Rick Bookstaber Sun 2009-09-20 14:30 EDT

Regulation in Defense of Capitalism

Rick Bookstaber

Will regulation hobble capitalism? I think the opposite is true. Properly done -- and I think most of the financial regulation that is envisioned fits into this camp -- government regulation of the financial industry will move the industry closer to the capitalist ideal. By capitalism, I mean where those who take the risks and put up the money get the fruits of their labor. And, importantly, where those who take the risks and put up the money actually do take the risks, bearing the full costs of failure as well as success.

capitalism; defense; Regulators; Rick Bookstaber.

naked capitalism Sun 2009-09-20 09:48 EDT

Guest Post: ``Assessing the Recent Performance of the Fed''

Richard Alford, former economist at the New York Fed

...the current Fed: 1) actively promoted the asset bubbles which precipitated the most costly business downturn since the Great depression; 2) passively sat by ignoring its regulatory and supervisory responsibilities allowing the growth of imbalances that led to the worst business downturn since the Great depression...the economic and financial imbalances that built up between 2000 and 2007 will generate the opportunity costs in terms of lost output and idle and misallocated resources that will exceed the costs inherent in the economic and financial imbalances reflected in the most expensive anti-inflation fight ever fought by the Fed (1980-1983). The US financial system remains on life support. Furthermore, the Fed has played a part in allocating credit and in engineering redistributions of wealth on a scale that is likely to on the same scale as the redistribution of wealth from the household sector to government during the inflation ridden 1970s. The independence of the Fed has been compromised. Many in the Congress want to audit the Fed and limit its ability to make loans in future emergencies. The Fed is seen by many as an agency of the Treasury.

assessment; Fed; Guest Post; naked capitalism; recent perform.

Thu 2009-09-17 10:36 EDT

Milton Friedman and the Economics of Empire

Greg Grandin

Excerpt from Greg Grandin's Empire's Workshop. (Milton Friedman, Chile, Arnold Harberger, General Augusto Pinochet's military government, shock treatment) Not only had Nixon, the CIA, and ITT, along with other companies, plotted to destabilize Allende's "democratic road to socialism," but now a renowned University of Chicago economist, whose promotion of the wonders of the free market was heavily subsidized by corporations such as Bechtel, Pepsico, Getty, Pfizer, General Motors, W.R. Grace, and Firestone, was advising the dictator who overthrew him on how to complete the counterrevolution -- at the cost of skyrocketing unemployment among Chile's poor. The New York Times identified Friedman as the "guiding light of the junta's economic policy," while columnist Anthony Lewis asked: if "pure Chicago economic theory can be carried out in Chile only at the price of repression, should its authors feel some responsibility?"

economic; Empire; Milton Friedman.

The IRA Analyst Thu 2009-09-17 10:22 EDT

Back to Basis for Securitization and Structured Credit: Interview With Ann Rutledge

To get some further insight into the world of securitization and cash flows, we spoke last week to Ann Rutledge of RR Consulting...The difference between a futures contract for T-bonds and a credit default swap is that the former is a real contract for a real deliverable, whereas the CDS trades against what people think is the cash basis, but there is no cash market price to discipline and validate that derivative market. Rutledge: a contract or structure without a cash basis should not be allowed at all. You cannot have a derivative that is honest and fair to all market participants without a true cash basis. ...derivatives markets such as CDS and CDOs that have no cash basis tend to magnify speculative excesses, while derivative markets where there is a visible cash basis market to discipline investor behavior seem less unstable in terms of systemic risk. Rutledge: If the cash market were visible and could be examined by all participants, then it would give away the ability of the dealer banks to tax participants in the market and extract these abnormal returns. So how do we fix the problem... Rutledge: These originators play this game over and over again and they don't get caught, in part because we do not have a common, standardized set of definitions for governing the most basic aspects of the securitization process. The buyers don't do the work and the accounting framework is a counterparty-oriented framework, not one that is focused on the underlying assets. So banks like Countrywide and WaMu originated and sold some truly hideous structures during the bubble, but the buyers only diligence was reliance upon recourse to these banks. It costs maybe 50bp for a buyer to get the data and grind the numbers to really diligence a securitization based on cash flows, even a complex CDO. But the cost to the buyer and the system of not doing the diligence is an order or magnitude bigger. If the Congress, the SEC and the FASB, and the financial regulators only do one thing this year when it comes to reforming the world of structured credit, then it should be to impose by law and regulation common standards for the definitions used in the marketplace.

