McLaughlin identified China, Germany, and Japan as being prime offenders in the global economic meltdown. Their “offense” was that they ran persistent trade surpluses, had savings rates that were “far too high” and consumption rates that were “far too low.” ...
In the first place, if the creditor nations of the world actually follow Mr. McLaughlin’s advice and become borrowers themselves, from just where does Mr. McLaughlin believe the money will come? These countries already lend to America. Does he think that they also have enough leftover to lend to themselves? Does he believe that America, which is tens of trillions of dollars in debt, has enough excess savings to lend? Perhaps he’s eyeing the Martians’ accumulated savings? The point is: the entire world cannot borrow at the same time. Someone has to do the lending. The only reason Americans are able to borrow so much is that those “offending nations” are loaning us the money.
Mr. McLaughlin apparently believes that if those countries simply adopted policies to encourage more consumption, America would then be able to export more products. Just what American-made products does he expect the Chinese to buy? If China did spend more, which they ultimately will, they would simply buy more of their own products that they currently ship to us. After all, if Americans are not buying American-made products, why would the Chinese? In most cases, it’s not that consumers do not want to buy American products: it’s just that there are so few American-made products that are competitive in the global marketplace.
If Americans are not buying American...
The global downturn didn't begin in the US
AT the recent meeting of G-20 nations in London, officials from many nations agreed on one thing -- that the United States is to blame for the world recession. President Obama agreed, speaking in Strasbourg of "the reckless speculation of bankers that has now fueled a global economic downturn." One problem with this blame-game is that last year's recession was much deeper in many European and Asian countries than it was in the United States....most of the economies that fell first and fastest were not heavily dependent on exports to the United States....
...What did all the contracting economies have in common? Not all had housing booms -- certainly not Canada, Japan, Sweden or the other countries at the bottom of the economic-growth list. What really triggered this recession should be obvious, since the same thing happened before every other postwar US recession save one (1960).
In 1983, economist James Hamilton of the University of California at San Diego showed that "all but one of the US recessions since World War Two have been preceded, typically with a lag of around three-fourths of a year, by a dramatic increase in the price of crude petroleum." The years 1946 to 2007 saw 10 dramatic spikes in the price of oil -- each of which was soon followed by recession.......In a new paper at cato.org, "Financial Crisis and Public Policy," Jagadeesh Gokhale notes that the prolonged decline in exurban housing construction that began in early 2006 was a logical response to rising prices of oil and gasoline at that time. So was the equally prolonged decline in sales of gas-guzzling vehicles. And the US/UK financial crises in the fall of 2008 were likewise as much a consequence of recession as the cause: Recessions turn good loans into bad. The recession began in late 2007 or early 2008 in many countries, with the United States one of the least affected. Countries with the deepest recessions have no believable connection to US housing or banking problems. The truth is much simpler: There is no way the oil-importing economies could have kept humming along with oil prices of $100 a barrel, much less $145. Like nearly every other recession of the postwar period, this one was triggered by a literally unbearable increase in the price of oil.
Bernanke's "bailout reflationary bubble"
"The financial community is donating more to Democrats than ever before and you've got more Democrats in the financial community, creating a very powerful pattern there. I don't think you're going to see the Obama administration and Congress willing to be tough enough in dealing with these things."...
A year ago, he warned of a the pending explosion of a 25-year "multibubble" that started in the 1980s, when the financial sector accounted for 10 percent to 12 percent of the U.S. economy had started metastasizing into an "arguably crippling" 20 percent to 21 percent by the middle of this decade.
Overleveraging and easy credit was bound to create disaster, he warned.
Phillips assigns much of the blame to former U.S. Treasury Secretary Henry Paulson, but perhaps even more on Federal Reserve Chairman Ben Bernanke, who he calls a "disaster," and his predecessor, Alan Greenspan.Phillips calls Paulson a Wall Street insider who was looking out for his own, and Bernanke an academic misguidedly trying to refight the 1930s Great Depression. Together they formed the wrong team at the wrong time whose ad hoc approach threw away hundreds of billions of dollars and more than doubled the Fed's balance sheet, he says.
"What you're seeing Bernanke do is he's trying to create a bailout reflationary bubble, which he can't describe as a bubble, just as Greenspan couldn't describe the housing mortgage bubble as a bubble. What we're seeing by Bernanke is a covert attempt to rebubble," Phillips told Reuters.
Moreover, a commodities cycle probably started early in this decade and is only being masked now by recession, Phillips says, presaging a repeat 1970s style inflation, he said.
"The danger is that the great unwind -- the unraveling of the mammoth buildup of debt -- is under way. If that predominates, Bernanke's theory is you're going to have deflation," Phillips said.
"My theory is that if we are in a commodities cycle, what you will get will be more like 1973-74-75 ... where as soon as the recovery begins you get rising inflation because you're going to play havoc with all money supply and liquidity that's been unleashed " he added.
