Bankers Don't Care About the Banks

I am a huge fan of the Young Turks and wanted to point out this must-read piece that their host Cenk Uygar wrote:

Tim Geithner and Larry Summers and many others are missing the fundamental flaw in the system. The bankers don't care about the banks; they care about the
bankers.

These days, the way executives make money instead is in the form of bonuses for years where they bring in a lot of return (and often times for years they don't), but the threat of being fired for too much risk taking is minimal. The more risk you take, the more money everyone makes. And it's not the partner's money you're playing with anymore. You're playing with house money. No one is minding the store anymore.

So, now we have Tim Geithner and the rest of Treasury working so hard to prop up not just these failed banks - but these failed bank executives - because we don't want government running these large companies. The self-interest of the market will do a better job of managing these companies. But it hasn't - because of this fundamental flaw.

These executives did not actually fail. They succeeded wildly. It's just that they had a different goal - to take home as much money as they possibly could for themselves. Mission accomplished!

The Treasury plan is all wrong. We have to first acknowledge that the boards of these companies are not truly representing the shareholders. They are largely friends with most of the CEOs and they do not have an incentive to reign in out of control compensation for the top executives. Then those CEOs pass on the wrong incentives to the executives below them. The more risk they all take, the more money they take home. And if their company goes broke one day - who cares?

Most of these guys took home millions upon millions of dollars already for profits that never really existed. If the company goes under, okay the gravy train came to an end but they still have all the money they made from all those years. It's in their personal bank accounts. That's enlightened self-interest!

Do you know that last year, as Merrill Lynch was in its death throes, 696 executives got bonuses over a million dollars? 696! As the company lost tens of billions of dollars, the executives took home a combined $3.6 billion that year. Billions in bonuses in the worst year in the company's history. They're not stupid; they're smart. They're looting the store before the cops show up.

This is the financial equivalent of the federal government not showing up to rescue people after Hurricane Katrina. Last year the five biggest Wall Street securities firms lost $25.3 billion. The executives at those companies still took home $26 billion in bonuses. In other words, they wouldn't have lost a nickel if they hadn't taken any bonuses.

The Treasury Department still hasn't shown up to take over these looted stores. In fact, they keep pouring taxpayer money into these same shops, as the money continues to move out the back door. Tim Geithner is the worst sheriff in the world.
But we already knew that. Because the main guy who was overseeing all of these banks in New York, as they took these giants risks, was the president of the Federal Reserve Bank of New York - Tim Geithner.

He is under the misimpression that his job is to protect the sanctity of the banks.
Not only is that not his job, but that is working against his actual goal. His real job is to stabilize the financial system, with or without these particular banks or bank executives. The longer he keeps these guys in charge, the longer the looting continues.

Fed Downgrades Economic Forecast for this Year

Do not expect a quick ending to the recession/depression lite, because today the Federal Reserve sharply downgraded its projections for the country's economic performance this year. They are predicting that the U.S. economy will actually shrink, while unemployment will grow.

Dear God when will it end.

Under the Fed's new projections, the unemployment rate will rise to between 8.5 and 8.8 percent this year. Personally I think they are being conservative here, I bet that it will be between 9.0 and 9.2. Of course this is using the metrics that don't count millions, and the actual number will be over 16 percent. Now the old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent. This was always a laugh. Employment is almost always the last part of the economy to heal once it emerges out of recession and is in recovery mode. Therefore the jobs picture will remain grim for years to come.

The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent. The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.

Fed officials do predict that the economy should pick up speed in 2011, growing by as much as 5 percent, which would be considered robust, though I again say they are being optimistic.

What is the Possibility of Stagflation

It has been an interesting year for the world economy. Over the last three months central banks around the world have undertaken a number of measures to forestall deflation and lift the global economy out of economic slump and credit crisis. Aside from traditional monetary policy tools such as official interest rate cuts and relaxations in reserve requirements, central banks have resorted to alternative unconventional tools. There has been measurable easing of the credit crisis, U.S. and Europe, who may be joined by other central banks as they too head towards zero interest rates in leaps and bounds

With monetary policy transmission broken by the unwillingness of the private sector to lend or borrow, central banks have had to scurry for alternatives to rate cutting in order to restore markets. They set up an alphabet soup of liquidity facilities that lend funds or purchase assets, offered guarantees on deposits and loans, and established currency swap lines, in addition to a host of fiscal stimulus packages announced by governments.

