FedUpUSA

Archive for December 28th, 2009

For some reason Zero Hedge is prone to take a great deal of heat (both directly radiated and reflected) whenever we opine on the (rather obvious to us) prospect that interest rates might actually (quelle surprise) rise in this environment.  Today, rather than engage in “we told you so” gloating, or endure the repetitive pleadings of commentators that this or that Treasury auction was really a success if you just look a little deeper at the figures, we’ll just quote Bloomberg quoting other fixed income observers on today’s auction of two years, in an article “ambiguously” titled “U.S. 2-Year Yields Highest Since October After $44 Billion Sale.”

Treasury two-year note yields reached the highest levels since October as an investor class that includes foreign central banks bought the least of the debt in five months at today’s record-tying $44 billion auction.

Indirect bidders purchased 34.8 percent of the notes, the lowest amount since July, and below the average for the past 10 sales of 45 percent. Treasuries of all maturities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst performance since at least 1978, when Merrill began collecting the data.

We aren’t really sure how this will be spun into a “good thing,”™ but we are sure that someone will find a way.  Back to you, CNBC.

By Edward Harrison

As we head into the New Year, I am trying to look back at the last one with some semblance of a coherent interpretation of events that leads to a strategic vision of the future.  I have already touched on stimulus, kleptocracy and crony capitalism as dominant themes for the year 2009. 

These posts have been critical of the economic vision presented by the Bush and Obama Administrations. I would stress that I see a lot of overlap in the two Administrations’ economic policies, which is why I use the phrase “the Bush and Obama Administrations” instead of focusing just on Obama.

But, now is the time to offer a review of alternative policy solutions. Bashing policy without pointing to an alternative doesn’t add value. I also believe quite strongly that this exercise will demonstrate that alternative policy solutions did exist – and that they were pointed out at the time. One can only assume that alternative policy solutions were rejected because the Bush and Obama Administrations preferred the solutions they crafted to these. And while, I am most concerned with outcomes, this juxtaposition between what could have been and what is points to the kleptocracy and crony capitalism I mentioned in my last two review posts.

Before I go into my spiel, I want to stress a point I made at the outset of a November post “The less optimistic view of Treasury’s handling of the crisis”:

one doesn’t have to take the view that its efforts to save the banking industry were a deliberate attempt to line bankers’ pockets by transferring money from taxpayers to the banking industry.

I will probably end up flexing my confabulatory muscles like every other pundit out there – making direct or unconscious assumptions about motives, agendas or intent. This is all just speculation – much of it false. It is outcomes that matter, not intentions. And it is the outcomes that leave me unsatisfied with the present policy course.

Change you can believe in

The key issue, in my view, is the desire for change in 2008.

For years, the U.S. had been lecturing others how to run a successful economy. The Mexicans needed to sell their banks to foreign behemoths to succeed. The Asians and the Argentines needed to take their depressionary medicine and eliminate crony capitalism. The Russians also needed to eliminate gangsterism and crony capitalism or no one would invest there. The Europeans were overly regulated and the state was too big.  And so on.

Then, after a quarter-century of apparent economic success (1982-2007), the U.S. economic and financial system was close to collapse. The masters of the universe were seen to have brought the economy to its knees because there were vulnerabilities at the core of American-style capitalism.  This was an ugly surprise for many – and it was humiliating, just as 9/11 had been on national defense. Change was the watch word.

What kind of change? Last month, I said:

If you asked 1000 people in those exit polls from November 2008 – or even last week, “what would make you know America was headed in the right direction,” you probably would have gotten 700 different answers.

But, one thing is clear: Since January 20th, a lot of people are saying to themselves, “I know change when I see it and this is not it.” That’s what all polls are saying. So, whatever Obama and the Democratically-controlled Congress are doing, it’s not working.

So, people wanted fundamental change and they felt Obama could deliver it. What the specifics were was less important. The key was that whatever changes were made, it reflected a more proportional connection between economic contribution and financial gains as well as elimination of the core vulnerabilities of our system.

