FedUpUSA

Archive for December 8th, 2009

By Edward Harrison of Credit Writedowns

I am not sure I buy Meredith Whitney’s assertion that the government is “out of bullets” in its quest to prop up the economy. It’s a matter of political will more than anything else. Nevertheless, I do agree with her basic premise in the CNBC video below that the financial sector is likely to see a more unfavourable economic climate in 2010 than it has done in 2009.

In particular, a looming crisis at the state and local government level, coupled with continued distress at regional and local banks will mean a deadly combination of higher taxes, fewer jobs and less credit for households and small businesses. Unless we see a change in the political climate in Washington, now oriented toward deficit reduction over jobs, we are likely to see a double-dip recession late in 2010 or 2011.

Whitney says “the component parts don’t add up” in addressing the Obama Administration’s conflicting rhetoric on jobs, stimulus and deficit reduction.

What’s so frustrating is you have an administration that is arguing such a populist [rhetoric] and not appreciating all the unintended consequences that the consumer and small businesses have far less credit.

I have said Barack Obama gets it because we have confirmation that he understands that raising taxes or cutting spending is what leads to a double dip recession.

I will accept that not everyone believes we should avoid recession if it means more government spending because of the enormous debt loads in the private sector and the unfunded liabilities in the public sector. Fair enough. I have my own doubts due to concerns about crony capitalism. That is an ideological debate about the role of government.

But in executing actual policy, I believe the President’s words and actions are at odds in part due to the political landscape and the wishes of the corporate interests to which he is beholden.

Witness the duelling headlines today where Joe Klein points out a speech with elbows that the President delivered today.  Michael Tomasky was equally impressed. But, this was just a speech. When it comes to actual policy, Robert Reich was less impressed.

Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn’t want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn’t look like more stimulus because it’s not really adding to the deficit. It’s coming out of savings from money already authorized to be spent on the bank bailout. Hmmm?

No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now — an economy fundamentally out of balance — we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

States and cities, for example, are estimated to be $350 billion hole this year and next. They can’t run deficits so they’re wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That’s a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama’s "new" stimulus, announced today, is about all we have, and it’s not nearly enough.

I am hearing a figure of $70 billion for a jobs initiative – a pathetically small number in an economy of nearly $15 trillion.  In my view, it is better to do nothing than to do something insignificant that acts to discredit your policies.

Returning to the bank world, Whitney’s recent bearishness has been on target (and one CNBC presenter mentions Goldman Sachs as an example). When asked pointedly whether she was making a general market call, Whitney says no. But she does rightly point out that distress in financials does have a spillover effect on the wider economy via restricted credit and this cannot be positive for shares.

As for TARP, Whitney makes an important point when she says the TARP repayments can be seen more as political calculation than an affirmation of banking sector health.  She believes the government needs the TARP funds to help states in severe budgetary distress because no funding will be forthcoming via legislative approval.

I see this as a textbook Larry Summers play and a continuation of the executive branch’s end-run around Congress to affect fiscal policy. In March I wrote:

The political realities of solving a financial crisis have often meant circumventing legislative approval to meet the exigencies of a particular situation. This was certainly the case in 1995 during the so-called Tequila Crisis in Mexico. And I believe it is the case again today in 2009.

Read that post to see how the Clinton Administration was able to bail out Mexico without legislative approval.  They are clearly seeking to exercise the same tactics in this case again.

The fact that this post has been all about government when I intended to write something about financial services should tell you something is seriously wrong.

The video of Whitney is below. It runs eight minutes.

As for Whitney’s comments on people without access to credit, see also Millions in US lack bank access from the Financial Times.

One day, Vince McMahon will pay handsomley to get Ben Bernanke and Alan Grayson in the squared circle. Until that day, we should just hope and dream. In the meantime, we have litters and public appearances by the Florida Congressman, who takes the latest AIG “taxpayer payback” opportunity to remind everyone of just how deeply he loves the “we create money out of thin air” institution that is the Federal Reserve.

I write with concern about two announced deals that are lauded by AIG CEO Robert Benmosche as AIG’s plan to ‘pay back the taxpayer’. In reading through the deal, it looks to me like the Federal Reserve is simply engaged in yet another disguised bailout of AIG. It’s not surprising that the New York Fed continues to shovel money at AIG using its balance sheet, since this seems to be official policy, but this time, the bailout also involves cheating the IRS.