So are the pieces now in place to prevent global stag-deflation?

It is too soon to tell. So far, money market and commercial paper markets have shown tentative signs of easing. But elsewhere in the private sector credit market, tensions remain as asset prices move shambolically and de-leveraging drags on among households, banks and businesses. Though money supply has grown, the velocity of money has slowed despite the flood of liquidity from central banks and official interest rates effectively at or near zero. In other words, we have fallen into a liquidity trap. Such a blow to consumer demand makes deflation in 2009 a real possibility.

Despite liquidity raining down on the financial system from the Fed and ECB, the financial fires have yet to be extinguished.

Yes, money market rates are off their peaks and the commercial paper market contraction has bottomed. But a lack of confidence among lenders in potential borrowers (and a lack of confidence among potential borrowers given the profit or income outlook) and falling asset valuations has stymied significant easing in market interest rates, such as for mortgages and car loans. Rate cuts and quantitative easing notwithstanding, it seems the threat of a liquidity trap is looming on the U.S.

In the U.S., private demand continues to fall sharply as does the string of awful economic and financial news. Job losses continue to keep mounting, and U.S. GDP is expected to shrink 4% or more in Q4 2008 and the contraction is expected to continue throughout 2009. Orthodox and unorthodox monetary policy measures are certainly needed but they have to be accompanied by a significant stimulus on the fiscal side to support aggregate demand. The great retrenchment of the private sector balance is already under way and the new U.S. administration is getting ready to make the largest investment in infrastructure of the last 50 years. The details of the size and content of the stimulus package are not available yet. However, there seems to be a general consensus that a package of $700-$800 billion dollars is the expectation. This may be enough, but it will be tight as recession sweeps up the entire world.

Contraction is not out of the question in 2009

Now the Fed is Trying to Give Away Cash

I honestly don't know what to think. A few years ago when Alan Greenspan dropped the key interest rate to 1 I thought it was a huge mistake. I did not think that the situation warrented it, and I was concerned about the flood of money into an economy based on perceived wealth. Now today the Federal Reserve has again cut its target for overnight interest rates, but this time they have dropped the rate from zero to 0.25%. I'm not even sure what that means, is it zero or is it 0.25%?

Whatever it is, its a pretty unconventional action. I know that the Fed and Bernanke are trying to do everything they can to lift the economy out of a year-long recession, but is this the right action? Cutting interest rates to 0.25% or 0% is not going to resolve any of the fundemental problems in the economy, other than to provid banks with very cheap money. I would not have done this unless there was a guarantee that the banks would drop their interest rates.

Paul Krugman writes in his blog today:

ZIRP!

"That’s zero interest rate policy. And it has arrived. America has turned Japanese."

"This is the thing I’ve been afraid of ever since I realized that Japan really was in the dreaded, possibly mythical liquidity trap."

"Seriously, we are in very deep trouble. Getting out of this will require a lot of creativity, and maybe some luck too."

With the Fed's key rate now essentially zero, the central bank is moving into uncharted territory. Nonetheless, Fed Chairman Ben Bernanke has made it clear the Fed isn't running out of ammunition to fight the worst financial crisis since the 1930s. Except that it basically has.

Bernanke claims that the Fed is exploring using tools other than rate cuts to revive the economy. Trouble is he does not have the authority or clout to really do anything else. Bernanke and his colleagues wrap up a two-day meeting Tuesday, but no one is sure what will come out of it.
The Fed is trying to send a message that it is ready to do everything in its power to stop the economy's free fall, but they have pretty much used up all their power.

Why is the Fed Refusing to Disclose Recipients of Bailout?

The Federal Reserve has refused requests by Bloomberg News to disclose who are the recipients of more than $2 trillion of emergency loans from U.S. taxpayersl.

Bloomberg news filed suit on November 7th under the U.S. Freedom of Information Act. They were requesting details about the terms of 11 Fed lending programs that were created by the Fed in response to the deepest financial crisis since the Great Depression.

