The Fourteenth Banker Blog

November 27, 2010

Eyes On Ireland

Filed under: Running Commentary — thefourteenthbanker @ 1:14 AM

The Ireland EU bailout is getting panned from many sides. This article by Mish shows that he agrees with one of his favorite adversaries on this particular issue. The question is how the ordinary people of Ireland benefit from bailouts of the banking system. Things are a little more clear over there than they are over here. Ireland is a small country, most of its creditors are foreign banks, and severe austerity is being imposed by outsiders. Why?

While these considerations are not openly discussed in most media stories, the reason all parties want to bail out the banks is the same this time around as it was last time. The perceived risk is contagion and systemic meltdown of the financial system. The flame of that perception is stoked by the commercial banking industry itself, captured government officials, and central bankers.

Writer Mike Whitney has stern words concerning this bailout.

This is a black day for Ireland. The Irish people will now face a decade or more of grinding poverty and depression thanks to their venal leaders. As soon as the ink dries on the IMF loans, the second occupation of Ireland will begin, only this time there won’t be armored cars and Paramilitaries in fatigues, but nerdy-looking bureaucrats trained in the art of spreading misery. In fact, the loans haven’t even been signed yet, and already IMF officials are urging the government to cut jobless benefits and the minimum wage. They’re literally champing at the bit. They just can’t wait to get their hands on the budget and start slashing away.

And don’t believe the hype about European unity or saving Ireland. My ass. This is about bailing out the banks. The bondholders get a free ride while workers get kicked to the curb. Here’s a clip from the Financial Times that spells it out in black and white:

“According to data compiled by the Bank of International Settlements, the three largest creditors to the Irish economy at the end of June…were Germany to the tune of €109bn, the UK at €100bn and France at €40bn. These sums amount to 2 per cent of France’s gross domestic product, 4.5 per cent of Germany’s GDP, and 7 per cent of British GDP.”

Ireland is being asked to cut to social services, slash wages, renegotiate contracts, and dismantle the welfare state so that undercapitalized banks in France and Germany can get their pound of flesh. But, why? They’re the ones who bought the bonds. No one put a gun to their head. They knew they could lose money if Irish banks went south. That’s the risk they took. “You pays your money, and you takes your chances.” Right? That’s how capitalism works.

Not any more, it doesn’t. Not while Cowen’s in charge, at least. The Irish PM has decided to bail them out; make all the bondholders “whole again.” But who made Cowen God? Who gave Cowen the right to hand over his country to the IMF?

No one. Cowen is a rogue agent kowtowing to international capital. After he finishes his work in Ireland, he’ll probably join globalist Tony Blair on the French Riviera for a little hobnobbing with the tuxedo crowd.

The Irish people didn’t struggle through centuries of famine and foreign occupation so they could be debt-peons in the EU’s corporate Uberstate. Like Sinn Fein president Gerry Adams said, “We don’t need anyone coming in to run the place for us. We can run it ourselves.” Right. Tell the EU plutocrats to take their Utopian Bankstate and shove it.

I also fail to see how holding bank bondholders harmless while severe austerity is imposed on a general population is not disproportionate central decision-making to benefit the few at the expense of the many. Risks were taken for profit. The losses should not be socialized. Granted, if the banks were suddenly insolvent, the ramifications for the economies would be severe. However, if as Bill Black has suggested in his recent writings, resolution authorities stood ready to continue business operations and a true free enterprise system had fresh private capital ready to step into the breach, the dislocations could be manageable. But we do not have a true free enterprise system here in America or in the West in general. We have oligarchy, plutocracy, corporatism, etc. It is vested interests that stand in the way of creative destruction. To prepare any economy for financial transition where old institutions die a natural death and new ones arise from the ashes requires a democratization of both politics and business. I see few leaders prepared to lead that democratization. In fact, here in the U.S. the protectors of the banks are still ascendant. This protection actually prevents the development of a cure. For surely the cure is not more of the same.

So today it is austerity for Ireland, Greece, Latvia, soon Spain and Portugal. When will it be America’s turn?

November 22, 2010

Where Do We Turn?

Filed under: Running Commentary — thefourteenthbanker @ 10:57 AM

This apt question, from commenter Sandi, is a timely one. On viewing the movie, Inside Job, Sandi finds the entire system corrupt because the supposed educators and advisors to Presidents are on the corporate dole. The beauty of an on camera interview is that the real person cannot be so easily hidden.

Our half dead populace, drunk on Dancing with the Stars, probably has no desire to turn anywhere or do anything. But a few posts from last week indicate rising awareness of the screw job we are all getting.

