Sunday, April 26, 2009

You call this civic media? Yeah, I do . . . sort of.

In a one-man-talking-to-himself sort of way. So far at least. Where a true civic media is dialogic, this site, so far, is pretty monologic. Too bad. I talk, but people aren't talking back - not yet. And where civic media sites are non-partisan and non-ideological, this one, maintained by a political independent who is relieved and often glad that Obama is our president, is marked by a deepening concern that his financial team of Bernanke, Summers and Geithner are so beholden to Wall Street that Obama is being shielded from the information he needs in order to help the U.S. and the world emerge from the global financial crisis. In the April 29 Press Conference held to mark his first 100 days in office, the President unblushingly conceded his ignorance of the coming crisis:
You know, when I first started this race [in December, 2007], Iraq was a central issue. But the economy appeared on the surface to still be relatively strong. There were underlying problems that I was seeing with health care for families and our education system and college affordability and so forth, but obviously, I didn't anticipate the worst economic crisis since the Great Depression.
I find this admission galling. It's hard to accept from an editor of the Harvard Law Review and a U.S Senator, surrounded by brilliant people, who reads a lot and can actually think straight. It's as if the Ivy League, Wall Street and the D.C. beltway suddenly sealed themselves off what by December 2007 was obvious to a lot of people. In late 2007 I myself knew fellow Realtors and loan officers here in Glenview, north of Chicago - who knew something terrible was bound to hapen - we just couldn't tell when it would hit. We saw it coming in our business and in alarm signals that were being sounded loud and clear in the financial media: Yves Smith, Felix Salmon, goldbugs like Jim Willie and Martin Wolf and John Authers of the Financial Times, for Pete's sake!How on earth could Obama and advisors like Austin Goolsbie have missed what was staring us in the face?

Yves Smith is one of many finance bloggers who could have saved America and the world endless grief had the Obama team read her posts in 2007. So are Obama's people reading her today? They sure should - her website has 25,000 hits a day. Here she dissects the flaws of Obama's finance team in a painstaking analysis of the New York Times' surprisingly harsh April 26 story about Tim Geithner. Her analysis prompted one commenter to say
I cried when Obama made these appointments. Summers, Geithner and keeping Bernanke. I knew all was lost. And now I watch as the whole thing falls apart.
Larry Summers, the ringleader of the Obama economic team, strikes me as a brilliant careerist in the mold of Henry Kissinger: a first rate self-promoter and a second-rate "realpolitik" thinker. To me, he's in denial about what first-rate thinkers like Steve Waldman are saying about the need for economic models grounded in a new understanding of sustainable wealth and wealth creation - a topic I discuss here. Summers and Co. are all the kings men trying to put Humpty Dumpty (American hegemony) back together again. It just won't work. (The Times article suggests that Summers, a big man at the White House, may be lobbying to replace the unpopular Geithner with a loyal fresh face. In other words, nothing will change.)

