The non-permabears I follow who were bearish in 2008 and perhaps 2007 and bullish for most or all of the up-move in stocks, are growling again. This blog has been growling as well for at least 2 weeks and has pointed out for months that stocks are fundamentally overvalued at almost record levels by two different measures, "q" and cyclically-adjusted P/E. Now that systemic contagion occurred with the famous meltdown last week, yours truly simply does not want to be in the U. S. equity markets. ETFs that own gold and foreign currencies are OK still, though some of them hit air pockets in the sell-off as well.
Charts tell the tale. The move up from the 2009 low was lengthy but the angle of the ascent was much weaker than the angle of the descent. If stocks were undervalued, they would laugh at Greek debt problems.
Given our wildly over-financialized economy, falling stocks will have an adverse feedback effect on the real economy. This is what happens when the powers that be try to revive "animal spirits" by printing money.
The problems we have with financial and monetary policy are worse than the excessive debt loads carried at all levels of society. They include lies such as those to Social Security recipients that it's your money, you paid in, you earned it, etc., disguising the pay-as-you-go nature of the scheme. We now have another lie in Obamacare, which passed due to almost certainly fraudulent assumptions such as that the Congressionally-mandated major cuts in Medicare physician reimbursement will finally occur and the pseudo-fraudulent tactic of providing years of tax increases before the costs really kick in.
Most of the country sees through the charade but can do nothing The time for real financial reform was a year ago, when Big Finance was on its knees. Instead Obama focused on remaking the U. S. health care system years from now. What a genius! Let the fire smolder while getting architectural plans for a major extension to the house. Helping Big Finance get on its feet was an essential part of the strategy that guaranteed that real reform would not occur.
The current Greek tragedy is small beer compared to what could come in the New World. Short-term, though, stocks are oversold. But they are too high. Treasuries may be over-bought. But there is no reported net inflation. Thus yields may arguable be too high. Interesting times, to say the least.
Copyright (C) Long Lake LLC 2010
Showing posts with label financial reform. Show all posts
Showing posts with label financial reform. Show all posts
Saturday, May 8, 2010
Thursday, February 25, 2010
R. I. P. Financial Reform We Can Believe In?
While I do not like the post's title, the body of a blog from Charles Gasparino re financial reform is spot on.
How Obama Screwed Volcker begins and ends as follows:
The president needed the gravitas of the former Fed chairman to sell his bank reform to Wall Street. And when the “Volcker Rule” didn’t fly, Obama sold him out. . .'
And just like that, the wise old man became the crazy uncle that no one listens to anymore.
According to Gasparino, Big Finance is in control.
Assuming this interpretation is more or less correct, one wonders how long Tall Paul will hang around with this crew. Party loyalty only extends so far with him, or at least that's his image.
Copyright (C) Long Lake LLC 2010
How Obama Screwed Volcker begins and ends as follows:
The president needed the gravitas of the former Fed chairman to sell his bank reform to Wall Street. And when the “Volcker Rule” didn’t fly, Obama sold him out. . .'
And just like that, the wise old man became the crazy uncle that no one listens to anymore.
According to Gasparino, Big Finance is in control.
Assuming this interpretation is more or less correct, one wonders how long Tall Paul will hang around with this crew. Party loyalty only extends so far with him, or at least that's his image.
Copyright (C) Long Lake LLC 2010
Friday, December 11, 2009
Update on Financial Reform Legislation
While certain pro-Federal deficit positions taken at New Deal 2.0 have met with disapproval at this site, thinking on the recent and ongoing financial crisis makes a lot of sense from true reformers of many political stripes. Here is a link to a Naked Capitalism post that summarizes some of what is going on in Congress on this topic and proposes (futilely, one suspects) improvements:
Financial Reform, or Rearranging Chairs on the Titanic.
(by) L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City and writes for New Deal 2.0.
Note that the brilliant William Black is also a professor at the same university.