Ann Rutledge; basis; interview; IRA Analyst; securitizations; structured credit.

naked capitalism Sun 2009-09-13 15:59 EDT

Another Lehman Mess: No One Can Run the Software

Lehman's global derivatives book included contracts with a notional face value of $39,000bn and deals with 8,000 different counterparties when it went bust. The derivatives business was actually split into multiple strands, backed up by between 20 and 30 different systems. Once it went bankrupt, the staff who supported these systems "evaporated"...The more time goes by, the less insight remains in terms of the people who staffed those systems...Many previously hidden costs of running a derivatives business, including technology support of multiple disjointed systems, can no longer be discounted.

Lehman Mess; naked capitalism; running; software.

Asia Times Online Sun 2009-09-13 10:25 EDT

THE BEAR'S LAIR : Possible October surprises

Martin Hutchinson

The inflation that might be expected in the United States from unprecedented expansionary monetary policies has failed to appear, while huge budget deficits have yet to produce higher interest rates. Far from being signs of a new economic paradigm, this merely means new bubbles are forming...Commodities and gold therefore are the destination of this year's hot money and are forming the new bubble...a fair-sized bubble has developed in the T-bond market...however...a modest resurgence in US inflation or difficulty in a long dated T-bond auction could cause confidence to flee the Treasury bond market and yields to leap uncontrollably upwards...the long-term costs of excessively cheap money are beginning to be seen in the US economy itself. By allowing money to remain so cheap for so long, and by running incessant payments deficits, the United States has surrendered the advantage of its superior long-established capital base, narrowing its capital cost advantage over emerging markets and exporting that capital to countries with less profligate approaches. Huge budget deficits, themselves worsening the trade deficit, merely export yet more US capital to the surplus nations. That makes it inevitable that the years ahead, in which the United States will no longer enjoy a capital advantage over its lower-wage competitors, will see highly unpleasant declines in US living standards.

Asia Times Online; BEAR'S LAIR; Possible October surprises.

Bruce Krasting Tue 2009-09-08 12:06 EDT

Wallboard - China Inc.+$25mm, USA $-3.2b

Bruce Krasting

The Wall Street Journal had an interesting piece Tuesday on defective wallboard that had been imported from China . The LA Times had a more detailed discussion of this problem on July 4th. This article makes a case that the wall material may contain radioactive material. It provides the names of some of the companies involved. The problematic wallboard was sent to the US in 2006. These imports totaled $25 million. The WSJ estimates that the cost of repairing a home that has this material is $100,000. The LAT piece puts the number of homes involved at 32,000. Put those two numbers together. There are $3.2billion of losses relating to $25mm of wallboard.

25MM; 2B; 3; Bruce Krasting; China Inc; USA; wallboard.

Calculated Risk Thu 2009-09-03 11:43 EDT

Houses and Autos: The Cost of a Tax Credit per Additional Units Sold

CalculatedRisk

To calculate the cost of a tax credit per additional unit sold, we need to sum up the total cost of the credit - as an example $2.877 billion for Cash-for-Clunkers according to the Dept. of Transportation - and then divide by the estimated increase in sales because of the credit. Remember some cars or houses would have been sold anyway (even though they still receive the tax credit), but it is the additional sales that matter. That was the purpose of the tax credit! (update: Shnaps notes that the auto credit had an additional benefit of better mileage). Highly inefficient subsidies for home and auto purchases.

Additional Units Sold; auto; Calculated Risk; cost; Housing; Tax credit.