In describing the deal specifics:

This relationship is not significantly different from just making the subsidiaries collateral for the existing loan from the New York Fed, with four exceptions. One, the FRBNY’s right are downgraded in this deal from creditors to preferred shareholders. Two, AIG gets to claim “repayment” and take a tax loss to reduce the company’s income taxes. Three, the FRBNY credit facilities are already collateralized. Four, the New York Fed owns nearly 80% of AIG, putting it on all sides of the deal.

And most brazenly, and deserving of applause, the allegation that Bernanke is implicilty breaking the law by his most recent AIG bailout:

As the New York Fed owns most of AIG, this deal could be considered a faked sale to generate a capital loss for the purposes of injecting Treasury funds into AIG without the consent of Congress. Please explain the legality of the arrangement.

Full Grayson letter to Bernanke:

Note: Other countries that were not included in this article are: Portugal, Italy, Greece, Spain and Ecuador

Dubai’s economic meltdown was a warning sign of further sovereign default troubles for other governments.

CMA, a credit information specialist, tracks the world’s most volatile sovereign debt issuers according to percentage changes in their 5 year Credit Default Swaps.
On top of their list for the greatest sovereign risks are countries from the former Russian Eastern Bloc, conflict-torn nations, and an oil-rich dictatorship.
START HERE
LINK HERE

100 MILLION DOLLAR Manhattan Subway Deal Goes to China State Firm
LINK HERE

Paul Krugman argues that cap and trade worked to reduce sulfur dioxide and stop acid rain, and so it will work to reduce C02.

However, two EPA lawyers with more than 40 years of cumulative
experience – including the guy who has been head of California’s cap
and trade offset programs for more than 20 years – say that sulfur
dioxide was different, and that cap and trade for climate is a scam which only
benefits the financial players.

Specifically, they point out that:

• Cap and trade was tried in Europe, but ended up raising energy
  prices, creating volatility, produced few greenhouse gas reductions,
  but made billions for the financial players

• Even the guy who invented the cap and trade concept doesn’t think it will work in regards to climate change (see this and this)

• Carbon offsets – which are part of the cap and trade plan – increase pollution

• One reason that offsets lead to more pollution is that investors
  fight to keep toxic chemicals legal, so they can make more money off of
  trading the offsets

• Like subprime mortgages and other creative financial instruments
  which brought us the economic crisis, carbon offsets lack integrity and
  don’t work (see this)

Watch the video:

I can’t believe this is coming from five Democrats:

Five House Democrats will call this week for a return to a Depression-era law that separated Wall Street investment banking from Main Street commercial banking.

If adopted, the measure would give banks one year to choose between being commercial banks or investment banks. The nation’s biggest — those now commonly referred to as “too big to fail” — would be broken up. The Obama administration opposes the measure.

The amendment’s five co-sponsors — Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts – want to restore the Glass-Steagall Act of 1933, which prohibited commercial banks from underwriting stocks and bonds. The act was repealed in 1999 at the urging of, among others, Larry Summers, now President Barack Obama’s chief economic adviser.

Gentlemen, you’re on the right side of this.

You can start reading here, then page back.  There’s a lot of reading for you to do….. (this is the search results for all of my Tickers that have mentioned Glass-Steagall, of course.)

http://market-ticker.org/search/glass-steagall/P12.html

A FULL re-instatement of Glass-Steagall – not some watered-down piece of legislative trash, but the real deal - will prevent the economic meltdown we are in the middle of from ever happening again.

The key to such a fundamental re-balancing of our economy would be the restoration of the balance of credit, by making it impossible for those banks with access to the sovereign’s fractional reserve privilege to speculate with it. 

Instead, lending would shift primarily to productive investment.

Glass-Steagall, in point of fact, was one of the primary reasons post-WWII that we came roaring forward with our economy.  Lending went to finance productive assets (e.g. factories, machines, tractors, combines, etc) instead of financial speculation as it had in the 1920s. 

It was that financial speculation that led to the asset bubbles in the 1920s – and that, in turn, resulted in the malinvestment that was responsible for The Great Depression.

It was that very same financial speculation in the 1990s and 2000s that led to the current bust, and contrary to the claims made by Bernanke, Geithner and others, the pain is not over, nor can it be until and unless the banks’ abuse of sovereign credit for financial speculation is prohibited.

If this amendment passes it will eviscerate Wall Street’s “profit gravy train”, but it will also usher in a productive explosion in America that we have not seen in the last 50 years.

You want to see jobs created by the millions and Americans return to work?

Pass this amendment.