Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Financial Crisis Page 7 of 13

Serious People Notice Banks Are Gouging Consumers and Tanking the Economy

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On July 5, 2010

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Well, better late than never:

rates on 10-year Treasury bonds are only about 3 percent, many consumers still carry tens of thousands of dollars of credit card debt at 20 percent or more. This burden has been a continuing drag on spending. The federal government could reduce it by borrowing at 3 percent and lending to consumers at 8 percent under a one-time debt-restructuring plan.

With their debt service payments cut by more than half, consumers could increase spending immediately. And the five-percentage-point spread on money lent under the program would help cover its administrative costs, and maybe even relieve short-run government budget pressure.

This is, of course, correct, though I’d only push it up 4%, myself. I originally suggested this February 9, 2009. It was the right thing to do then, it’s still the right thing to do.

As David Anderson notes, this would be a huge help to ordinary people:

Going from 18% to 8% interest, the individual with $10,000 in credit card debt would see their initial monthly payment go from $250 a month to $167 per month. Using a declining minimum payment formula of (monthly interest expense +1% of current balance), the debt burden at the end of the year is still $9,000 but the interest expense declines from $1,570 to $700. That gap of $870 is greater than the ARRA Making Work Pay tax credit and it most likely would be targeted at individuals with a high marginal propensity to spend (as evidenced by credit card debt.) If balances or interest rates are higher, the freed up cash flow would be even greater.

Also the government can make real, significant money by doing this. All it is is arbitrage. If you can borrow money cheap and lend it at higher rates that’s free money. Not only would that help consumers, and the economy, it would also reduce the deficit. Win/Win/Win. If Blue Dogs are really sincere about their belief in deficit reduction they should jump all over this suggestion.

Note that rates being so high is a classic case of market failure. The banks are charging more than they need to in order to make a profit. In an actual free market other banks are supposed to step in and undercut them, but that isn’t happening. We could argue about why (they’re a collusive oligopoly or they’re broke being the most probable causes), but in the immediate term, it doesn’t matter, what matters is fixing it.

But I doubt it will happen. Why? Because the banks are making a TON of money by gouging customers, and they own DC. I suspect the best we can hope is that this is a warning shot across their bows, a message to reduce the looting or pillaging to “acceptable” levels.

Which will be a heck of a lot higher than you might like, but hey, they run the place.

How bailing out the rich created the Depression

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On June 29, 2010

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The other day, Krugman wrote that we’re in the beginning of a new Long Depression.

Forgive me, but he’s wrong: this isn’t the beginning, it’s been going on for about two years now.

During a Depression there are periods where GDP grows.  There are periods where jobs grow.  It’s just that the periods of job growth don’t last.

There were opportunities to end the Depression before it really dug in its heels.  The last one was at the beginning of Obama’s term.  Kicking out of the Depression required two things.

The first was an adequate stimulus. This didn’t just mean a large enough stimulus, though the one offered was not large enough, it meant one properly constructed.  Tax cuts for ordinary Americans are not stimulative, because folks like banks who have pricing power (you must have a credit card, loans, etc…) will simply take that money away by raising rates and fees.  And it doesn’t mean short term shovel-projects, it means making commitments which will last for years so that businesses, when making plans know that hiring is worth it because those employees will be needed for more than a year or so.

Likewise the US has some serious problems with the structure of the American economy.  The cornerstone of the stimulus had to be reducing US dependence on oil because as long as the US economy is so dependent on oil, full fledged growth is simply not possible.  The days of $20/barrel oil aren’t coming back, and every time the price of oil gets too high, it puts great pressure on the US economy (and every other modern nation.)

The second thing which had to be done is to force the banks to actually eat their losses.  Wipe out the shareholders and let the bondholders take their losses.  All the money plunged into the banks (and it was much more than the TARP money, which was the smallest part of it) was wasted.  Banks are not lending, and restoring lending is what the bailouts were sold as doing.  Moreover they have raised borrowing rates and fees on those who need credit most, soaking up money which otherwise would be helping the economy rather than simply being sopped up to plug holes in bank balance sheets.

The trillions of dollars spent attempting to bail out the banks weren’t just wasted, by keeping zombie banks alive they made the situation worse.  Further by not wiping out the wealth of banks and those rich folks who made foolish investments which wrecked the world economy, they created a political problem: to whit, as Durbin said—the banks still own Congress.  (Along with the military industrial complex, pharma and various other monied interests).  Because monied interests still own Congress, they have made it impossible to fix America’s structural problems.