More of the same

So, when Tim Geithner says:

I spent most of my professional life in this building. Watching the politics of the things we did in the past financial crises in Mexico and Asia had a powerful effect on me. The surveys were 9-to-1 against almost everything that helped contain the damage. And I watched exceptionally capable people just get killed in the court of public opinion as they defended those policies on the Hill. This is a necessary part of the office, certainly in financial crises. I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

this is either cynical propaganda or self-delusion. People did not elect your President to do deeply unpopular things. They elected Obama to make the fundamental change that he is not delivering. You may think this is change we can believe in, but polls show Americans do not. This quote encapsulates why you can’t have people who created the mess clean up after it. They are prone to defend their prior policies tooth and nail to vindicate their actions. As I said when reviewing a recent Matt Taibbi piece:

What happens when a company is nationalized or declared bankrupt is instructive; here, new management must be installed to prevent the old management from covering up past mistakes or perpetuating errors that led to the firms demise. The same is true in government.

And Geithner and Summers do not represent change in the least. They were at the center of many of the past decade’s policy mistakes: Lehman, OTC derivatives, and anti-regulation of money center banks.

It’s not difficult to see what’s going on. For Obama, it’s kind of hard to get change when you surround yourself with insiders who have vested interests in the status quo.

Credit Crisis Options

A quote from “America needs a pre-privatization plan” is my jumping off point because it does a good job of framing the policy choices at the time.

To my mind, there are three ways to deal with an insolvent financial institution:

• Bankruptcy. Allow the  institution to collapse (like Lehman Brothers)
• Nationalization. Seize the assets of that institution and nationalize it (like Northern Rock, AIG, or Fannie Mae)
• Bailout. Inject capital into the institution in order to allow it breathing room until it can meet capital adequacy levels.

As you can see, governments have tried all three solutions.  However, there are vast differences between the three.

The bailout solution is the most ‘anti-free market’ choice and seems to be the favored solution of governments everywhere.  It props up organizations, giving them an unfair advantage at the expense of other more prudent institutions.  It also acts as a subsidy, which favors domestic institutions over foreign rivals.  Bailouts increase moral hazard by rewarding risky and reckless lending practices.  And they are often the result of crony capitalism due to the power of the financial services lobby. There are many other problems with bailouts. All around, bailouts are a poor solution.

As you know, the Bush and Obama Administrations chose the third option. Here are a few posts from the crisis detailing the Bush response (for which Geithner as New York Fed Chair shares responsibility). Paulson wanted to allow failed firms to fail. But, he quickly learned the same lesson that the Brits learned during the run on Northern Rock, namely this is a very risky strategy unless you have a well-thought out process to limit contagion (see the first post below).

After the post-Lehman panic, I see the policy as bailouts that are “a naked attempt to preserve status quo” as I say in the Dead on Arrival post below (and I present a coherent policy alternative there). Congress was asleep at the wheel, as usual.

• Lehman’s bankruptcy: putting the cart before the horse? – Sep 2008
• The $700 billion Paulson Plan is dead on arrival – Sep 2008
• The Paulson Bailout Plan is unconstitutional crony capitalism – Sep 2008
• The Paulson plan is not going to make it – Sep 2008
• Congress does need to act on the Economic Patriot Act – Sep 2008

So, when Obama was elected, there was an enormous opportunity to change course. I had pointed to Paul Volcker’s presence in Team Obama as encouraging in October 2008 (Paul Volcker: Obama’s other economic advisor) and November 2008 (Volcker warns how serious things have become).

However, after the election, Obama immediately put Geithner and Summers in charge despite their complicity in the policies that led to crisis. I will sheepishly admit to putting a positive spin on things pre-inauguration (see Crony capitalism in U.S. banking bailout should end from January). But, Geithner and Summers consolidated power over time as infighting begins within Obama’s team forced Obama to cast his lot with Geithner-Summers or Volcker. By March, Marshall Auerback was asking Where’s Volcker? as it became obvious he was being shunted aside.

The path not chosen

So, to sum up, we had an economic and financial crisis of a lifetime. The Bush Administration and the Fed were in disbelief and failed to make enough preparations for the obvious coming failures. An almost religious belief in market mechanisms and an incoherent policy led to disaster with Lehman – after which the Bush Administration got religion about bailouts and crony capitalism.

When Obama came to town, you might have thought his policies would be substantively different. But they were not – not on regulatory reform, auto bailouts or bank bailouts. His was the neo-liberal prescription of the Clinton era – substantively the same as the Bush policies. When I wrote Seven reasons to be skeptical of Obama’s economic plans already in January, this was why.

That’s how things panned out.

