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Where in the World are the Jobs? New Economic Rule: Job Growth not Necessary in new Economy. The Second Derivative Gives Way.

For the first time since March, the stock market actually
showed a little reaction to reality based information.  As it turns out, even removing any hint of
stimulus will cause the market to retreat. 
We already expected the cash for clunkers program was largely a gimmick
with auto sales dropping like a stone in the last reading.  Home sales are being artificially juiced by
the $8,000 tax credit and the Federal
Reserve
keeping 30 year mortgages near historical lows.  You can expect that if the Fed and the tax
credit were removed we would see a similar reaction as the cash for clunkers
program in the housing market.  It is
amazing that so much energy and focus is being put on bailouts, gimmicks, and
transient market forces all the while ignoring one major component.  Jobs.

 

The jobs report issued on Friday was another
disappointment.  The problem with how the
jobs argument has been framed since the start of the year is any report is
going to look good compared to the 741,000 job losses in January.  Did anyone really think we were going to stay
at an annualized job loss pace of nearly 9 million?  Of course not.  So every subsequent reading seemed like a
blessing to the media.  The rate of
change on a month over month basis has been referred to as the second
derivative (or more specifically the rate of change OF the rate of change).  Let us look at both job losses and the rate
of change:

 

 

It is rather obvious that we were not going to see 741,000
job cuts per month even if we were heading into another Great
Depression
.  So as you can see from
the chart above the second derivative from February to May of 2009 was
positive.  Yet anyone can see how flawed
this argument really is.  It is using the
ground shaking monthly loss of -741,000 as a backdrop for every subsequent
month.  Nothing can compete with
that.  In fact, the following months had
equally bad reports:

 

February 2009:           -681,000

March 2009:               -652,000

April 2009:                  -519,000

 

And then in June, we had the second derivative give out
again.  Of course the market being guided
by easy money and unlimited stimulus kept moving on up.  This minor hiccup was nothing to worry
about.  That is until the last report
that shows the rate of change giving way again. 
Even at our current pace, we are losing over 3 million jobs a year yet
somehow this is good.

 

Yet in this new economy apparently buying a car and buying a
home
are more important than having a stable job.  Even Henry Ford understood that you needed to
pay workers a wage to afford the product you were dishing out.  In this new economy, apparently having a job
is an afterthought. 

Let us set aside the job losses for the moment. 
Who in the world is hiring? 
Apparently very few:

 

 

Those hiring are still at the levels seen in the March
abyss.  Virtually nothing has changed on
the jobs front since March of this year. 
Instead of playing hide and seek with mortgages and creating a massive shadow
inventory
 why not at least focus
some energy on the employment situation?

 

There is this pervasive tunnel vision focus on everything
put job creation.  It seems like very few
want to talk about this.  They want to
obsess that the Case Shiller has stabilized or that home sales have increased
but fail to examine the employment front. 
For the first time in our history did we have an economy largely built
on a housing and credit bubble.  So why
are we to expect similar outcomes in this so-called recovery?  In fact, many of these jobs losses are
permanent:

 

 

5.4 million people have been unemployed for 27 weeks or
more.  In times like this simple
questions bring out the best answers. 
This is like asking how a person with no income and no job is going to
pay a $500,000 mortgage in California?  If you asked a question like that the outcome
would have been obvious.  So with this
above chart, we ask who or what industry is going to employ these people?  That is the question that has no answer even
as we pass 21 months of our deep recession. 
  

 

 

    

 

 

 

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The Real Reason the Giant, Insolvent Banks Aren't Being Broken Up

http://www.youtube.com/watch?v=3g7Ln2wc4Ww”>Marc

Washington’s Blog.

Why isn’t the government breaking up the giant, insolvent banks?

We Need Them To Help the Economy Recover?

Do we need the Too Big to Fails to help the economy recover?

No.

The
following top economists and financial experts believe that the economy
cannot recover unless the big, insolvent banks are broken up in an
orderly fashion:

  • Dean
    and professor of finance and economics at Columbia Business School, and
    chairman of the Council of Economic Advisers under President George W.
    Bush, R. Glenn Hubbard
  • The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
  • Economics professor and senior regulator during the S & L crisis, William K. Black
  • Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.

In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke’s thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.

Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:

The
report was particularly scathing in its assessment of governments’
attempts to clean up their banks. “The reluctance of officials to
quickly clean up the banks, many of which are now owned in large part
by governments, may well delay recovery,” it said, adding that
government interventions had ingrained the belief that some banks were
too big or too interconnected to fail.

 

This was dangerous because it reinforced the risks of moral hazard
which might lead to an even bigger financial crisis in future.

If We Break ‘Em Up, No One Will Lend?

Do we need to keep the TBTFs to make sure that loans are made?

Nope.