In his recent "100 days" press conference, President Obama named the economists he follows (scroll to "Where the economists are coming from"). The central debate in his mind, he said, is between Wall Streeter Robert Rubin and realative main streeter Robert Reich, with attention to corporate globalism critic Joseph Stiglitz and inflation-breaking Paul Volcker. And he sums up his philosophy nicely: "The truth is," Obama says, "that what I’ve been constantly searching for is a ruthless pragmatism when it comes to economic policy." And: "The touchstone for economic policy is, does it allow the average American to find good employment and see their incomes rise." Sounds OK, but can Obama's "ruthless pragmatism" put America's financial system on a sound and durable footing? Pragmatists lack vision. Their ideas work short term, not long. The President needs pragmatisim and vision. Is he listening to people like these:
  • Charles R. Morris, author of The Trillion Dollar Meltdown, argues in a brief but prescient column that "Merrill Makes the Case for Nationalization" (1/29).
  • Henry Kaufman, for decades a leading Wall Street insider, argues here that "We should, therefore, fundamentally re-examine the role of the Fed and the supervision of our financial institutions." He discusses the rise of a "social milieu [of policy makers that] encouraged financial decision makers to cherry-pick the theories that supported excessive risk taking. It discouraged whistle-blowing, not just by risk-management officers in large financial institutions, but also by the economists whose scholarship provided intellectual justification for the financial institutions’ decisions. The consequence was that scholarship that warned of potential disaster was ignored. And the result was global economic calamity on a scale not seen for four generations. (Financial Times 4/28)
  • Steve Waldman: "If you believe, as I do, that we need a root-and-branch reorganization of the financial system, which must necessarily involve the dismemberment and intrusive restraint of deeply entrenched institutions . . ." (4/27)
  • Barry Eichengren of the U.C. Berkeley Dept. of Economics argues that "The Great Credit Crisis has cast into doubt much of what we thought we knew about economics". (National Interest 4/30)
  • Charlie Munger of Berkshire Hathaway says banks will use their “enormous political power” to prevent changes to the industry that would benefit society. (Bloomberg, 5/2)Univ. of Chicago Economist Anna Schwartz, a Friedman/Volcker pure monetarist, says the Bernanke Fed has misjudged the financial crisis (City Journal, Spring '09)
  • Martin Wolf of the Financial Times says "The world economy cannot go back to where it was before the crisis, because that was demonstrably unsustainable. It is at the early stages of a long and painful deleveraging and restructuring. Fortunately, policymakers have eliminated the worst possible outcomes. But there is much more yet to be done before fragile shoots become healthy plants (4/21)
  • Martin Wolf says that "Those who hope for a swift return to what they thought normal two years ago are deluded" (FT 4/28).
  • Joseph Stiglitz (whom Obama follows) here calls for something Wall Street does NOT want: a new global reserve currency (3/26). The findings of the UN panel that Stiglitz chaired are described here (3/26). In this article in the South China Morning Post James Dorn (Cato Institute) challenges Stiglitz. Here the Wall Street Journal is defensively on China's call for a new global reserve currency. (American financial media largely overlooked or suppressed the Stiglitz story and are covering this issue poorly if at all. Shame on us.)
  • Matthew Richardson and Nouriel Roubini punch holes in the Obama administration's case for progress towards restoring banks to solvency (WSJ 5/5).
  • In her post on "The Banks and Orwell," finance blogger Yves Smith isolates some of the doublespeak that Wall Street chieftains are using to resist real regulation. She says that "M. Rodgin Cohen [managing partner of Sullivan & Cromwell] is already leading the fightback [against hostile public opinion]. Yesterday, he even had the gall to say that the system as currently constituted was fundamentally sound. Yes, for him and a handful of Goldman partners, I'm sure that's true, but on planet earth, it's a bit of a different picture." (5/9)

Saturday, April 18, 2009

Misjudging Motives: Why Bernanke (and Geithner and Summers) Are the Wrong People for Their Jobs

I wonder what President Obama would say to this post. Reading and re-reading the first two quoted passages below, I find myself thinking that America will never - not ever - recover from its financial crisis until its President has in place a financial team that carefully assesses the motives of the Wall Street elite whose "risk-free" financial innovations ran the world's economies into the ground. Of course Wall Street never intended for its innovations to backfire as they did - clearly it intended to do something else. But what? And more to the point of motive, why? Answers given in the two revealing passages below, both from mid-2006, could hardly be more disparate. Which comes closer to unearthing the truth? Here's my take. Judge for yourself .

In June of 2006, Ben Bernanke concluded his speech on "Modern Risk Management and Banking Supervision" by voicing confidence in the ability of banking organizations and banking agencies - Fedspeak for private banks and government regulators - working in tandem, to eliminate the possibility of systemic risk:
We expect that risk management and banking supervision will continue to develop along parallel tracks. The Basel II framework [the latest recommendations on banking laws and regulations issued by the senior representatives of the ten Western central banks who form the Basel Committee on Banking Supervision] represents an important effort by supervisors to integrate leading-edge risk management practices with the calculation of regulatory capital requirements. The ongoing work on this framework has already led large, complex banking organizations to improve their systems for identifying, measuring, and managing their risks. Indeed, banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. The banking agencies will continue to promote supervisory approaches that complement and support banks' own efforts to enhance their risk-management capabilities.
Ben Bernanke strikes me as a decent man. Yet his blind faith in the status quo - his assertion that "substantial strides" had been made towards managing risks - tells me not just that he was oblivious to immanent disaster but that he was so because he had fallen in the wrong crowd. As we now know, this crowd was doing more to abet than to curb the excesses of America's financial elite.