Since I detailed some of the policy choices in my review post on crony capitalism, I won’t cover that ground here. I will point out just a few March 2009 posts from Credit Writedowns which I did not mention in the last review posts. They all point to problem’s with Team Obama’s solution in terms of wealth transfers and sustainable outcomes as pointed out by leading economists.

• Is Obama considering nationalisation? – Mar 2009
• Geithner’s Plan: one of the most regressive wealth transfers of all time – Mar 2009
• Roubini: Nationalization “fully on the table” in Geithner’s Plan – Mar 2009
• Krugman: Geithner Plan “won’t work” — Mar 2009

I will use this as a natural place to stress how motives and intent are irrelevant.  Think Obama is a bad guy all you want. Think Larry Summers has an alternative agenda all you want. Think the perennial public servant Tim Geithner doesn’t want to do good all you want.  Motives and intent don’t matter; outcomes matter.

And here are the posts I feel best represent a number of potential alternative solutions to what we have witnessed from pre-Lehman through March.

• The Swedish banking crisis response – a model for the future? – Aug 2008
• How to tackle systemic malaise – Sep 2008
• The global economy has crashed: we need a comprehensive credit crisis plan – Sep 2008
• The problem with comprehensive banking crisis solutions – Nov 2008
• Seven reasons to be skeptical of Obama’s economic plans – Jan 2009
• What is an economic depression? – Feb 2009
• A conversation with Bridgewater Associates’ Ray Dalio – Feb 2009
• Yves Smith: Nationalization is what the FDIC is doing every week – Feb 2009
• America needs a pre-privatization plan – Feb 2009
• Did Sweden really nationalize its banks? – Feb 2009
• Lessons from Swedish bank resolution policy — Mar 2009
• A few thoughts about the banking crisis response in the United States – Mar 2009
• What would an alternative to bailouts have looked like? – Nov 2009

Likely outcome

I’ll finish this off by quoting from my third post “The US Economy 2008” which points to over-indebtedness and a purge of malinvestment as the problem which politicians will refuse to tackle:

The global economy, now supported in the main only by the overextended U.S. consumer, finds itself at stall speed, susceptible to any number of potential exogenous shocks. Ultimately, the economic malaise created by this confluence of events will take years to unwind. A positive outcome to this process is dependent wholly on liquidation of excess credit and consumption.

This process will be extremely painful in the short term, but will lead to a healthy economy long-term. Unfortunately, experience shows that these painful steps will only be taken as a last resort. Moreover, geopolitical events become volatile in a world of economic insecurity, leading to political upheaval and protectionism. Protectionism is a natural outgrowth of nationalist economic policy as it transfers wealth from foreign producers to domestic producers by cutting off access to lower cost excess capacity in the goods in service sectors. However, this also serves to transfer wealth from domestic consumers to domestic producers by increasing the price of goods in the protected sectors, ultimately reducing consumption demand.

For these reasons, I am cautious about the long-term outlook for the global economy and the U.S. economy in particular. The likely outcome for the next decade is one of sub-par global growth with short business cycles punctuated by fits of recession.

Could it be any different?

Now things are heating up:

Just hours after federal agents charged banker Allen Stanford with fleecing investors of $7 billion, the disgraced financier received a message from one of Congress’ most powerful members, Pete Sessions.

“I love you and believe in you,” said the e-mail sent on Feb. 17. “If you want my ear/voice — e-mail,” it said, signed “Pete.”

Heh, now that’s innocent, right?

Let’s talk about what’s going on here, because this is not limited to a handful of interests – it is in fact widespread and part and parcel of the corruption that has swept our nation.

The “revolving door” game – and the so-called “perks” of being a lawmaker, including the ability to travel to exotic (and expensive) places on the dole of others – has always been an issue.

In the last 20 years it has become completely out of control.

Stanford hosted New York Congressman John Sweeney’s wedding dinner at his five-star restaurant in Antigua in 2004 — toasting the couple for photographers — and staged a cocktail fundraiser for now-disgraced Ohio congressman Bob Ney at his bayfront Miami office.

Why is this legal at all?

Part of the duty of a Congressperson is what is called “honest service.”  How can one legitimately make the argument that you are providing that “honest service” when this sort of thing is going on left, right and center, with the clear intent of scuttling bills that would harm you?

Over the years, he took on battles to protect his banking network while fending off regulators.