Fortune pointed out
in February that smaller banks are stepping in to fill the lending void
left by the giant banks’ current hesitancy to make loans. Indeed, the
article points out that the only reason that smaller banks haven’t been
able to expand and thrive is that the too-big-to-fails have decreased
competition:

Growth for the nation’s smaller banks
represents a reversal of trends from the last twenty years, when the
biggest banks got much bigger and many of the smallest players were
gobbled up or driven under…

 

As big banks struggle to find a way forward and rising loan losses
threaten to punish poorly run banks of all sizes, smaller but well
capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…

At a congressional hearing on small business and the economic
recovery earlier this month, economist Paul Merski, of the Independent
Community Bankers of America, a Washington (D.C.) trade group, told
lawmakers that community banks make 20% of all small-business loans,
even though they represent only about 12% of all bank assets.
Furthermore, he said that about 50% of all small-business loans under
$100,000 are made by community banks…

Indeed, for the past two years, small-business lending among community
banks has grown at a faster rate than from larger institutions,
according to Aite Group, a Boston banking consultancy. “Community banks
are quickly taking on more market share not only from the top five
banks but from some of the regional banks,” says Christine Barry,
Aite’s research director. “They are focusing more attention on small
businesses than before. They are seeing revenue opportunities and
deploying the right solutions in place to serve these customers.”

And Fed Governor Daniel K. Tarullo said in June:

The
importance of traditional financial intermediation services, and hence
of the smaller banks that typically specialize in providing those
services, tends to increase during times of financial stress. Indeed,
the crisis has highlighted the important continuing role of community
banks…

For example, while the number of credit unions has declined by 42
percent since 1989, credit union deposits have more than quadrupled,
and credit unions have increased their share of national deposits from
4.7 percent to 8.5 percent. In addition, some credit unions have
shifted from the traditional membership based on a common interest to
membership that encompasses anyone who lives or works within one or
more local banking markets. In the last few years, some credit unions
have also moved beyond their traditional focus on consumer services to
provide services to small businesses, increasing the extent to which
they compete with community banks.

Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.

Specifically
since Glass-Steagall was repealed in 1999, the giant banks have made
much of their money in trading assets, securities, derivatives and
other speculative bets, the banks’ own paper and securities, and in
other money-making activities which have nothing to do with traditional
depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still
have trillions in bad derivatives gambling debts to pay off, and so
they are only loaning to the biggest players and those who don’t really
need credit in the first place. See this and this.

So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

The
largest banks often don’t show the greatest efficiency. This now seems
unsurprising given the deep problems that the biggest institutions have
faced over the past year.

 

“They actually experience diseconomies of scale,” Narter wrote of
the biggest banks. “There are so many large autonomous divisions of the
bank that the complexity of connecting them overwhelms the advantage of
size.”

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many
community banks have thrived, in large part because their local
presence and personal interactions give them an advantage in meeting
the financial needs of many households, small businesses, and
agricultural firms. Their business model is based on an important
economic explanation of the role of financial intermediaries–to
develop and apply expertise that allows a lender to make better
judgments about the creditworthiness of potential borrowers than could
be made by a potential lender with less information about the
borrowers.

A small, but growing, body of research suggests that the financial
services provided by large banks are less-than-perfect substitutes for
those provided by community banks.

It is simply not true
that we need the mega-banks. In fact, as many top economists and
financial analysts have said, the “too big to fails” are actually
stifling competition from smaller lenders and credit unions, and
dragging the entire economy down into a black hole.

The Giant Banks Have Recovered, And Are No Longer Insolvent?

Have the TBTFs recovered, so that they are no longer insolvent?

Negatory.

The giant banks have still not put the toxic assets hidden in their SIVs back on their books.

The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.

The
overhang of derivatives is still looming out there, and still dwarfs
the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).

Indeed, Nobel prize winning economist Joseph Stiglitz said recently:

The
U.S. has failed to fix the underlying problems of its banking system
after the credit crunch and the collapse of Lehman Brothers Holdings
Inc.

 

“In the U.S. and many other countries, the too-big-to-fail banks
have become even bigger,” Stiglitz said in an interview today in Paris.
“The problems are worse than they were in 2007 before the crisis.”

 

Stiglitz’s views echo those of former Federal Reserve Chairman
Paul Volcker, who has advised President Barack Obama’s administration
to curtail the size of banks, and Bank of Israel Governor Stanley
Fischer, who suggested last month that governments may want to
discourage financial institutions from growing “excessively.”

 

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

Some
very smart people say that the big banks – even after many billions in
bailouts and other government help – have still not repaired their
balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.

The Government Lacks the Power to Break Them Up?

Does the government lack the power to break up the TBTFs?

Wrong.