The Fed responded by saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP. So far total Fed lending is reported to exceed $2 trillion. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since September, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.

Congress is demanding more transparency from the Fed and Treasury. THe Fed however is arguing that the release of such information to the public would cause a loss in confidence in and between financial institutions.

What?

The public can't know what the government is doing with our money?

That is ridiculous.

Anatomy of a Meltdown

Read this first draft of history from the New Yorker called "The Anatomy of a Meltdown" by John Cassidy. Be sure you're sitting down.

Ben Bernanke and the financial crisis.

At Princeton, where Bernanke taught economics for many years, he was known for his retiring manner and his statistics-laden research on the Great Depression. For more than a year after he was appointed by President George W. Bush to chair the Fed, in February, 2006, he faithfully upheld the policies of his immediate redecessor, the charismatic free-market conservative Alan Greenspan, and he adhered to the central bank’s formal mandates: controlling inflation and maintaining employment. But since the market for subprime mortgages collapsed, in the summer of 2007, the growing financial crisis has forced Bernanke to intervene on Wall Street in ways never before contemplated by the Fed. He has slashed interest rates, established new lending programs, extended hundreds of billions of dollars to troubled financial firms, bought debt issued by industrial corporations such as General Electric, and even taken distressed mortgage assets onto the Fed’s books. (In March, to facilitate the takeover by J. P. Morgan of Bear Stearns, a Wall Street investment bank that was facing bankruptcy, the Fed acquired twenty-nine billion dollars’ worth of Bear Stearns’s bad mortgage assets.) These moves hardly amount to a Marxist revolution, but, in the eyes of many economists, including supporters and opponents of the measures, they represent a watershed in American economic and political history.

Ben Bernanke, who seemed to have been selected as much for his predictability as for his economic expertise, is now engaged in the boldest use of the Fed’s authority since its inception, in 1913.

Bernanke, working closely with Henry (Hank) Paulson, the Treasury Secretary, a voluble former investment banker, was determined to keep the financial sector operating long enough so that it could repair itself—a policy that he and his Fed colleagues referred to as the “finger-in-the-dike” strategy. As recently as Labor Day, he believed that the strategy was working. The credit markets remained open; the economy was still expanding, if slowly; oil prices were dropping; and there were tentative signs that house prices were stabilizing. “A lot can still go wrong, but at least I can see a path that will bring us out of this entire episode relatively intact,” he told a visitor to his office in August.

By mid-September, however, the outlook was much grimmer. On Monday, September 15th, Lehman Brothers, another Wall Street investment bank that had made bad bets on subprime mortgage securities, filed for bankruptcy protection, after Bernanke, Paulson, and the bank’s senior executives failed to find a way to save it or to sell it to a healthier firm. During the next forty-eight hours, the Dow Jones Industrial Average fell nearly four hundred points; Bank of America announced its purchase of Merrill Lynch; and American International Group, the country’s biggest insurance company, began talks with the New York Fed about a possible rescue. Goldman Sachs and Morgan Stanley, the two wealthiest investment banks on Wall Street, were also in trouble. Their stock prices tumbled as rumors circulated that they were having difficulty borrowing money. “Both Goldman and Morgan were having a run on the bank,” a senior Wall Street executive told me. “People started withdrawing their balances. Counterparties started insisting that they post more collateral.”

The Fed talked with Wall Street executives about creating a “lifeline” for Goldman Sachs and Morgan Stanley, which would have given the firms greater access to central-bank funds. But Bernanke decided that even more drastic action was needed. On Wednesday, September 17th, a day after the Fed agreed to inject eighty-five billion dollars of taxpayers’ money into A.I.G., Bernanke asked Paulson to accompany him to Capitol Hill and make the case for a congressional bailout of the entire banking industry. “We can’t keep doing this,” Bernanke told Paulson. “Both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation.”

Paulson agreed. A bailout ran counter to the Bush Administration’s free-market principles and to his own belief that reckless behavior should not be rewarded, but he had worked on Wall Street for thirty-two years, most recently as the C.E.O. of Goldman Sachs, and had never seen a financial crisis of this magnitude. He had come to respect Bernanke’s judgment, and he shared his conviction that, in an emergency, pragmatism trumps ideology. The next day, the men decided, they would go see President Bush.