The right crowd? It was a group of economists, finance writers and businessmen - a fairly large group - that was willing to examine and discuss, with due scepticism, the likely effects of the innovations of this elite and the wellspring of their motives as well. (Their findings were by no means identical.) The paragraphs below, written by one of this group, appeared in May, 2006, a month before Bernanke's speech:
Free markets are based on choice. But more and more homeowners are discovering that what they got for their money is fewer and fewer choices. A real estate boom that began with the promise of “economic freedom” almost certainly will end with a growing number of workers locked in to a lifetime of debt service that absorbs every spare penny. Indeed, a study by The Conference Board found that the proportion of households with any discretionary income whatsoever had already declined between 1997 and 2002, from 53 percent to 52 percent. Rising interest rates, rising fuel costs,
and declining wages will only tighten the squeeze on debtors.

But homeowners are not the only ones who will pay. The overall economy likely will shrink as well. That $200 billion that flowed into the “real”economy in 2004 is already spent, with no future capital gains in the works to fuel more such easy money. Rising debt-service payments will further divert income from new consumer spending. Taken together, these factors will further shrink the “real” economy, drive down those already declining real wages, and push our debt-ridden economy into Japan-style stagnation or worse. Then only the debt itself will remain, a bitter monument to our love of easy freedom.
So said University of Missouri/St. Louis economist Michael Hudson, whose "Illustrated Guide to the Coming Housing Collapse" is a core text for me. Now what's the difference between Bernanke and Hudson? How could one professional economist be so blind to immanent disaster and the other so prescient? President Obama is a smart man. Has he ever asked himself this question? If he's going to serve America well as president, shouldn't he?

If he does, the answer is plain to see. The difference is partly one of perspective: of the economy as seen from the contrasting vantage points of the Wall Street lender and the American borrower. But the main difference is one of motive. Bernanke, on one hand, presumably sees Wall Street's "leading-edge risk management practices" as motivated by a benign desire to realize a fair profit while helping borrowers realize the American dream. Hudson, on the other, sees these same practices darkly, as intended to subjugate borrowers to lenders in a manner more appropriate to a feudalistic society than a democracy. And he sees them as motivated by a desire for absolute control and power.

This, granted, is an extreme assertion. Many will question it. But from what we know today about the effects of sub-prime lending and the motives of Wall Street and the Federal Government - far less pure than pure, at a minimum - Hudson's account has to be much closer to the truth than Bernanke's.

I therefore find myself, on balance, asking how Ben Bernanke can serve effectively at the Fed. Removing him, Larry Summers and Tim Geithner is impracticable at the moment, even unthinkable. But sometimes it's important to think the unthinkable. Simon Johnson does so. He's an M.I.T. economist and past chief economist for the International Monetary Fund. In "The Quiet Coup," appearing in the latest Atlantic Monthly, he argues that Wall Street's wildly innovative financial practices were nothing short of oligarchical. Here's a summary:
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
How would recovery occur once America's financial oligarchy was broken? Who would replace President Obama's current financial team? I'll be looking for answers at The Baseline Scenario, Simon Johnson's problem-solving site. I wonder if the White House is following it. Here Terry Gross of NPE interviews Simon Johnson - for 44 minutes!

Friday, April 17, 2009

Let's take another break

A musical one this time that Georgi, a student in my writing class at Oakton Community College, just posted at our class Ning site. And here's another if you like musical underdogs. And here's one more to see how the underdog compares with the top dog.