Here is the general topic:
Congress is nearing completion of its financial reform bill HR 4173 (Wall Street Reform and Consumer Protection Act of 2009), which appears to amount to shifting chairs on the deck of the sinking Titanic. The monstrous legislation is too big and too complex to analyze in a short blog. Instead I will discuss three areas in which Congress is failing to address the real issues: dangers posed by derivatives, the folly of bailing-out troubled “systemically important” institutions, and reformation of credit ratings agencies.
It's a good read, though it won't "make your day".
Copyright (C) Long Lake LLC 2009
Financial Reform, or Rearranging Chairs on the Titanic.
(by) L. Randall Wray is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City and writes for New Deal 2.0.
Note that the brilliant William Black is also a professor at the same university.
Here is the general topic:
Congress is nearing completion of its financial reform bill HR 4173 (Wall Street Reform and Consumer Protection Act of 2009), which appears to amount to shifting chairs on the deck of the sinking Titanic. The monstrous legislation is too big and too complex to analyze in a short blog. Instead I will discuss three areas in which Congress is failing to address the real issues: dangers posed by derivatives, the folly of bailing-out troubled “systemically important” institutions, and reformation of credit ratings agencies.
It's a good read, though it won't "make your day".
Copyright (C) Long Lake LLC 2009
Tuesday, June 23, 2009
The Longest Word
Caroline Baum has an opinion piece about the administration proposals on "reform" of the financial system on Bloomberg.com titled Obama Bulks Up 'Too Big Too Fail' With Steroids. Here are two choice paragraphs.
In other words, the same folks who missed, or did nothing to prevent, the worst crisis since the Great Depression will definitely, absolutely, positively be able to anticipate the next one. Uh-huh.
It gets worse. Instead of eliminating the doctrine of “too big to fail,” which encourages risky behavior because of perceived government backing, the Obama plan defines, institutionalizes and expands on it.
It's a concise read which EBR generally endorses. EBR predicted in December that there would be a Bushbama continuity in the field of finance. The news continues to be bad in that regard. We learn today that the allegedly conservative Republican Robert Bennett of Utah would look positively at the appointment of Larry Summers as new Fed Chairman. Some populist Mr. Obama is turning out to be!
From the prism of 2001-5, with the country looking to be center-right politically, Jimmy Carter was remembered in many circles as a wild-eyed liberal. It was easy to forget that Sen. Edward Kennedy engaged in the unusual step of challenging a sitting President within his own party- and from the left, as not being liberal enough. The financial blogs I go to, which range from libertarian/center to left- has hardly a good word now to say about this administration's financial policies.
As predicted by EBR, the administration has accepted the recommendations of the G30, led by an AIG Vice President, for financial system reform. Mr. Obama is channeling the longest word we learned as schoolchildren: antidisestablishmentarianism. In short, this word means being pro-Establishment. One thing the Establishment does not like is change. It simply likes to change lipstick colors on the same pig.
Copyright (C) Long Lake LLC 2009
In other words, the same folks who missed, or did nothing to prevent, the worst crisis since the Great Depression will definitely, absolutely, positively be able to anticipate the next one. Uh-huh.
It gets worse. Instead of eliminating the doctrine of “too big to fail,” which encourages risky behavior because of perceived government backing, the Obama plan defines, institutionalizes and expands on it.
It's a concise read which EBR generally endorses. EBR predicted in December that there would be a Bushbama continuity in the field of finance. The news continues to be bad in that regard. We learn today that the allegedly conservative Republican Robert Bennett of Utah would look positively at the appointment of Larry Summers as new Fed Chairman. Some populist Mr. Obama is turning out to be!
From the prism of 2001-5, with the country looking to be center-right politically, Jimmy Carter was remembered in many circles as a wild-eyed liberal. It was easy to forget that Sen. Edward Kennedy engaged in the unusual step of challenging a sitting President within his own party- and from the left, as not being liberal enough. The financial blogs I go to, which range from libertarian/center to left- has hardly a good word now to say about this administration's financial policies.