FDR Wasn’t FDR…Until His Hand Was Forces By Civil Disobedience

A Debtcropper Society

There are solutions to this mess. Perhaps our inspiration will come from abroad. Perhaps the civil disobedience or political insurrection in other countries will lead to an awakening in ours. We do not have to degenerate into anarchy to bring change, but we do have to act in some manner. Right now there are too few people acting. I’m thinking of pulling my money on December 7. That will only be symbolic and nobody will notice. But it is one small defiant step. Then I will take another one, and another one, until it is the path I walk.



Yves Smith on MERS Bailout – Not!

Filed under: Running Commentary — thefourteenthbanker @ 10:26 AM

In this Naked Capitalism piece, Yves expresses her opinion that despite last week’s reported attempts to reframe MERS and provide fig leaf cover for the allies of bank bailouts, this is unlikely to happen.

The industry is seeking legislation that would effectively affirm MERS’s legality and block any bill that would call into question what MERS does.

The latter bit, trying to block anti-MERS legislation, does have a shred of logic, given that the electronic database is coming under unfavorable scrutiny. Not only has Marcy Kaptur proposed legislation that would bar Fannie and Freddie from buying mortgages registered in MERS, but even Republican senator Richard Shelby, who once owned a title insurer, roughed up MERS president R.K. Arnold in hearings earlier this week.

But the idea of passing a Federal statue to solve MERS’ growing state-level problems is a huge stretch. As the latest report of the Congressional Oversight Panel noted,

In the absence of more guidance from state courts, it is difficult to ascertain the impact of the use of MERS on the foreclosure process. The uncertainty is compounded by the fact that the issue is rooted in state law and lies in the hands of 50 states judges and legislatures.

We’ve been told that Constitutional scholars have said that repeated Supreme Court decisions have found real estate transactions to be beyond the reach of Commerce clause, and hence not subject to Federal intervention. So the idea that MERS can be legitimated by Congress appears far-fetched.

She is probably right on this particular legislative idea. But I would not underestimate the power of the banks, and this is about the banks, not about MERS. The banks run the governments, as the selling out of the Irish people to save bankers and bondholders attests. Even Moody’s is explicit that the aid package from the EU shifts the burden of the banks to the Irish sovereign. Governments may fall, but institutional bondholders won’t.  In fact, the trans-national companies that went to Ireland to evade U.S. income taxes won’t help out either.  Several of these threatened to pull out if Ireland if their tax scheme is modified.




November 19, 2010

A Retroactive Bailout for MERS

Filed under: Running Commentary — thefourteenthbanker @ 6:29 PM

In this Washington Post article the strategy of major banks becomes clear. Reframe the issue, collect on IOUs from the campaign, demonstrate the revolving door promises for tomorrow.

The financial services industry has launched an aggressive campaign on Capitol Hill to bolster the legality of the way companies have turned mortgages into securities and traded them across the globe in recent years.

The companies have opened wide their wallets for lobbying and are flying top executives to Washington for one-on-one meetings with lawmakers. They are holding briefings for key staffers, including an event last week that drew more than 60 aides. And they are blanketing Congress with white papers, memos and other documents that lay out their arguments.

The industry is seeking legislation that would effectively affirm MERS’s legality and block any bill that would call into question what MERS does. MERS has spent more than $1 million in lobbying since fall 2008, when lower courts around the country began to rule against it. But MERS had kept its name under the radar until the recent uproar over foreclosures revealed broad problems in mortgage paperwork.

If successful on Capitol Hill, the industry could in one quick swoop make all lawsuits related to MERS across the country moot and remove one of the key uncertainties dangling over the mortgage industry. On the flip side, lawmakers could create a new federal registry, effectively killing MERS’s business and forcing the industry to submit to greater oversight.

Reframing efforts:

In the wake of such controversies, lobbyists for Reston-based Merscorp, which runs MERS, have been floating the idea of legislation that would establish the firm as the national registry to track the transfer of mortgages.

The MERS database “is a powerful tool that can be harnessed by the Congress and the industry to improve the mortgage finance system,” R.K. Arnold, Merscorp chief executive, told members of the Senate banking committee this week.

This reframing approach offers the fig leaf to congressmen that would support this backdoor bailout. A bill to eliminate liability for fraud, the high costs for legal remediation, and public accountability for misdeeds while intruding on the states abilities to safeguard property rights, would be colored instead as a measure to support efficient commerce.

Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group that defended the validity of MERS in a recent paper being circulated on Capitol Hill, said establishing a centralized tracking system would resolve much of the confusion resulting from the patchwork of local laws governing mortgages and their transfer.

“There’s a lot of validity in the idea of a national mortgage registry that is complete and unambiguous about legal title to loans across all 50 states,” he said in an interview.

In its paper, the forum argued that although there have been “several minority decisions” in the courts that have taken issue with MERS, “not one of these decisions has challenged MERS’ ability to act as a central system to track changes in the ownership.”

Consumer advocates say such legislation would retroactively bless all mortgage transfers made through MERS – and eliminate one of the strongest legal arguments that homeowners in foreclosure are using to challenge their cases. There’s also concern among state officials that such a bill might permanently remove some of their power over property law and place it within federal jurisdiction.