In 2001, he pressed successfully to kill a bill that would have exposed the flow of millions into his secretive offshore bank in Antigua.

The next year, he helped block legislation that would have drawn more government scrutiny to his bank.

And let’s remember, he is accused of basically stealing the money.

Now tell me how different this is from Henry Paulson showing up at the SEC’s office to press for, and receive, a removal of leverage limits from the Investment Banks – an act that then allowed big Wall Street firms to package up trash loans into securities, shop ratings to get that coveted “AAA” and then sell them off to unsuspecting rubes – who in turn took huge losses in 2007 and 2008?

I argue there is no difference.

There is a fine line between a “campaign contribution” and a “bribe”.  The law defines it in one place – an explicit “quid pro quo.”

I define it somewhere else: influence, irrespective of how gained, with or without explicit promises to act (or not act as the case may be.)

It began in 2003, when lawmakers including Sessions, Ney, Sweeney, Gregory Meeks, Donald Payne, Max Sandlin and Phil Crane arrived in Antigua on a mission to “promote relations” with the Caribbean nation.

The cost of the January trip — including nights in luxury hotels and two Stanford jets for travel — came to $39,500, records show.

For four days, they gathered for talks on business in the Caribbean, trading jokes with Prime Minister Lester Bird and touring the island.

In time, the group of lawmakers, which became known as the “Caribbean Caucus,” would take 11 more trips — the costs picked up by the Inter-American Economic Council, a nonprofit funded by Stanford.

Promote relations eh? 

Remember my note about “Caribbean Banking Centers” allegedly owning over $200 billion in Treasury instruments?

Where did the money come from to buy those?

Is it drug money?  Or is it just under-the-table “grease” (and lots of it) put forward by American interests to literally buy legislation they want, and kill legislation they don’t?

Which is more harmful?  Some ganja-loving hippie smoking a joint in his living room, or the corruption of our political process to the tune of hundreds of billions of dollars, making the entire legislative process nothing more or less than an extension of corporate board rooms seeking to legitimate that which either disadvantages ordinary people or worse, is outright fraudulent on it’s face.

I know what I believe, and so-called “Campaign Finance Reform” was supposed to fix it.  It didn’t because it failed to force disclosure.

Look, The First Amendment is incompatible with the concept of restricting speech, and money buys speech.  So let’s cut the unconstitutional nonsense.

It is plenty sufficient to force each and every donation to be fully disclosed in real time, and further, to absolutely ban the expenditure of funds by anyone for these junkets and similar events.

I am already forbidden to give anything of material value to a Congressperson as a natural person.  Why is it that we allow non-profits (funded by for-profit firms and individuals!) to pay for these sorts of “junkets”?  Whether someone is acting formally “for profit” or not should not be the test!

In any event I have no expectation that we will see meaningful reform in this regard any time soon, as the American Sheeple continue to sit back and allow this sort of nonsense to happen.  In the case of Stanford it appears that the result was the theft of billions of dollars, but if you look inside most of the legislation passed over the last 100 years, dating all the way back to Harry Anslinger, who it certainly can be argued obtained his strong “anti-marijuana” stance not from principle or personal belief, but rather as a means of protecting the multi-billion dollar Hearst paper and publishing empire.

Evidence?  Plenty, including Anslinger’s attempt to halt a joint ABA/AMA report on criminalization of drugs – a paper intended to shine the white light of reason on the debate from the perspective of both practitioners of law and medicine.

There are lessons here that are as old as The Republic, if we care to listen.  They’re not limited to a few examples like Stanford, although those, being the most sensational, do of course draw the press. 

Rather they are pervasive and found throughout politics, and if we are to ever disentangle “the vampire squids” that engulf public policy, whether it be in relationship to narcotics (upon which we blow tens of billions of dollars without meaningful effect) or the intoxication garnered by deceptive and outrageous practices in the securities markets we must put a stop to the junket train by treating all equally, ban the provision of “gifts” to lawmakers from any source whatsoever (including junkets and similar entreaties) and force the reporting of all “campaign contributions” in real time, with specificity.

At the same time we should mandate that all lobbying contacts take place either in written form (and be immediately published for consumption by the public) or that they be taped (audio and video) and similarly distributed immediately.

After all, if Congress is “The People’s House” and these are allegedly our elected representatives, do we not have a right to know what these mendacious vipers are up to?

I think so.