As predicted by EBR, the administration has accepted the recommendations of the G30, led by an AIG Vice President, for financial system reform. Mr. Obama is channeling the longest word we learned as schoolchildren: antidisestablishmentarianism. In short, this word means being pro-Establishment. One thing the Establishment does not like is change. It simply likes to change lipstick colors on the same pig.
Copyright (C) Long Lake LLC 2009
Wednesday, June 17, 2009
Not Much Financial System Reform We Can Believe In
EBR believes that the administration has made a substandard start at financial system reform. Here are some first comments.
1. The administration wants to give the Fed more powers. However, the Fed more than any one institution enabled this mess. What is needed instead is to oversee the Fed better to verify that it can fulfill its current role. We should also ban such nonsense as letting Alan Greenspan serve 16 years as Fed Chairman. Au contraire, consider limiting the Fed Chair to one 3-6 year term. Also, since the House of Representatives creates all spending proposals, let the House nominate the incoming Fed chairman, let Congress approve him/her, and let the White House have veto power. That might take away the Nixonian and Bushbama approach to the Fed, which is that it is an affiliate of the Treasury Department.
This proposal is a disaster. We must recall that no-one owns the Federal Reserve Bank. It controls our money but answers to no one. It has no stockholders. It is too powerful as it is.
2. The President wants the power to simply dismantle financial companies whose failure would, in the opinion of the powers-that-be, harm the financial "system" - whatever that actually is. Just think 0f the potential for political abuse. The message would be: play ball, or we will shut you down. After the company has been shut down, what good would it do to show that the company was sound, after all?
A much better solution is Nassim Taleb's: do not allow any company to be big enough to threaten the stability of the world or the U. S.'s financial system should it fail. Small is beautiful.
A related solution is that the banking system should be a small utility-like cog in the wheel, processing payments and making low-risk loans. All the gambling should be done by uninsured entities that are free to succeed or fail without involving taxpayers.
3. The administration wants to regulate all sorts of complex derivatives. One cheer for that. But what it will not do is simply ban the toxic ones, such as "credit default swaps", that simply add costs to the system and distort incentives. Failing that, there is no proposal to ban systemically important financial companies from owning these sorts of securities. One thing we have learned is that regulation cannot or deliberately will not keep up with the pace of financial "innovation".
4. Mr. Obama wants to strengthen the Community Reinvestment Act. The premise is that banks must invest in communities where they gather deposits.
Let's forget about ethnicity and ask whether this proposal is sensible. Consider the many small towns that dot Pennsylvania and the West. They were built in, say, the 1800s to service mines and factories that no longer exist. But the houses and roads exist, so the towns live on, generally shrinking. No sensible investments can be made there, as the towns are likely going to continue to shrink away absent an unexpected boom. No pensioner living in the town wants to lend money to the local bank to invest in the town; the depositor wants the deposited funds to make loans in growing areas where the loan opportunities are greater, prices of assets are trending upward rather than downward, people are moving in rather than out, etc.
The CRA makes no sense. Sure, lenders should not discriminate on the basis of skin color, religion or the like, and laws could be strengthened in that field should they be insufficient at present. But the upshot of the CRA may simply be to deprive small towns of a bank branch that otherwise would be happy to gather deposits and provide routine banking services, but sees no loan opportunities in the town. Beware unintended consequences.
5. Mr. Obama has now spoken of a need to rush a bill through to passage. Given how favorably disposed toward the debt culture the President has said he is, the best thing would be for Congress to give the White House proposal a very, very long and careful look. Whatever is passed needs to make Democrats happy when they are out of power as well as when they are flexing their muscles. The idea of making the unaccountable, imperial and often incompetent Fed increasingly powerful seems especially antithetical to the populist roots of the current party in power.