Mish's Global Economic Trend Analysis Sun 2009-08-30 12:03 EDT

Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High

Michael Shedlock

The second quarter 2009 Quarterly Banking Profile has some interesting charts and facts that inquiring minds will be interested in.Insured Institution Performance Higher Loss Provisions Lead to a $3.7 Billion Net LossMore Than One in Four Institutions Are UnprofitableCharge-Offs and Noncurrent Loans Continue to RiseNet Interest Margins Show Modest ImprovementIndustry Assets Decline by $238 BillionThe Industry Posts a Net Loss for the Quarter The Industry Posts a Net Loss for the Quarter Burdened by costs associated with rising levels of troubled loans and falling asset values, FDIC-insured commercial banks and savings institutions reported an aggregate net loss of $3.7 billion in the second quarter of 2009. Increased expenses for bad loans were chiefly responsible for the industry's loss. Insured institutions added $66.9 billion in loan-loss provisions to their reserves... ``Conventional wisdom regarding money supply suggests there is massive pent up inflation in the works as a result of the buildup of excess reserves...The reality is excessive debt and falling asset prices have rendered the best efforts of the Fed impotent. Banks are not well capitalized, they are insolvent, unwilling and unable to lend.''

15-year high; Bank problem listings; FDIC insured institutions; greater; Mish's Global Economic Trend Analysis; unprofitable.

Mish's Global Economic Trend Analysis Thu 2009-08-27 10:52 EDT

Bankrupt Auto Parts Suppliers Seek $100 Million In Executive Bonuses

Michael Shedlock

In every corner, greed continues to amaze. Please consider Bankrupt suppliers seek exec bonuses. A growing number of bankrupt auto suppliers are seeking court approval to pay tens of millions of dollars in bonuses to key executives, as they shed employees and cut costs.

100; Bankrupt Auto Parts Suppliers Seek; executives bonus; Mish's Global Economic Trend Analysis.

Mish's Global Economic Trend Analysis Wed 2009-08-26 15:55 EDT

Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks

Michael Shedlock

Here is an interesting Email from a Bank Owner and CEO regarding As of Friday August 14, 2009, FDIC is Bankrupt. ``I have been in banking for over 30 years and from my perspective this is much worse than anything I have seen.'' ABO, who as been in the business 30 years, writes: A comment concerning the FDIC - As of June 30 the rates being charged banks have increased substantially. Risk 1 category went to 12 basis points from 5, risk 2, 17 basis points, risk 3, 35 basis points, and risk 5, 50 basis points. Additionally, a 5 basis point special assessment is being charged on September 30 on total assets less tier 1 capital. It is probable that a second assessment will also be charged in December. The cost of FDIC insurance for a two hundred million dollar, 1 risk rated bank last year would have been around...

bank owner; capitalized banks; Email; FDIC; Mish's Global Economic Trend Analysis.

ClubOrlov Wed 2009-08-26 15:25 EDT

Local food: success is 100% possible

kollapsnik

This is a guest post from Tim, a city planner from sunny Moncton, NB. Tim has spent some time looking into the viability of local, small scale agriculture, and has come up with some results that give us every reason to be optimistic regarding our ability to feed ourselves through our individual and neighborhood-scale efforts, even as the systems of large-scale, industrial agriculture and food delivery unravel due to a combination of high input costs, epic droughts brought on by accelerating climate change, and a shortage of credit caused by the financial collapse. The remaining challenge is start doing it quickly enough: this summer, that is. "Russian households (inclusive of both urban and rural) collectively grow 92% of country's potatoes on their garden-plots, the size of which is typically...

100; ClubOrlov; local food; possible; Success.

Thu 2009-07-30 00:00 EDT

Hussman Funds - The Destructive Implications of the Bailout - Understanding Equilibrium - May 18, 2009

-- ``The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured...transferring wealth from those who did not finance reckless loans to those who did... the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.''

18; 2009; Bailout; Destructive Implications; Hussman Funds; Understanding Equilibrium.

Tue 2009-06-16 00:00 EDT

A Game of Credit Cost Smoke and Mirrors at Wells Fargo? : HousingWire || financial news for the mortgage market

Credit Cost Smoke; financial News; game; HousingWire; mirror; mortgage markets; Wells Fargo.

Tue 2009-04-21 00:00 EDT

Mish's Global Economic Trend Analysis: Geithner's Plan Can Succeed

...in avoiding a hit to bondholders at seemingly any taxpayer cost

Geithner's plan; Mish's Global Economic Trend Analysis; succeed.

Tue 2009-04-21 00:00 EDT

Mish's Global Economic Trend Analysis: Costs of Transportation Projects Collapse

cost; Mish's Global Economic Trend Analysis; Transportation Projects Collapse.