Some of the advocates are referring to the idea as the “great MERS whitewash bill.”
“Fixing MERS on a federal level to give them a free pass from complying with what we have known as the law for many years because the banks screwed up is really a bad precedent,” said Ira Rheingold, executive director of the National Association of Consumer Advocates.

The compensation for politicians comes in two forms. Down payment made in campaign contributions. Big Bonus later in fancy high paying jobs.

Lobbyists working for MERS include people who were prominent legislators or federal officials: former U.S. representative Bob Livingston and his former chief of staff, Allen Martin; John M. Duncan, assistant secretary of the Treasury for legislative affairs in the George W. Bush administration; and Arnold Havens, a former general counsel at Treasury.

The revolving door into lucrative lobbying deals and high paying, low responsibility industry jobs is wide open.  Here is where one former Congressman landed.  Here is where a former Senator landed. Pretty good jobs. Do not for a minute think that the MERS bailout won’t result in some good work down the line for our public servants.



November 17, 2010

Unsafe At Any Speed

Filed under: Running Commentary — thefourteenthbanker @ 1:39 AM

When I first became aware of Ralph Nader, he was already considered a flake by the New Economic consensus that would shortly sweep Ronald Reagan into office. I would have laughed out loud if you had told me that 30 years later I would quote him. In the preface to his book, Unsafe At Any Speed, he says the following:

This country has not been entirely laggard in defining values relevant to new contexts of a technology laden with risks. The post-war years have witnessed a historic broadening, at least in the courts, of the procedural and substantive rights of the injured and the duties of manufacturers to produce a safe product. Judicial decisions throughout the fifty states have given living meaning to Walt Whitman’s dictum, “If anything is sacred, the human body is sacred.” Mr. Justice Jackson in 1953 defined the duty of the manufacturers by saying, “Where experiment or research is necessary to determine the presence or the degree of danger, the product must not be tried out on the public, nor must the public be expected to possess the facilities or the technical knowledge to learn for itself of inherent but latent dangers. The claim that a hazard was not foreseen is not available to one who did not use foresight appropriate to his enterprise.”

These words speak of legal and social developments in materials manufacturing going on 50 years ago. Yet it is striking that we have not achieved these most foundational values when it comes to another kind of manufacturing, the manufacture of financial products.

The clock has completed its cycle on the day in which the Congressional Oversight Panel released its report on Mortgage Irregularities and the consequences for financial stability.

In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at least a minimum value. Allegations have surfaced that banks may have misrepresented the quality of many loans sold for securitization. Banks found to have provided misrepresentations could be required to repurchase any affected mortgages. Because millions of these mortgages are in default or foreclosure, the result could be extensive capital losses if such repurchase risk is not adequately reserved.

The dawn will soon break in Europe, where volcanoes erupt with regularity. Today’s volcano is the Irish Debt Crisis and an apparent impending bailout or series of bailouts, this time more painful. I give you this link, not to endorse it’s assessment because frankly I don’t know. But the very fact that such extremity can be considered plausible and be posted to a highly reputable blog (not mine, Calculated Risk’s) paints the picture rather well does it not?

So back to the quote from Ralph Nader’s preface. “Where experiment or research is necessary to determine the presence or the degree of danger, the product must not be tried out on the public, nor must the public be expected to possess the facilities or the technical knowledge to learn for itself of inherent but latent dangers. The claim that a hazard was not foreseen is not available to one who did not use foresight appropriate to his enterprise.”

I heard a commenter recently say that in financial services, “complexity is fraud”.  I am becoming inclined to believe him.

November 12, 2010

Response to Goldman’s Threat – Simon Johnson vs Goldman Sachs

Filed under: Running Commentary — thefourteenthbanker @ 4:50 PM

In the near corner, wearing the red trunks, number one heavyweight contender Simon Johnsoooooooooon!

Johnson is known for his doggedness and determination. This slight man with a soft voice would hardly seem to be a threat. But he almost single-handedly saved financial reform from an ignominious death. Johnson is not done. Winning a round is not enough. Johnson is the new Great American Hope! Here is the champion of the little guy, the entrepreneur, the innovator, the jobs creator, ready to take on the most powerful of persons.

In the far corner, wearing the blue trunks with the GS emblem, despised financial markets champion Goldmaaaan Saaaaaachs!

Sachs is jumping up and down and is already glazed with a greasy sweat. Goldman’s Mel Gibson eyes are flashing angrily and froth and spittle alternately spew forth. This dangerous and unpredictable champion, like Hannibal Lecter, has a taste for sweetmeats and wants a piece of Johnson. Once worked into a frenzy by a monetary prize, Goldman will turn on anyone. Even those in his corner are not safe. Goldman once cannibalized his own cut man.