Copyright (C) Long Lake LLC 2009
1. The administration wants to give the Fed more powers. However, the Fed more than any one institution enabled this mess. What is needed instead is to oversee the Fed better to verify that it can fulfill its current role. We should also ban such nonsense as letting Alan Greenspan serve 16 years as Fed Chairman. Au contraire, consider limiting the Fed Chair to one 3-6 year term. Also, since the House of Representatives creates all spending proposals, let the House nominate the incoming Fed chairman, let Congress approve him/her, and let the White House have veto power. That might take away the Nixonian and Bushbama approach to the Fed, which is that it is an affiliate of the Treasury Department.
This proposal is a disaster. We must recall that no-one owns the Federal Reserve Bank. It controls our money but answers to no one. It has no stockholders. It is too powerful as it is.
2. The President wants the power to simply dismantle financial companies whose failure would, in the opinion of the powers-that-be, harm the financial "system" - whatever that actually is. Just think 0f the potential for political abuse. The message would be: play ball, or we will shut you down. After the company has been shut down, what good would it do to show that the company was sound, after all?
A much better solution is Nassim Taleb's: do not allow any company to be big enough to threaten the stability of the world or the U. S.'s financial system should it fail. Small is beautiful.
A related solution is that the banking system should be a small utility-like cog in the wheel, processing payments and making low-risk loans. All the gambling should be done by uninsured entities that are free to succeed or fail without involving taxpayers.
3. The administration wants to regulate all sorts of complex derivatives. One cheer for that. But what it will not do is simply ban the toxic ones, such as "credit default swaps", that simply add costs to the system and distort incentives. Failing that, there is no proposal to ban systemically important financial companies from owning these sorts of securities. One thing we have learned is that regulation cannot or deliberately will not keep up with the pace of financial "innovation".
4. Mr. Obama wants to strengthen the Community Reinvestment Act. The premise is that banks must invest in communities where they gather deposits.
Let's forget about ethnicity and ask whether this proposal is sensible. Consider the many small towns that dot Pennsylvania and the West. They were built in, say, the 1800s to service mines and factories that no longer exist. But the houses and roads exist, so the towns live on, generally shrinking. No sensible investments can be made there, as the towns are likely going to continue to shrink away absent an unexpected boom. No pensioner living in the town wants to lend money to the local bank to invest in the town; the depositor wants the deposited funds to make loans in growing areas where the loan opportunities are greater, prices of assets are trending upward rather than downward, people are moving in rather than out, etc.
The CRA makes no sense. Sure, lenders should not discriminate on the basis of skin color, religion or the like, and laws could be strengthened in that field should they be insufficient at present. But the upshot of the CRA may simply be to deprive small towns of a bank branch that otherwise would be happy to gather deposits and provide routine banking services, but sees no loan opportunities in the town. Beware unintended consequences.
5. Mr. Obama has now spoken of a need to rush a bill through to passage. Given how favorably disposed toward the debt culture the President has said he is, the best thing would be for Congress to give the White House proposal a very, very long and careful look. Whatever is passed needs to make Democrats happy when they are out of power as well as when they are flexing their muscles. The idea of making the unaccountable, imperial and often incompetent Fed increasingly powerful seems especially antithetical to the populist roots of the current party in power.
Copyright (C) Long Lake LLC 2009
Sunday, January 25, 2009
LIttle Change in Obama Reform Plan
The New York Times is reporting that "Obama Plans Fast Action to Tighten Financial Rules".
As predicted, the solution is going to be an expansion of Federal "oversight" activity, which is to say your tax money. It looks as though the incompetent Fed will be given greater power; this has it backwards. The Fed should lose power for enabling the housing bust and manipulating interest rates in chaotic fashion, almost always favoring borrowers over lenders.
Sadly, credit default swaps are going to be rewarded with a clearinghouse. They should instead be banned. Either they should be out-and-out insurance products and regulated within the existing insurance framework, or if they are between two parties neither of which has an economic interest in the loan failing, then they are gambling and are illegal depending on the jurisdiction; but in any case they then serve NO purpose.
