need for regulations, as they demonstrate that the free market solution cannot be tolerated. This conclusion is reinforced by the current bailouts, as they are being conducted under a rabidly pro-free-market-capitalism administration. Of course, if you are prepared to let the market discipline work, with no bailouts whatsoever, I might have more sympathy for your position."

you are doing exactly what the market says - saying that this example has demonstrated failure of a free market. whose idea of a free market involves a guy we think is really smart with data we hope is really accurate and calculations we hope are really good to utter a number that becomes the cost of credit?

and yes, no bailouts for homeowners, no bailouts for bad banks. if we bail them out aren't we privatizing profits for both households and businesses while socializing losses for both? isn't that the worst situation we could come up with?

[mike]

One glaring fact refutes the above: From the early 1930s, when the Glass-Steagall Act was passed separating Commercial Banking from the machinations of Investment Banking, not one giant asteroid collission with the earth occurred.

[Patricia Shannon]

Mike, are you trying to prove you are too silly & irrational to pay attention to?

[anne]

Reason:

"I suspect the dollar weakness is irrelevant in this case. All the banks affected almost certainly had US subsidiaries, probably acting semi-autonimously."

Nonetheless, what would have been the attraction of American mortgage packages for international banks in recent years? Obviously a relatively high dollar return was an attraction, but the a return higher than corporate bonds shows at least some increase risk and there was the dollar risk and in a rising interest rate environment mortgage packages were obviously going to show payment adjustment problems that would not have been found much more than 10 years before.

What were portfolio managers thinking? Select professionals were openly turning from mortgage packages by the close of 2002, while more professional were buying continuously. We did not even bother looking at the packages academically from 2002, since the little added return made no sense.

[hari]

It was the AAA ratings, stupid, which made the market digest the subprime SIVs/CDOs/etc.

And who was the rating Agency? Same banks who owned/paid the rating agencies....*social contract* of a sort in hi fi market a la America.

EU Commission is just now investigating how AAA ratings were made possible and potential collusion by US Banking System.

I suppose the Risk Dept of EU big banks simply accepted them at face value - AAA ratings!

[anne]

Hari:

"It was the AAA ratings, stupid, which made the market digest the subprime SIVs/CDOs/etc."

Careful of rumors, for there is much we do not understand. Were subprime mortgages packaged with investment-grade debt? How could this be done absent fraud? I think subprime and prime debt was largely distinguished, but the riskier debt bought anyway. I think much of the default is actually investment-grade default, driven by falling home prices and strain on paying ordinary mortgages that were easy to pay as long as home prices increased by drawing cash from appreciating homes. I am not willing yet to simply condemn rating agencies.

[reason]

Mike
you are doing exactly what the market says - saying that this example has demonstrated failure of a free market. whose idea of a free market involves a guy we think is really smart with data we hope is really accurate and calculations we hope are really good to utter a number that becomes the cost of credit?

No actually - lets not forget that Central Banks control short term interest rates not much else. Long term interest rates are determined by a host of other factors. You are taking cheap shots, hang your own head on the line. How would you let the money be determined?

[reason]

Oops.
... money supply be determined.

P.S. Mike I also doubt that the G-S is responsible in this particular case, it was not responsible for unloading mortgages from the lenders books and then removing all normal prudential control of borrowers.

[mike]

i think the ideal state would be tying currencies to commodities and letting them float against eachother and the market setting rates.

[hari]

@ Anne -

You'll be surprised by AAA rating(s) *incentive* to risk management by the global banking sector.

[anne]

http://www.nytimes.com/2008/04/01/business/01wall.html

April 1, 2008

On Paper, Wall Street Gets Its Way
By JENNY ANDERSON

More than a year ago, when the markets were flying high, a chorus of alarm went up on Wall Street. Talk spread that the United States risked losing its edge in the financial world.

But the threat that many executives saw was not the credit crisis then looming — it was the threat of excessive litigation and overregulation. Wall Street urged Washington to lighten up.