Let the bout begin.

Johnson strikes first. Quoting scholarship from Stanford Professor Anat Admati, Johnson challenges the very notion that requiring banks to be well capitalized is a danger to the economy. The false claim is this:

“Some claim that requiring more equity lowers the banks’ return on equity and increases their overall funding costs,” thus lowering economic growth, the professors write.

And the answer:


“This claim reflects a basic fallacy. Using more equity changes how risk and reward are divided between equity holders and debt holders, but does not by itself affect funding costs.”

They go on to say: “High leverage encourages risk taking and any guarantees exacerbate this problem. If banks use significantly more equity funding, there will be less risk-taking at the expense of creditors or governments.”

…capital requirements should be simplified and greatly increased — relative to what the Group of 20 leaders will congratulate themselves on.

“Lending decisions would be improved by higher and more appropriate equity requirements,” they say.

And they are also completely on target with regard to the political economy problem here: “Many bankers oppose increased equity requirements, possibly because of a vested interest in the current systems of subsidies and compensation. But the policy goal must be a healthier banking system, rather than high returns for banks’ shareholders and managers, with taxpayers picking up losses and economies suffering the fallout.”

Let me put another spin on it. Some say that requiring banks to have more of their own money at risk means they will put less total money at risk and therefore provide less support to the economy. Let’s see how Goldman strikes back. First, the left jab:

Requirements that banks hold more cash to prevent against economic downturns won’t just hurt the banks themselves, but also the companies they lend to, Goldman Sachs says in a new report.

Then the right cross!

“Small- and mid-sized” companies that have relied on bank financing will be hit hardest, the report says.

And finally, characteristically below the belt…

“These firms are likely to grow more slowly than the larger firms and multinationals that enjoy more flexibility in financing. Slower growth among smaller and mid-sized firms may act as an overhang on economic growth and the job creation that these firms traditionally propel. And because the adjustment to higher prices and constraints on credit availability is a dynamic process, the potential ongoing rise in capital requirements means that smaller firms are likely to bear the cost for some time to come, acting as a continuing drag on bank loan growth.”

Ouch! Goldman is standing up for Johnson’s little guy! What an unexpected blow! It turns out that Goldman must be the New American Hope! The crowd is confused! Goldman corner man Vikram Pandit spits on Johnson!

“There is a point beyond which more is not necessarily better. Hiking capital and liquidity requirements further could have significant negative impact on the banking system, on consumers and on the economy.”

Now the Goldman corner is on the side of consumers as well! What a turn of events!

Johnson staggers, then recovers, striking at Pandit:

Why then does he advance such obviously specious arguments in the pages of the Financial Times?

The answer is straightforward.

a)      He can get away with it.  Modern financial CEOs float in a cloud above the public discourse; they can spout nonsense without fear of being contradicted directly in the pages of a leading newspaper.

b)      Officials listen to bank CEOs and an op ed gets their attention.  Perhaps they think Mr. Pandit knows what he is talking about – or perhaps they know that these arguments are completely specious.  In any case, they are deferential.

c)      Mr. Pandit is communicating with other CEOs and, in this fashion, encouraging them to take recalcitrant positions.  There is an important element of collusion in their attempts to capture the minds of regulators, politicians, and readers of the financial press.

Mr. Pandit is engaged in lobbying, pure and simple.

14 here. I score this bout for Johnson, surprised? Goldman and Citigroup are “talking their book”. They are part of the old school that brought down the economy. They believe in a highly levered theory of finance where shareholders invest the minimum equity, maximize debt and thus try to generate more profit for themselves. Their concern for small business and the consumer is a subterfuge. Goldman, Citi, and the like have overseen the financialization of the economy. They have overseen the processes that consolidate power at the top of the economic structure, where large firms crush small ones. For them, consumers and small businesses are krill. Yes, they want them alive, so they can eat them.

They are speaking one truth though. Their model is based on leverage. If you change the leverage requirements, you threaten their standing. So in a universe where Goldman and Citi are the only hypothetical players, you would see a short term contraction in credit because of decisions they would make, because of who they are. Their choices would be to either raise new equity or to shrink their risk assets. Raising new equity would dilute the existing shareholders, reduce the metrics they use to justify their pay packages, and reduce the value of their own stock interests (common stock and stock options). So they would not choose to do that voluntarily, whether it is the right thing for the global economy or not. What their nature would require them to do is run off a portion of their assets, the least risky and profitable portion, double down on their most risky bets and try to make just as much money for shareholders with fewer assets deployed. That is not a reflection on some natural laws of business and economics. That is a reflection of their thought processes and models for doing business.

But here is the salvation, the Great American Hope. Nature fills a vacuum. The broken model of Wall Street would be filled by a new, more responsible, durable, and beneficial model. As Johnson says, the issue with the capital structure of firms is about how the returns are divided up, not about what the returns from business operations are. Wall Street confuses those issues, because their primary concern is with their returns.