Six percent of GDP could have been saved by doing health care reform properly, but that didn’t happen.  The current “financial reform” bill under consideration is so week that I don’t know of one credible outside analyst who thinks it is sufficient to make sure there isn’t another financial crash, and on and on.

Historically speaking periods of high concentration of wealth only end when the rich lose it in a huge crash.  They are never ended by, say, high marginal taxation—high marginal taxation only occurs after the losses have occurred as those who saw the run-up do their best to make sure it can’t happen again.

That lasts until the generations who saw the mania and crash start dying off and losing power.  So you start seeing really serious decreases in marginal tax rates and slashing of financial regulations when the generations who lived through not just the Great Depression but the Roaring twenties were no longer around.

The cliche that a crisis is an opportunity is, sadly, true.  But it is only an opportunity if you take it.  What politicians, and this includes Obama and Geithner, as well as Bush, Paulson and Bernanke, did, was they protected the rich from their own folly, and made  ordinary people pay for it.  The wealth of the rich has mostly recovered, corporate profits have recovered, but for ordinary people the economy still sucks and there is no reason to believe it isn’t about to start sucking even more.

The financial elites think that what they can do is create an economy with a permanently high unemployment rate and that Americans (and Europeans, for that matter) will put up with it, because what choice do they have?

We are going to have another kick at this can, because the legislation being put in place is not sufficient to prevent another financial crisis.  This is a Depression, and it is not going to go away.

Next time I hope we will consider doing the right thing.  Make those who crash the system take their losses and break the power of the rich over government.

Be very clear, it’s you, or it’s them.  You break their power, or they will continue to push your wages towards parity with China.

And they are very determined it’s not going to be them.

Are you determined it’s not going to be you?

The Housing Bubble Was Based On Fraud

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On June 26, 2010

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Once again:

Recent filings by two Federal Home Loan Banks — in San Francisco and Seattle — offer an intriguing way to clear this high hurdle. Lawyers representing the banks, which bought mortgage securities, combed through the loan pools looking for discrepancies between actual loan characteristics and how they were pitched to investors.

You may not be shocked to learn that the analysis found significant differences between what the Home Loan Banks were told about these securities and what they were sold.

The rate of discrepancies in these pools is surprising. The lawsuits contend that half the loans were inaccurately described in disclosure materials filed with the Securities and Exchange Commission.

Half of them were fraudulent.

Half

There would have been no housing bubble without widespread fraud.  None.

Virtually every major bank executive in the US should be indicted for fraud.  The fact that there aren’t even serious investigations, let alone indictments, tells you everything you need to know.  Everyone in the system knows it was all fraud, they knew it at the time, and that is exactly why there are no real investigations.

Catching Up with the Obama Dilemma

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On June 21, 2010

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I haven’t had much to say the last bit, because the rest of the blogosphere and even mainstream pundits are catching up to where I was a while ago.  Let’s see where we are, and where we’re going.

To recap:

1) the stimulus bill was neither big enough, nor well enough put together to do the job.  However many jobs it “saved and created” they weren’t enough.

2) Obama is not in the least interested in doing progressive things unless great pain is inflicted on him, personally.  This is most likely because he is not a progressive.

3) On civil liberties, Obama is probably actually worse than Bush.  Yes, that’s quite an accomplishment, but there you have it.

4) He’s an incompetent leader, who over-centralizes decision making, refuses to delegate, then makes decisions slowly and badly.

5) His courtiers are not the problem (although they’re almost all scum), he is the problem: he chose them.

6) The spring job recovery is already petered out, and around the world virtually every major economy other than China is turning to austerity, including the US.  US cities and States are in a horrible state, gross income is down, and bank lending is still not recovering.  The US economy has become more oligopolistic and more sclerotic than ever before, with the major firms who run the economy making their money by squeezing little people who have nowhere to turn.  Thanks to Bernanke, Paulson, Geither, Bush and Obama’s bailouts, and refusal to engage in meaningful restructuring of the economy or the financial industry, their profits have recovered.  That means, to them, that the crisis is over.

7) Election results in the midterms are looking really bad.  I was warning about this in beginning of 2009, because if Obama’s economic policies didn’t work, and if he continually alienated the base, it was going to cause problems.  The only thing Obama and Congressional Dems have going for them is how bloody awful the Republicans are.  But being the lesser evil isn’t always enough.  Liberals and progressives can’t vote Republican, but they can refuse to donate, not volunteer, and in many cases, not vote.

Going forward Obama is faced with a choice.  He won’t do enough to make the base happy, because he genuinely doesn’t believe in any progressive ideals.  What he can do, however, is goose the economy. He has most of the TARP slush fund to play with.  He could dump it into the economy post-haste in order to rescue the mid-terms.