On October 3rd, Congress passed an amended bailout bill, giving the Secretary of the Treasury broad authority to purchase from banks up to seven hundred billion dollars in mortgage assets, but the turmoil on Wall Street continued. Between October 6th and October 10th, the Dow suffered its worst week in a hundred years, falling eighteen per cent. As the selling spread to overseas markets, the Fed’s failure to save Lehman Brothers was roundly condemned. Christine Lagarde, the French finance minister, described it as a “horrendous” error that threatened the global financial system. Richard Portes, an economist at the London Business School, wrote in the Financial Times, “The U.S. authorities’ decision to let Lehman Brothers fail will be severely criticised by financial historians—the next generation of Bernankes.” Even Alan Blinder, an old friend and former colleague of Bernanke’s in the economics department at Princeton, who served as vice-chairman of the Fed from 1994 to 1996, was critical. “Maybe there were arguments on either side before the decision,” he told me. “After the fact, it is extremely clear that everything fell apart on the day Lehman went under.”

The most serious charge against Bernanke and Paulson is that their response to the crisis has been ad hoc and contradictory: they rescued Bear Stearns but allowed Lehman Brothers to fail; for months, they dismissed the danger from the subprime crisis and then suddenly announced that it was grave enough to justify a huge bailout; they said they needed seven hundred billion dollars to buy up distressed mortgage securities and then, in October, used the money to purchase stock in banks instead. Summing up the widespread frustration with Bernanke, Dean Baker, the co-director of the Center for Economic and Policy Research, a liberal think tank in Washington, told me, “He was behind the curve at every stage of the story. He didn’t see the housing bubble until after it burst. Until as late as this summer, he downplayed all the risks involved. In terms of policy, he has not presented a clear view. On a number of occasions, he has pointed in one direction and then turned around and acted differently. I would be surprised if Obama wanted to reappoint him when his term ends”—in January, 2010.

Bernanke and Paulson’s reversals have been deeply unsettling, perhaps especially so for the millions of Americans who have lost jobs or defaulted on mortgages so far this year. And yet, for the past year and a half, the government has confronted a financial debacle of unprecedented size and complexity. “Everyone knew there were issues and potential problems,” John Mack, the chairman and chief executive of Morgan Stanley, told me. “Nobody knew the enormity of it, how global it was and how deep it was.” In responding to the crisis, Bernanke has effectively transformed the Fed into an Atlas for the financial sector, extending more than $1.5 trillion in loans to troubled banks and investment firms, and providing financial guarantees worth roughly another $1.5 trillion, making it global capitalism’s lender of first and last (and sometimes only) resort.

“Under Ben’s leadership, we have felt compelled to create a new playbook for the Fed,” Kevin Warsh, a Fed governor who has worked closely with Bernanke, told me. “The circumstances of the last year caused us to cross more lines than this institution has crossed in the previous seventy years.” Paul Krugman, the Times columnist, a former colleague of Bernanke’s at Princeton, and the winner of this year’s Nobel Prize in Economics, said, “I don’t think any other central banker in the world would have done as much by way of expanding credit, putting the Fed into unconventional assets, and so on. Now, you might say that it all hasn’t been enough. But I guess I think that’s more a reflection of the limits to the Fed’s power than of Bernanke getting it wrong. And things could have been much worse.”

Read more here.

Fed Won't Identify Recipients of $2 trillion

The Federal Reserve is refusing to identify all of the recipients of $2 trillion.

What???

Bloomberg is reporting:

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends
far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities
the banks are pledging in return.

"The collateral is not being adequately disclosed, and that's a big problem,'' said Dan Fuss, vice chairman of Boston-based Loomis Sayles & Co., where he co-manages $17 billion in bonds. "In a liquid market, this wouldn't matter, but we're not. The market is very nervous and very thin.''

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

"It's your money; it's not the Fed's money,'' said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. ``Of course there should be transparency.''

The $2 trillion is taxpayer money, and taxpayers have a right to know where that money is going, and what sweetheart deals Bernanke is giving out, and who's getting what. Bernanke needs to go, and either before or after he goes, the Fed needs to come clean about who it has given 2 trillion in loans to, and what the collateral is.