Saving Wall Street at the expense of Main Street is the policy of our government. Enough is enough. Do not buy the baloney.

November 10, 2010

Bill Black Slam Dunks American Banker Columnist!

Filed under: Running Commentary — thefourteenthbanker @ 7:38 PM

In these two posts, Part 1 and Part 2, Bill Black mops the floor with American Banker columnist Andrew Kahr. In his column, Kahr had suggested that mortgage applicants be prosecuted to the full extent of the law including fines up to $1 million and up to 30 years in prison, if they gave false information in a mortgage application. Kahr is suggesting that banks comb their files and make criminal referrals to the U.S. Attorney in their jurisdiction.

Laws against bank fraud are of course necessary and appropriate. However, Black makes an amazing case that what has happened in general is widespread fraud by predatory lenders. He uses Kahr’s own words to convict him.

I find it incredible that with an abysmal record in regard to home mortgage origination, securitization, servicing, and foreclosure, a financial industry representative would recommend severe sanctions for clients. Yes, there are some who did intentionally commit fraud. But what is good for the goose is good for the gander. The U.S. Attorneys should start by prosecuting the fraudsters in the industry who knew what they were doing and did it for personal gain. Only then might there be some hope of an honest banking industry.


November 8, 2010

Watch Inside Job – The Movie | zero hedge

Filed under: Running Commentary — thefourteenthbanker @ 4:29 PM

Watch Inside Job – The Movie | zero hedge.

I endorse this as well. For those who follow alternative financial blogs, you will already know well the broad story line. But, seeing the images and hearing the voices has a value far greater than a couple hours and the price of a ticket. These are the things that steel your resolve.

The American Latvia

Filed under: Running Commentary — thefourteenthbanker @ 11:04 AM

These videos are of a speech Michael Hudson made several weeks ago to the American Monetary Institute. It is pretty engrossing. I hope you find time to watch it. Some of his examples are simplified to serve an explanatory purpose. I agree with much of his historical analysis and his description of the current problems of wealth distribution and political power. However, the financial system is complex and not all institutions or transactions are exactly as described in this speech. So let’s not quibble about that.

In the first segment he correctly points out at about the 3:30 mark that banks do not lend for productive purposes (in general). They lend on existing assets and cash flow streams. This is particularly the case with large banks that have much standardization and centralization of functions. As Amar Bhidé states in his book, “The financial system has been giving up, albeit unwittingly, on the decentralization of judgment and responsibility. Case-by-case judgments by many, widely dispersed financiers with the necessary ‘local knowledge’ have been banished to the edges, to activities such as venture capital, which accounts for a useful, but tiny proportion of financing activity.” Without this decentralized judgement and responsibility, banks are simply incapable of providing productive risk capital as Hudson describes. Instead, capital is consistently deployed to increase the values of existing assets, much like Bernanke proposes to do today.

All Tea Party supporters should watch this speech because it explains how America is becoming the new Latvia and how labor (90% of us) is and will continue to pay the freight. The greater public has been co-opted by a blind faith in the Neo-Classical economic paradigm. They believe that their angst, created by flat to decreasing real incomes for those still employed, high unemployment, and extreme volatility in perceived wealth, has been caused essentially by too much regulation and too much government. While I agree that inefficient or ineffective government is a problem, it pales relative to the effects of the power structures dividing up the wealth in a way the average citizen cannot grasp.

Further in the speech, Hudson refers to this increasingly debt based system and how all cash flow streams and assets are ultimately “capitalized”. In other words, debt is issued against them and profits are extracted by those able to do so. Perhaps you have seen this as we have more and more toll roads, red light cameras, and prisons run by private companies for profit. Those who outsource these things see one part of the picture, the part where government outlays are supposedly reduced. They do not see the part of the picture where those assets and cash flow streams are used to move wealth to the top of the social structure. Tea Party favorite Rand Paul unwittingly plays into this with his ideas on privatization. From an interview this weekend comes this quote:

When pressed on “This Week” about which programs the he would cut, Paul declined to identify individual programs. “All across the board,” the senator-elect said.

Amanpour challenged Paul, saying, “But you can’t just keep saying all across the board.” Still, the newly elected senator refused to budge. “No, I can. I’m going to look at every program, every program.” He later continued on the theme: “You need to ask of every program — and we take no program off the table. Can it be downsized? Can it be privatized? Can it be made smaller?”

This things that are privatized will then be leveraged and the profits will be extracted up front. Any change in the cash flow stream will then create future losses on that leverage and those losses will be allocated to taxpayers or the most unwary investors who bought the residuals after all the fees and equity dilutions for management have been stripped.

While John Hussman is writing on a different topic, the Bubble Crash cycle, his points tie in as well. After acknowledging that the markets already rose on the Fed action, Hussman effectively makes it clear that this has little to do with real wealth.