Whether to do so is a dilemma for him.  On the one hand standard methodologies are still showing that the Dems (barely) hold onto the House, and keep the Senate.  But it isn’t much of a stretch for the Republicans to win the House.

If they do so, Obama’s presidency is effectively over.  The Republicans will Clintonize him, tying him down in a blizzard of subpoenas and fake scandals.  He will get nothing done for the next two years, and will probably lose re-election.

On the other hand, if he spends the money in 2010, it won’t be there in 2012, and after all, Dems might squeeze through without it.

Choices, choices…

I’d feel sorry for him, but he’s made clear that he isn’t a Democratic president, and he isn’t a liberal or a progressive, so I see no point in wasting any angst on personal problems he himself created.  All of this was totally predictable, and was, in fact predicted by multiple people.

Obama never made a sincere effort to fix the economy, to end the wars, to stop civil liberties abuses or to revamp the financial industry.

As he reaps, so he sows.  It is unfortunate Americans have to suffer even more than he does (he’ll be taken care of after he leaves the Presidency, never fear), but such is life.  Maybe it’s time to stop voting for people who say they love Reagan and that they don’t believe in Democratic solutions to problems.

Coming up…

We’re still in a Depression

and

Why it is never in Congress’s interests to look after Americans

Crunch Time: Two Economic Scenarios for the rest of the year

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On May 21, 2010

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Ok, we’re in crunch time.  Bernanke is pulling a strong dollar play and trying to unwind as much of what was done in 08 and 09 as he can.  Meanwhile, across the Western world, we have a wave of Hooverism, everyone wants to cut, cut, cut spending.  And China isn’t looking as healthy as it once did, which is bad, because basically China is keeping the actual (as opposed to financial) world economy afloat.

However, the good news is the drop in oil prices.  High oil prices (and yes, $80 is high) had led to, essentially, only a few half decent months of job growth.  Oil had to be gotten under control.

This is, in essence, the same play Bernanke tried to perform in 08.  He crashed out oil prices, and took the world financial economy with it.

To understand why you need to understand the contradiction at the heart of the modern neoliberal world economy.

There is a lot of hot money in the world economy, more hot money than there are truly safe investments.  The financial bubble and collapse could be summed up as “trying to get AAA security with higher than AAA returns”.  The paper was almost all produced in an attempt to get better than Treasury bond returns while claiming to be as secure as Treasury bonds.  Obviously, the paper wasn’t, and it all crashed out.

There is still too much hot money which wants AAA security, and better than AAA returns.  They demand that governments find a way to give it to them.  One way is for the Fed to give them free money, then borrow it back from them (we’ll lend to you at zero, you lend back to us at 3%.  Free money!)  But there are limits to these sorts of games.

Why?  Well, that’s the contradiction.  Because the hot money is both scared by the prospects of high deficits (government defaults) and by the economy itself crashing out because, well, there isn’t enough stimulus.  If you’re scared of too much stimulus and you’re scared of too high deficits, well, you’re caught between the proverbial rock and a hard place.

Currently the pressure is mostly on the austerity side, with an IMF style crackdown in both Greece and Spain, with a healthcare bill in the US which “saves money” and so on.

The problem is that actual private income in the US, for example, is about 500 billion lower than it was pre-crisis.

The economy breathes fine, as long as we don’t unplug the life support.

And unplug the life support is what everyone except the Chinese seem to want to do.

The US dollar getting higher and commodities getting lower, if it doesn’t crash out the economy when added to global austerity, means that a relatively small amount of money can reorient the economy.  This is the Rubin play, and when Rubin did it for Clinton, it worked.  The thing is, back then, the internet boom was waiting to happen.  I don’t see what Obama and Bernanke will reorient the US economy towards: I don’t see the next big boom (oh, I see some things it could be, but I don’t think they want any of those things.)

The next few months will tell the tale.  Will global austerity throw the world into a second downleg of this depression?  Or will global austerity and Bernanke’s strong dollar play crush commodity prices without crushing the real economy?  And will investors freak out, caught between their twin fears of deficits (don’t want to be in bonds) and lack of stimulus (don’t want to be in stocks), and go on strike again, causing another financial contagion?

Who knows.  I’m coming down on the downside right now, mainly because I believe that when you’re given a choice of betting for or against Bernanke, you should generally bet against.  (Not directly or in the short run, though, he’s still the player with the biggest stack on the table.)