In another disastrous trial balloon/shakedown/statist solution, "Administration officials have begun to study ways to control executive compensation".
Let us recall how the stock options craziness of the 1990s got going. The Democrats under George Mitchell (Senate Majority Leader) forced/persuaded Bush I to sign legislation eliminating deductibility of salaries over $1 M yearly. (Of course, Democratic-leaning high earners such as movie stars had their multi-million dollar salaries remained deductible.) In response, companies went to a "best practices" option-enhanced salary package. This led to an excessive effort to drive up the stock price, helping to lead to crazy stock valuations that had to fall.
Let us also recall that the non-scandal "scandal" that some wealthy people had enough tax deductions from time to time to legally pay no income tax some years led to the disgusting and widely-hated Alternative Minimum Tax.
There they go again. First the Government pushes money on banks, which either really, really needed it because they were insolvent and could have simply failed (and may yet fail), or which didn't need it and therefore were given an unnecessary and inappropriate gift from you and me; then it takes this poorly-thought out preferred stock position in these companies to propose to control what the executives earn. As with the AMT, let's think the implications of this control through. In one way or another, the Government is our partner in every legal business. Does that give it a right to control compensation? Even if the Government owns preferred stock, what right does that give it to influence salaries?
A much better solution is that companies that overcompensate their executives will pay the price in a free market.
While undoubtedly there will be positive aspects of the Obama/Democratic plan, the first quick take here is disappointment that it further legitimizes credit default swaps rather than getting rid of them or calling them insurance contracts plain and simple; that it apparently does not call for a real simplification of what derivative products can be marketed; and that it wants to be on compensation committees along with the elected directors of companies.
As predicted, the solution is going to be an expansion of Federal "oversight" activity, which is to say your tax money. It looks as though the incompetent Fed will be given greater power; this has it backwards. The Fed should lose power for enabling the housing bust and manipulating interest rates in chaotic fashion, almost always favoring borrowers over lenders.
Sadly, credit default swaps are going to be rewarded with a clearinghouse. They should instead be banned. Either they should be out-and-out insurance products and regulated within the existing insurance framework, or if they are between two parties neither of which has an economic interest in the loan failing, then they are gambling and are illegal depending on the jurisdiction; but in any case they then serve NO purpose.
In another disastrous trial balloon/shakedown/statist solution, "Administration officials have begun to study ways to control executive compensation".
Let us recall how the stock options craziness of the 1990s got going. The Democrats under George Mitchell (Senate Majority Leader) forced/persuaded Bush I to sign legislation eliminating deductibility of salaries over $1 M yearly. (Of course, Democratic-leaning high earners such as movie stars had their multi-million dollar salaries remained deductible.) In response, companies went to a "best practices" option-enhanced salary package. This led to an excessive effort to drive up the stock price, helping to lead to crazy stock valuations that had to fall.
Let us also recall that the non-scandal "scandal" that some wealthy people had enough tax deductions from time to time to legally pay no income tax some years led to the disgusting and widely-hated Alternative Minimum Tax.
There they go again. First the Government pushes money on banks, which either really, really needed it because they were insolvent and could have simply failed (and may yet fail), or which didn't need it and therefore were given an unnecessary and inappropriate gift from you and me; then it takes this poorly-thought out preferred stock position in these companies to propose to control what the executives earn. As with the AMT, let's think the implications of this control through. In one way or another, the Government is our partner in every legal business. Does that give it a right to control compensation? Even if the Government owns preferred stock, what right does that give it to influence salaries?
A much better solution is that companies that overcompensate their executives will pay the price in a free market.
While undoubtedly there will be positive aspects of the Obama/Democratic plan, the first quick take here is disappointment that it further legitimizes credit default swaps rather than getting rid of them or calling them insurance contracts plain and simple; that it apparently does not call for a real simplification of what derivative products can be marketed; and that it wants to be on compensation committees along with the elected directors of companies.
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