As a result of Bernanke’s actions, investors now own higher priced securities that can be expected to deliver commensurately lower long-term returns, leaving their lifetime “wealth” unaffected, but exposing them to enormous risk of price declines over the intermediate (2-5 year) horizon. This is not a basis on which consumers are likely to shift their spending patterns. What Bernanke doesn’t seem to absorb is that stocks are nothing but a claim on a long-term stream of cash flows that investors expect to be delivered over time. Propping up the price of stocks changes the distribution of long-term investment returns, but it doesn’t materially affect the cash flows. This reckless policy has done nothing but to promote further overvaluation of already overvalued assets. The current Shiller P/E above 22 has historically been associated with subsequent total returns in the S&P 500 of less than 5% annually, on average, over every investment horizon shorter than a decade.

With no permanent effect on wealth, and no ability to materially shift incentives for productive investment, research, development or infrastructure (as fiscal policy might), the economic impact of QE2 is likely to be weak or even counterproductive, because it doesn’t relax any constraints that are binding in the first place. Interest rates are already low. There is already well over a trillion in idle reserves in the banking system. Businesses and consumers, rationally, are trying to reduce their indebtedness rather than expand it, because the basis for their previous borrowing (the expectation of ever rising home prices and the hope of raising return on equity indefinitely through leverage) turned out to be misguided. The Fed can’t fix that, although Bernanke is clearly trying to promote a similarly misguided assessment of consumer “wealth.”

My final point before leaving you to this treasure trove of speechmaking is this. Today we have what we have. We cannot change it overnight. Evolutionary change is our only viable option until more dramatic shifts in our culture enable bolder political action. Right now the regulators are in the process of determining how to implement the provisions of Dodd-Frank. Simon Johnson penned a strong statement. It is essential to win these little battles on the regulatory front.

The Volcker Rule is not a panacea but if designed and implemented appropriately, it would constitute a major step in the right direction.  The effectiveness of our financial regulatory system declined steadily over the past 30 years; it is time to start the long process of rebuilding it.

Rebuilding the financial sector must be done a one step at a time. We must hope to rebuild it before we become the American Latvia and must sacrifice whole segments of our society to feed our parasite.

Please watch Professor Michael Hudson.

November 4, 2010

Bernanke Blows Bubbles

Filed under: Running Commentary — thefourteenthbanker @ 9:28 AM

Yesterday the Fed laid out the plan it had signaled months before. In an Op-Ed at the Washington Post, Bernanke laid out his reasoning and self-indictment of the Federal Reserve when it comes to economic influence. First, his philosophy:

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Bernanke’s view is that monetary policy, specifically expansionary monetary policy, can promote economic prosperity. The method he proposes is cheap borrowing costs and fictitious paper wealth in the form of an inflated stock bubble. In fact, according to the Op-Ed, this has already worked.

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.

Let me not mince words here. This policy has been a boon to the wealthy and the traders and has increased the disparity in wealth between the rich and the middle class. It has served to further the entrench the funding advantage of giant corporations and thus has reduced the opportunity for Small Business to drive economic performance. This is an “All-In” play on the philosophy of trickle down. But it is rife with risk and injustice.

You see, most Americans do not have huge bond portfolios or huge stock portfolios. In fact, while the market has been rising, average citizens have pulled money out of the stock market for 26 consecutive weeks. The stock market is now a traders playground and this policy will make them a lot of money. Please click on this link and look at the chart midway down that shows the performance of the stock market and flows into and out of domestic mutual funds. You will see that the average citizen buys high and sells low. Ben invites you to buy high again. Buy now and we can pump the Dow up a couple thousand points. They you will feel wealthy and buy a car.

In the meantime, Bernanke does not really explain the costs of this policy. He mentions that he wants to prevent the pernicious risk of deflation, but the truth is he has already stimulated consumer inflation though it barely shows in the backwards looking indexes. The Fed likes to use inflation rates that discount the “volatile” energy and food sectors, even though these sectors are among the most meaningful for middle and lower-income consumers. Look what is happening with energy commodity prices. Oil prices are up over 12% since the Fed signaled this policy in August. Look what is happening with food commodity prices. Farm products, processed foods and feeds are up 9.9% in 12 months. Grains are up 33%. Mild products are up 17%. You will see these hit your credit card bill very soon. You are asked to reinvest in the stock market and use your phantom earnings, which the Fed will attempt to guaranty, to cover your increased cost of living and spend more on discretionary items and hopefully houses. Good luck with that.