One of the world’s leading economic historians – Niall Ferguson – argues in a current article in Newsweek:

[Geithner is proposing that] there should be a new “resolution
authority” for the swift closing down of big banks that fail. But such
an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as “too big to fail” banks.

And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and
Law) – says that the Prompt Corrective
Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government
to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.

Whether or not the banks’ holding companies can be broken up using the PCA, the banks themselves could be. See this.

And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.

FDR seized gold during the Great Depression under the Trading With The Enemies Act.

Geithner
and Bernanke have been using one loophole and “creative” legal
interpretation after another to rationalize their various
multi-trillion dollar programs in the face of opposition from the
public and Congress (see this, for example).

And the government could use 100-year old antitrust laws to break them up.

So
don’t give me any of this “our hands are tied” malarkey. The Obama
administration could break the “too bigs” up in a heartbeat if it
wanted to, and then justify it after the fact using PCA or another
legal argument.

Is Temporarily Nationalizing the Giant Banks Socialism?

Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.

That
may be true. But government regulators in the U.S., Sweden and other
countries which have broken up insolvent banks say that the government
only has to take over banks for around 6 months before breaking them up.

In
contrast, the Bush and Obama administrations’ actions mean that the
government is becoming the majority shareholder in the financial giants
more or less permanently. That is – truly – socialism.

Breaking
them up and selling off the parts to the highest bidder efficiently and
in an orderly fashion would get us back to a semblance of free market
capitalism much quicker.

The Real Reason the Giant Banks Aren’t Being Broken Up

So what is the real reason that the TBTFs aren’t being broken up?

Certainly, there is regulatory capture, cowardice and corruption:

  • Joseph Stiglitz
    (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the
    financial industry because it is politically difficult, and that he
    hopes the Group of 20 leaders will cajole the U.S. into tougher action
  • Economic historian Niall Ferguson asks:

    Guess
    which institutions are among the biggest lobbyists and campaign-finance
    contributors? Surprise! None other than the TBTFs [too big to fails].

  • Manhattan Institute senior fellow Nicole Gelinas agrees:

    The
    too-big-to-fail financial industry has been good to elected officials
    and former elected officials of both parties over its 25-year life span

  • Investment analyst and financial writer Yves Smith says:

    Major financial players [have gained] control over the all-important over-the-counter debt markets…

    It is pretty hard to regulate someone who has a knife at your throat.

  • William K. Black says:

    There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

    Instead, the Treasury and the Fed are urging us not to
    examine the crisis and to believe that all will soon be well. There
    have been no prosecutions of the chief executives of the large nonprime
    lenders that would expose the “epidemic” of fraudulent mortgage lending
    that drove the crisis. There has been no accountability…

    The Obama administration and Fed Chairman Ben Bernanke have
    refused to investigate the nature and causes of the crisis. And the
    administration selected Timothy Geithner, who with then Treasury
    Secretary Paulson bungled the bailout of A.I.G. and other favored “too
    big to fail” institutions, to head up Treasury.

    Now Lawrence Summers, head of the White House National Economic
    Council, and Mr. Geithner argue that no fundamental change in finance
    is needed. They want to recreate a secondary market in the subprime
    mortgages that caused trillions of dollars of losses.

    Traditional
    neo-classical economic theory, particularly “modern finance theory,”
    has been proven false but economists have failed to replace it. No
    fundamental reform can be passed when the proponents are pretending
    that there really is no crisis or need for change.

  • Harvard professor of government Jeffry A. Frieden says:

    Regulatory
    agencies are often sympathetic to the industries they regulate. This
    pattern is so well known among scholars that it has a name: “regulatory
    capture.” This effect can be due to the political influence of the
    industry on its regulators; or to the fact that the regulators spend so
    much time with their charges that they come to accept their world view;
    or to the prospect of lucrative private-sector jobs when regulators
    retire or resign.

  • Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.

But there is an even more interesting reason . . .

The number one reason the TBTF’s aren’t being broken up is [drumroll] . . . the ‘ole 80’s playbook is being used.

As the New York Times wrote in February:

In
the 1980s, during the height of the Latin American debt crisis, the
total risk to the nine money-center banks in New York was estimated at
more than three times the capital of those banks. The regulators,
analysts say, did not force the banks to value those loans at the
fire-sale prices of the moment, helping to avert a disaster in the
banking system.

In other words, the nine biggest banks were all insolvent in the 1980s.

And the Times is not alone in stating this fact. For example, Felix Salmon wrote in January:

In
the early 1980s, when a slew of overindebted Latin governments
defaulted to their bank creditors, a lot of big global banks, Citicorp
foremost among them, became insolvent.

So the
government’s failure to break up the insolvent giants – even though
virtually all independent experts say that is the only way to save the
economy, and even though there is no good reason not to break them up – is nothing new.

William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (“the entire strategy is to keep people from getting the facts”) makes a lot more sense.

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