Thursday, April 16, 2009

Let's Take a Break for a Sec

Two students in a class I'm teaching are writing papers on the financial crisis. After doing some research on their own, they asked me for some articles. I gave them two:
  • Michael Hudson's May, 2006 Harper's Magazine prediction of the housing crisis
  • "Quants Gone Wild," a little-known piece by William Bodine and Christopher Nagel of the business faculty at Concordia C0llege-New York. It deserves a wide readership for three reasons. It traces the origins of today's credit crisis back to new valuation methods developed on Wall Street in the 1970's, with J. P. Morgan leading the way. It faults hopelessly complex computer-driven risk models that were simply beyond human understanding, including that of the Wall Street CEO'S who profited most from their use. Finally, it ends magnificently, with a touch of zen (or whatever):
  • A couple closing thoughts: don’t run with the lemmings; don’t be overly impressed with things you don’t understand; drink some green tea and take time to write a Haiku as we witness a staggering capital meltdown from the consequences of uncontrolled financial engineering in derivatives currently estimated at US $500 trillion globally.

Saturday, April 11, 2009

Wells Fargo Quarterly Results Boost the Dow 247 points to 8038!

The Obama Spring rally found a second wind today thanks to a Wells Fargo earnings report that benefited the big financial stocks. With the spring rally is now in its fifth straight week, even the Financial Times front-paged President Obama talking about "glimmers of hope." Yet I wondered: how could Wells Fargo, in this terrible economy, announce a record high quarterly profit of $3 billion? By borrowing at zero per cent and doling out refi's at five? That's a ton of refi's. I didn't get it. Then I stumbled on this post by a guy I don't know - well, he's a goldbug - who knows more about finance than I do and puts questions I'd like to see put to Fargo's Howard Atkins (minus the vitriol):
DaveInDenver said:
This is beyond belief. Wells Fargo's 1st quarter profit forecast goes way beyond any fairy tale ever written in history. Here's what they say: Chief Financial Officer Howard Atkins says the results "reflected strength in our traditional banking businesses, strong capital markets activities, and exceptionally strong mortgage banking results." Mr. Atkins, you are an outright liar and fraud.

Hmmm..."strength in traditional banking?" Who is borrowing that money and making their interest and principal payments on time? Has there been a bunch of businesses started no one is aware of yet? Are existing businesses expanding? You've got to be kidding me.

"strong capital markets activities." Where is this revenue coming from? Any big equity IPO's during Q1 that we missed? Corporate debt issuance was occurring, but at a very low rate and Wells Fargo is not a real player in that business. Mortgage securitizaton? I'm not aware of any. Please explain to me, Mr. Atkins, the source of your "strong capital markets acitivities."

"exceptionally strong mortgage banking results." This one is the most puzzling and troubling to me. We know, with hard data and facts, that home sales and mortgage issuance is plummeting every day. Where are the revenues coming from in this area? Mr. Marks goes on to cite that WFC's acquisition of Wachovia boosted their results. How on Earth can this be? Wachovia's balance sheet is mostly the kinds of subprime mortgage assets that are melting down to zero.

The only possible source of extraordinary revenues I can think of for WFC during Q1 would have been WFC's use of the massive amount of Treasury and Fed money extended to banks at little or no cost and being put to work in Treasury bonds and WFC earning the positive interest carry.

In fact, we know from hard data released every week that the very business activities that Wells says are creating massive profits are, in fact, melting down quickly in every corner of the U.S. and global economy.

For WFC to come out and make those claims is beyond fairy tale - it's outright fraud. And lest we forget, the beloved Warren Buffet owns over 10% of WFC, and thus de facto is standing behind this massive fraud. George Orwell is laughing uncontrollably in his grave now.
Thanks, Dave. Is anyone asking these questions? Is Fargo answering them? Here's one answer:
Wells Fargo’s revenue was boosted by its mortgage banking operations, as the company received about $190 billion in mortgage applications, a 64 percent jump from the fourth quarter. Roughly $83 billion of that volume came in March, when announced governmental programming sent interest rates tumbling. The majority of that was refinance applications with roughly 25 percent coming from home purchases.
And here's another:
Wells Fargo attributed the strong results to healthy lending margins driven by lower interest rates, fewer additional costs related to its purchase of Wachovia and a boom in mortgage activity.
Do these accounts satisfy anyone?