Ben does not discuss the injustice to savers, those anachronistic Americans that still have a little cash but not a lot. I have been searching for a place to earn more than 1% on my savings with something other than a promotional rate that will adjust downwards again in three months. Average Americans, savers, retired folks who cannot speculate in the markets, are getting creamed by low-income and rising prices while speculators, primary dealers, hedge fund managers and other front-runners are making a killing in trading ahead of the Fed. Savers will earn 1% on their money, pay 15% to 33% of that in Federal Income Tax, netting between 67 and 85 basis points. Then the Fed will hit you with a minimum of 2% inflation and will probably overshoot and give us much more. You lose again if you are not a speculator. This system rewards the entrenched financial power structure and penalizes the hard-working Americans who cannot play that game. It is a reverse Robin Hood subsidy to the rich and is unjust. Will it save all of us by saving the banks? Is that the real game being played? Not addressed by the Fed.

November 1, 2010

There Is No Thinking Like Systems Thinking

Filed under: Running Commentary — thefourteenthbanker @ 6:04 PM

How do we make sense of the ongoing mortgage and foreclosure fraud news flow and the attempts of the Fed and others to resuscitate the engines of job creation? About a week ago I re-posted an item from James Kwak at Baseline Scenario.

In this post, James discusses industrial food production and industrial finance. He refers to ideologies and how those are reflected in these industries. These industries are imprisoned in their ideologies.

It might be helpful at this point to think in terms of “Systems“.  Tomorrow there is an election and it appears that the ideologies of the “Right” will win out. I’m not sure how those ideologies are going to help their supporters though. The vast majority of the Tea Party seems to share the angst of people on the right and the left who feel that we are losing our economic liberty. The ideology they are caught up in is the myth that we used to have free markets and now we don’t because there is too much government spending (even though the government does not bother to tax in order to spend), or too much regulation (even though neither Dodd Frank or the Health Care bill has done diddly squat yet).

Read this for a take on the state of the free market these days and where the threat comes from.

The CEOs I have talked to in recent years over drinks, overseas, and in private, are worried too. I have heard this comment at Davos far too many times to ignore: “I am as patriotic as anyone, but when I see where my corporation is investing, where it is doing R&D and especially where it is hiring, I worry about my country. It’s all going outside America. But what can I do?”

Or read this:

Democracy’s Death Spiral is a positive feedback loop between ever-greater concentrations of wealth and the ever-higher costs of retaining political power…

…In the U.S., the ever-greater concentrations of wealth gathered by an ascendant Financial Power Elite has entered a positive feedback loop with the costs of gaining or retaining political power. The costs of winning an election have skyrocketed to the point that fundraising is the key function of any politico who is not independently extremely wealthy.

This quantum leap up in the costs of gaining or retaining power has forced politicos to curry the favors of those few Elite groups which can give them millions of dollars.

Just as in an arms race, the amounts of money which can be spent on campaigns is essentially unlimited. The explosion of media now requires multi-million dollar campaigns on multiple fronts: broadcast TV, cable TV, mailed flyers, radio spots, promotion campaigns to influence the mainstream media coverage, adverts on the Web and social media campaigns–the list grows longer every year.

Here is the positive feedback loop. Candidate A gains the backing of a Power Elite group (a political action committee or other front) and collects $5 million. As a result of a media blitz, he/she wins.

Between elections, he/she amasses a “war chest” of $5 million from the same donors, guaranteeing that the final cost of the next election will be $10 million.

Potential rivals understand that victory against this well-funded incumbent, no matter how incompetent, will require $15 million. The only sources of that amount of cash are other Financial Power Elites and State-funded fiefdoms like teachers unions, and so each candidate sells their soul to the few “special interests” with deep enough pockets to harvest and contribute millions of dollars.

Back to “Systems” thinking. This is a complex topic but here are some basic elements of a system.

System concepts

Environment and boundaries
Systems theory views the world as a complex system of interconnected parts. We scope a system by defining its boundary; this means choosing which entities are inside the system and which are outside – part of the environment. We then make simplified representations (models) of the system in order to understand it and to predict or impact its future behavior. These models may define the structure and/or the behavior of the system.
Natural and man-made systems
There are natural and man-made (designed) systems. Natural systems may not have an apparent objective but their outputs can be interpreted as purposes. Man-made systems are made with purposes that are achieved by the delivery of outputs. Their parts must be related; they must be “designed to work as a coherent entity” – else they would be two or more distinct systems
Theoretical Framework
An open system exchanges matter and energy with its surroundings. Most systems are open systems; like a car, coffeemaker, or computer. A closed system exchanges energy, but not matter, with its environment; like Earth or the project Biosphere 2 or 3. An isolated system exchanges neither matter nor energy with its environment; a theoretical example of which would be the universe.
Process and transformation process
A system can also be viewed as a bounded transformation process, that is, a process or collection of processes that transforms inputs into outputs. Inputs are consumed; outputs are produced. The concept of input and output here is very broad. E.g., an output of a passenger ship is the movement of people from departure to destination.
subsystem is a set of elements, which is a system itself, and a component of a larger system.
System Model
A system comprises multiple views such as planning, requirement, design, implementation, deployment, operational, structurebehavior, input data, and output data views. A system model is required to describe and represent all these multiple views.
System Architecture
system architecture, using one single coalescence model for the description of multiple views such as planning, requirement, design, implementation, deployment, operational, structurebehavior, input data, and output data views, is a kind of system model.