The financial industry could not get what it wanted then, but it may get what it wants now.

If adopted, the sweeping overhaul of the system overseeing the American financial system proposed by Treasury Secretary Henry M. Paulson Jr. on Monday could hand Wall Street investment banks a major victory in their years of effort to streamline regulation.

While the plan is unlikely to gain Congressional approval soon, and may go nowhere in a partisan election year, it echoes many of the seemingly subtle and yet profound changes that Wall Street has been lobbying for all along.

One change Wall Street wants is for regulators to shift from policing the industry with hard and fast rules — do this, don't do that — to using looser "principles" that might be open to interpretation. Another is to modernize the hodgepodge of state and federal regulators that sometimes overlap and compete with one another.

Mr. Paulson's plan would take a step toward both of these changes by consolidating banking and insurance regulators and potentially merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, then stripping the combined entity of much of its regulatory authority. Many on Wall Street applaud those proposals.

"I thought it was a major step forward," Thomas A. Russo, chief legal officer of Lehman Brothers, said of the proposal. "The world became homogenized, but the regulatory structure stayed within the same straitjacket."

Proponents of the principles approach say it is more efficient. They point to the meteoric rise of London as a global financial center, which has fueled worries that New York might one day lose its title as the world capital of capital. The Financial Services Authority, Britain's main financial regulator, relies on principles rather than rules....

[anne]

http://www.nytimes.com/2008/04/01/business/01wall.html

"More than a year ago, when the markets were flying high, a chorus of alarm went up on Wall Street. Talk spread that the United States risked losing its edge in the financial world.

"But the threat that many executives saw was not the credit crisis then looming — it was the threat of excessive litigation and overregulation. Wall Street urged Washington to lighten up.

"The financial industry could not get what it wanted then, but it may get what it wants now."

Notice the internal contradiction, where the complaints was too much regulation at the very time when too little regulation was allowing the creation of a true financial crisis. I have been arguing, from what I have been told by attorneys, that the problem was no lack of regulatory tools but an unwillingness to use to tools even to attend to oversight.

[anne]

Suppose Wall Street had been regulated as London, would there have been no speculative abuse by financial companies? Regulation as London was suppose to mean less regulation, not more. There have been of course problems in London, but suppose the problems fewer than ours. Why?

Wall Street wished for less regulation, and was given less by a Republican Congress and President, not because rules were change but because there was less attention to finding when rules were needed.

Supposing we move to London rules which are more philosophical, the questions is who interprets and administers the philosophy?

[anne]

The Federal Reserve however reviled has responded properly to the crisis, and may have alievated it sufficiently though there will be ripple effects as from the remarkably short-lived market crash of October 1987. The Fed however needs to attend more to what is possible and actually manated under current law in terms of oversight and regulation.

[hari]

If you subcribe to RGB Blog and newsletter, you'd know by now that recession is going to be severe and may last 18mths or so. RGB also has access to other financial institutions in EU, including ECB.

So, in a word, he is well informed...and ahead of the curve.
Paul has been more or less reacting to developments; he has admitted RGB had a headstart on the credit crunch mess.

A analyst must try NOT to inject his *prejudices* into the analysis, and stay away from jargons which are best left to the politico(s). RGB does exactly that type of objective analysis, and that's way he is now read/listened to in EU.

American *punditry* has become remorselessly defunct and a wasteland of *ignoramus* (excepting our Mark). And I'll tell you why - (unfortunately) insularity has become a *religion* and it tends to insulate the intellect from asserting an independent vision/mind of what the damn reality is all about. [Bruce Wilder, when he gets on his soapbox(operatic!),
brings out the *old* America with conscience and conviction.
He can't always be right - applies to to us all mortals - but atleast he's prepared to use his professional knowledge from IO to share his wisdom with us. That's what is lacking in a lot of commentary - a lot of blah, blah.....and so on.