BTW, George Orwell's essay on Politics and the English Language is as timely today as when he wrote it in 1946. Dave may be thinking of Orwell's warning against the "invasion of one's mind by ready-made phrases (lay the foundations, achieve a radical transformation)" that "anaesthetize a portion of one's brain."

DaveInDenver was responding to Henry Blodget's article about why Dylan Ratigan left CNBC. Ratigan, the able host of CNBC's hot "Fast Money" show, says he left because
When you're dealing with systemic policy failures that have rendered a catastrophe the likes of which we've really never seen, the role of journalism is to ask questions of money and power from the broadest possible platform.
Ratigan has anti-fans who doubt his credentials as a journalist - see the other responses to Blodget's article - but for months he has been targeting bailouts that seemingly pick the pockets of taxpayers to benefit big bankers. This alone doesn't make him golden in my book, but I look forward to seeing what he does next.

Friday, April 10, 2009

Larry Summers: Maximizing Wealth with "One of the "Greatest Minds of the Past 500 Years"

Of the past 500 years? Really? Maximizing wealth? Whose? We'll get to all that. But first, will someone kindly send me something about Larry Summers that shows him in a better light than this godawful tedious CNBC clip of him fielding soft grounders about the economy before the Economic Club (of New York, I think) on 4/9. It SO reminds me of my undergrad days at Harvard in the 1960's and the smoke and mirrors political discussions that routinely marginalized outsider views as "generating more heat than light". (Anyone else remember this phrase?) This cozy CNBC clip suggests that the old boys' network is still in fine working order today, its nexus having merely migrated northwards to Cambridge from New Haven, from whence an unbroken string of Yale graduates (Bush/Clinton/Bush) had occupied the White House for an unprecedented 20 years. (My take on the historic "Yale succession" of U.S. Presidents is here, here, here and here.)

Well, I'm getting carried away. But seriously: are video clips like this one the best that CNBC - and Summers himself - can give the American people at this critical juncture in our history?

Well I gotta rant a bit more. Just listen to the long-winded introduction (suckup?) that consumes the first two minutes of this nine-minute clip, including the moderator's paean to Summer's astounding skills as a tennis player - "his greatest talent," says the host, confessing his own need for professional training in order to beat Summers - "barely" - on a doubles court. Please. This idle talk only assures Summers that he is among friends and will not be asked any hard questions (say, about bank solvency or bank spending of government bailout money). And the warm audience response to his not-so-witty dismissal of any claim to certainty in the making of economic forecasts confirms that none are expected. I decided to scout the web a bit on this man, focusing on his ties to Wall Street. It didn't take to find a couple interesting items:

  • At Econospeak (via Naked Capitalism) I found this glowing account of Summers' "stadium rock concert" and "performance art" presentation last year to Goldman Sachs. Smoke and Mirrors? For sure, it was patently a magic show. Genius? One of the greatest minds of the past 500 years? That was the take of one Monique, a Goldman employee who says “It was his entertainment that opened me up and made me receptive, but the economic vision was irreplaceable. I thought I was maximizing wealth before I heard Larry, but I didn’t know the half of it.” Maximizing wealth, huh? Whose? (4/4)

  • Well, consider this. The New York Times reports that "Lawrence H. Summers, the top economic adviser to President Obama, earned more than $5 million last year from the hedge fund D. E. Shaw and collected $2.7 million in speaking fees from Wall Street companies that received government bailout money, the White House disclosed Friday in releasing financial information about top officials." OK, so Summers, as Treasury Secretary, isn't pulling in the big bucks from Wall Street. But whose wealth he is maximizing? And who is benefitting from his great wisdom? So far, it's still going to Wall Street while the Americian people, on CNBS, get jargon. (4/3)
OK already, enough ranting. Here's a challenge, stemming from the 2nd sentence of the 2nd paragraph of the New York Times' brief bio of Larry Summers, which celebrates his "deep understanding of global economic issues, at a time when the American mortgage crisis has leaped borders to become a worldwide contagion." Whoah, hold it. Can anyone show that Summers had any prior understanding of this crisis before it hit full force in 2008? What was one the greatest minds of the past 500 years saying about it in 2006 and 2007?