All you have to do is read this description of “systems” and think of the news you read these days and you can see that we have dysfunctional systems. For example, there are concepts of exchange of matter and energy with surroundings. Implicit is that exchange is two way and beneficial. Exchange and extraction are not the same thing. There is a concept of transformation. Implicit is that stasis is not a measure of health of a system. The system must adapt. We do not see healthy adaptions in our system. A system must have a workable architecture. Does the inter-relationship between the Congress, the Fed, Wall Street, and Main Street feel like it has a workable architecture? Will leaving Congress, the Fed, and Wall Street unconstrained by any intentionality lead to a good outcome for Main Street?

Another word that you hear a lot these days is “Ecosystem.


The entire array of organisms inhabiting a particular ecosystem is called a community.[1] In a typical ecosystem, plants and other photosyntheticorganisms are the producers that provide the food.[1]Ecosystems can be permanent or temporary. Ecosystems usually form a number of food webs.[2]

Ecosystems are functional units consisting of living things in a given area, non-living chemical and physical factors of their environment, linked together through nutrient cycle and energy flow.[citation needed]

  1. Natural
    1. Terrestrial ecosystem
    2. Aquatic ecosystem
      1. Lentic, the ecosystem of a lake, pond or swamp.
      2. Lotic, the ecosystem of a river, stream or spring.
  2. Artificial, environments created by humans.

Central to the ecosystem concept is the idea that living organisms interact with every other element in their local environmentEugene Odum, a founder of ecology, stated: “Any unit that includes all of the organisms (ie: the “community”) in a given area interacting with the physical environment so that a flow of energy leads to clearly defined trophic structure, biotic diversity, and material cycles (i.e.: exchange of materials between living and nonliving parts) within the system is an ecosystem.”[3]

I am convinced that what is broken is the system. The system today is like a shattered mirror. The best that could be done with that mirror is all the hundreds of pieces could be put back together like a jigsaw puzzle, with great effort and cost, and then the mirror would only be partially functional.

The system is like the land. For 40 years we have used the land in a way that has depleted its productive capacity so that now all we can do to maintain industrial food production is engineer more synthetic fertilizers and engineer seeds that can withstand the ecological desert in which we plant them. We can’t get off this merry-go-round because if we did there would be nothing to eat. Then we would kill each other with our guns.

But we can recognize that the system we have is not optimal and begin to change it. Converting farmland back to organic takes a minimum of three years. During those three years the land can produce a little fodder for livestock or can product low yields of food crops. But it cannot produce much. During this time though, it can become healthy if the land, the soil, is nurtured properly. Organic content is increased. PH balance is restored. Microorganisms begin to return. The soil returns to life and living soil, properly managed with biodiversity, is productive soil and produces healthy food. Healthy food can improve quality of life and reduce health care costs and yes, even government expenditures. But we must invest in healthy food.

I recommend a book, Inquiries into the Nature of Slow Money, by Woody Tasch.

Quoting from the Forward:

We have to find a new form of economy, an economy that knows how to govern its limits, an economy that respects nature and acts at the service of man, a situation where political and humanistic choices govern the economy and not the other way around. We have to discover new economic relationships that respect the pace of nature. Lacking this respect, we have an economy that is speeding out of control, promoting unlimited consumption and always chasing after distant markets, with destructive consequences for local economies, communities, and all living things.

Quoting from Chapter One:

The problems we face with respect to soil fertility, biodiversity, food quality, and local economies are not primarily problems of technology. They are problems of finance. In a financial system organized to optimize the efficient use of capital, we should not be surprised to end up with cheapened food, millions of acres of Genetically Modified corn, billions of food miles, dying Main Streets, kids who think food comes from supermarkets, and obesity epidemics side by side with persistent hunger.

You see, the financial system is part of the food system and it is like the food system. There is no biodiversity in the financial system. It is largely monocultural. Monoculture breeds disease. Monoculture depletes the environment. Monoculture is standardized. Loan servicing is standardized. Monoculture is efficient. Outsourcing jobs is efficient. Monoculture is fragile. Too Big to Fail banks are fragile. Monoculture is about maximizing production. Biodiversity is about sustaining productive capacity without chemical infusions. Just as our monocultural agricultural processes require maximum synthetic inputs to produce crops, our monocultural financial system requires increasing infusions of monetary stimulus, fiscal stimulus, legislative protectionism, and public subsidy. We have a sick system. We need to quit protecting the sick system and build a healthy system.

Then we can have healthy communities.




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