Obama, Congress and Bernanke did not save the world from a Great Depression

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On May 14, 2010

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Sorry, they simply did not. The baseline IMF forecast before the bailouts and before the stimulus bill tracks almost exactly what happened.

The bailouts were an actual net drag on the economy.  Instead of cleaning up banks balance sheets, they allowed zombie banks to continue to exist, banks which are crippled when it comes to lending.  In order to make sure these banks can pay down their bad debts, the Fed not only had to take on huge amounts of their paper at par when it was worth 20 cents at most, it has had to lend to them at concessionary rates, pay extra interest to them, and let them leverage that to make obscene profits from what lending they are doing (why did your credit card rate go up, that’s why?) and from trading on a captive market.

As best I can figure the stimulus was large enough to counteract the negative effect of the bailout.

The net, is a wash.

Furthermore, there were far, far more intelligent things which could have been done.  The crisis was, as the tired phrase goes, also an opportunity to break the power of monied interests, so that ordinary Americans could prosper again and could reclaim their government.  The stimulus was an opportunity to restructure the US economy to allow real, widespread growth in the future.

Both those opportunities were wasted, and they were wasted by Obama.  TARP would not have passed without him, and once he was in power he could have demanded that Bernanke do as he commanded (break the banks) or step down, if Bernanke wouldn’t, he could have easily impeached him.  The stimulus was his stimulus.

Obama, Congress, Bernanke, Geithner, Paulson—none of them saved anybody except the banks and the rich from apocalypse.  I understand that partisan Democrats want to pretend Dems saved the world, but they did no such thing.

(Addendum. See Rosenbert here (h/t Sean-Paul):

There are classic signs indeed that the recession in the U.S. ended last summer — output, sales, etc. But the depression is ongoing and the reason we say that is because real personal income, excluding handouts from the government, has barely budged. In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trendline for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits . . .

Real consumer spending is up $200 billion over the past 16 months and everyone believes we have a sustainable recovery even though organic income is down almost $500 billion. Think about that for a second because once the stimulus wears off, and with a 10% deficit-to-GDP ratio and concerns surfacing everywhere about sovereign credit risks, there is little out there to support future growth in consumption.)

Actual Good News

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On May 13, 2010

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The reform of the credit agencies, which creates an office in the SEC which assigns securities to the agencies to be rated, rather than the security issuer choosing (and paying) who rates them, is an actual good reform.  The Fed audit, while it is more limited than I would have liked, if done properly, should be very interesting.  Financial reform is still far from sufficient, but some intelligent good stuff is being passed.

Clarifying The Dow Drop And Its Consequences

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On May 8, 2010

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Some folks seem to misunderstand what I wrote (which indicates I wasn’t clear enough.)  I do not know if the huge drop was a message, it certainly may have been.  But whether it was deliberate or not, it indicates that the big money CAN crash the market whenever it wants.  This is a sharper demonstration of what the 2008 crisis showed—that the hot money can crash the markets and the economy any time it wants.

The lesson of 2008, as understood by political elites, was that this hot money MUST be appeased.  The money wants high, risk free returns, and if it doesn’t get them, it will make everyone hurt.  This is why, instead of taxing the rich, which is where the money is and which has essentially no economic costs (a 20% tax on purchases of luxury goods or services over 1.5 million would have essentially zero cost to the real economy) what is happening instead is talk of slashing entitlements, or in edge economies like Greece, austerity.  (Britain will soon be getting cuts at their national level  and States and Cities have already had cuts in the US.)

Instead of appeasement, the 2008 crisis offered an opportunity to break the rich, by forcing them to recognize their losses, by refusing to bail out the financial institutions so that shareholders AND bondholders got smashed.  At the same time, to reduce the effect on the real economy, either the FED could have loaned directly to businesses and consumers or the FDIC could have taken over major banks which were dead, like Citigroup, and pushed out Fed money through the newly nationalized banks.

The end result would have been the power and wealth of the rich broken, and the real economy in not much worse shape, but able to recover much better, since the recovery wouldn’t be hobbled by the need to prop up insolvent banks, by crippled lending by effectively insolvent banks and by the need to provide above market returns to banks and the hot money rich.

This is explicitly what I was proposing in 2008, but of course, it didn’t happen.  So, instead, we get a decade of suck, if we’re lucky, the EU gets multiple failed economies and austerity plans, and the rich get 80%+ of the profits of the coming economic cycle.  If we’re unlucky (or maybe if we’re lucky) it crashes out sometime before then, since it is teetering on the edge.

Here is the basic thing you need to understand:

You can have lots of rich people, or you can have widespread prosperity.  You cannot have both.

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