Thursday, April 9, 2009

CNBC's Rick Santelli Fires off on the Solvency/Liquidity Issue

A good moment yesterday morning for the Great Santelli on CNBC's Squawkbox. Here it is. At 1:40 of the segment, which opens with Carl Quintanilla interviewing Umrai Gill, Santelli waves a paper and says he wants to take note of a recent white paper written by Harvard and Princeton economists Joshua Coval, Jakub Jurek and Erik Stafford. The conclusion he reads, however, is not from the Coval/Jurek/Stafford paper. It's from an article about the paper by John Carney of Business Insider. Carney writes (and Rick reads, revising the last sentence):
In short, the government cannot save the banks by improving liquidity or changing mark to market rules because the problem isn't illiquidity or accounting. The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks--because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors.
This caught my attention. Umrai Gill's rejoinder to Santelli did too.

Saturday, April 4, 2009

Is Massive, truly MASSIVE, Bank Fraud going Unpunished and Unregulated?

Is America ignoring bank fraud on an unprecedented scale in its haste to bail out its apparently insolvent banks? This 20 minute Bill Moyers Journal video makes a strong case for the affirmative. Moyers interviews William K. Black, a senior regulator during the Savings and Loan Crisis of the 1990's. Black's take on the decay of American finance over the past 20 years reminds me of David Cay Johnston's take on the decay of the IRS since 1980. Two straight shooters. Black is hard on Geithner and Summers and on President Obama too. A key passage:
The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.
So what needs to be done? Here's Black's 9/08 Nation article co-authored with economist James K. Galbraith. Here are some related links:
  • Tim Geithner outlines his regulatory plan before the House Committee on Financial Regulation (3/??)
  • President Obama backs up Geithner's plan (3/24)
  • The Economist says "The rich are an easy target. But when you try to bash them, you usually end up punching yourself in the nose." Seems to me this caution against political retribution skirts the hard issues of legal accountability and regulatory reform. (4/2)
  • Meredith Whitney says that the country's biggest banks, still undercapitalized despite government efforts to refloat them, are reducing credit card lines and thereby "sucking liquidity out of consumer wallets." How much? "In the fourth quarter alone," she says, "half a trillion dollars of lines were cut from the consumer--half a trillion." (4/6)
  • Mike Mayo's "Seven Deadly Sins of Banking" is out today - David Faber and others at CNBC blame today's down market (Dow -114 several hours before the close) in part on Mayo's report.
  • William D Cohan on how Goldman Sachs emerged as the king of financial institutions (NYT op ed. Not fraud, but sleight of hand ( 4/15)

Wednesday, April 1, 2009

CNBC Highlights London Public Protests

It sure isn't civic media - it's not giving the public anything like a direct and informed voice in defining and solving the world's financial woes - but CNBC videos are giving the public a powerful voice of sorts as the G20 summit prepares to open in London. We'll be seeing these videos all day long. We haven't seen videos like this since the 1999 WTO Protests in Seattle. These protests has a positive outcome: they helped empower underdeveloped nations worldwide to find alternatives to the counterproductive programs of the International Monetary Fund. On the other hand, these videos can backfire. Recall network TV coverage of the 1968 Democratic National Convention riots in Chicago and the resulting voter backlash against the "hippy" student protesters. This backlash plucked the presidency from the grasp of Hubert Humphrey and handed it to Richard Nixon. Recall also the riots in 110 American cities following the assassination of Rev. King.

Are street protests the best or only way for Americans to let off steam or outrage? Why aren't American media doing a better job of helping the American people think as a nation? That's what a true civic media can do.