Going Broke by Degree...
The dramatic rise in university tuition costs is placing a greater financial burden on millions of college-bound Americans and their families. Yet only a fraction of the additional money colleges are collecting—twenty-one cents on the dollar—goes toward instruction. And, by many measures, colleges are doing a worse job of educating Americans. Why are we spending more—and getting less? In Going Broke by Degree, economist Richard Vedder examines the causes of the college tuition crisis. He warns that exorbitant tuition hikes are not sustainable, and explores ways to reverse this alarming trend....
America’s universities have become less productive, less efficient, and more likely to use tuition money and state and federal grants to subsidize noninstructional activities such as athletics. These factors combine to produce dramatic hikes in tuition, making it more difficult for Americans to afford college.
The traditional argument for government subsidies is that a college education provides not only the private benefit of a higher income and a more abundant life but also the social benefit of a more productive and educated citizenry. Maybe, but Mr. Vedder ingeniously shows that the states that have spent the most on higher education in the past 25 years have experienced the least economic growth.
Will bailouts lead to U.S. Treasury default?
The most dangerous consequence of federal bailouts is growing market anxiety about an eventual Treasury default, raising the specter of potentially fatal damage to the credit of the U.S. Treasury. “Including the Fed’s commitment yesterday to buy $1.15 trillion in additional bonds, the U.S. government has now spent, loaned, guaranteed or committed an astronomical sum of $12.7 trillion in an all-out attempt to bail out failing companies, save Wall Street from a financial meltdown, and prevent an economic disaster,” said Dr. Weiss. “Yet, despite these Herculean efforts, American households have already lost $12.9 trillion in wealth, millions are losing their jobs, and, despite short-lived stock market rallies, the economy is sinking into a depression.” The debt crisis is much greater than the government has reported, according to the white paper. The FDIC’s “Problem List” of troubled banks includes 252 institutions with assets of $159 billion. An analysis by Weiss Research, however, shows that a total of 1,568 banks and thrifts are at risk of failure with assets of $2.32 trillion due to weak capital, asset quality, earnings and other factors. In addition, four large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with two in particular — Citigroup and JPMorgan Chase — taking especially large risks.
Clinton on the repeal of Glass-Steagall
BW:Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you
regret that decision?Clinton:No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill.
BW:Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?
Clinton: Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.
The NYT's critique of Geithner's financial system reforms
"...Mr. Geithner called for all large hedge funds and private equity firms to register with the Securities and Exchange Commission, a move that could bring much-needed disclosure and oversight to vast pools of capital that fed the bubble economy. But the S.E.C. would not have the full authority to resolve all concerns. Rather, it would report its findings up what could turn out to be a convoluted chain of regulatory command. [So, too little regulation of hedge funds]
"...Mr. Geithner called for oversight of unregulated derivatives, like the credit default swaps at the heart of the debacle at American International Group. But he made a troubling distinction between “standardized” derivatives and “non-standardized” ones, and proposed different regulation for each. That looks like a loophole disguised as a new rule. Derivatives, now swapped one-on-one, ad infinitum across the financial system, need to be traded on a fully regulated exchange, period. [Same goes for derivatives and CDS's]
[And now for the Gramm-Leach-Bliley narrative...]
"...firms, like A.I.G., have proved dangerous mainly because of their involvement in a web of often conflicting financial practices and products. The A.I.G. financial unit that sold credit default swaps did not have the wherewithal to make good on its obligations, but leeched off the AAA rating of the company’s strong insurance business.
"...Mr. Geithner...called for a single powerful regulator to police the most powerful institutions, presumably intervening to require more capital whenever sheer size and conflicting activities appear threatening. In the all-too-likely event that firms would get too big to fail anyway, he called for new government powers to seize and restructure them, if failure seemed imminent.
"No one disputes that this authority is needed in today’s world to avoid calamitous bankruptcies and bailouts. The aim would be to make such takeovers as orderly as a bank seizure by the Federal Deposit Insurance Corporation.
The important question, however, is whether, in a reformed future, any firm should even come close to getting too big — too diverse, too interconnected — to fail. Geithner’s plan assumes that such firms will be a feature of the financial landscape going forward. That is a radical shift in perspective. [Wow. "Radical shift in perspective" is putting it mildly. It's a rejection of the basic left/NYT narrative about G-L-B as the basic cause of the crisis.]
Depression-era legislation, after all, prevented financial firms from mixing commercial banking with investment banking and insurance. Only in the last 10 years — with the passage in 1999 of the Gramm-Leach-Bliley Act — have such financial supermarkets been allowed to re-emerge.
Supporters of Gramm-Leach-Bliley recognized that too-big-to-fail firms posed a risk of taxpayer bailouts. Their concerns were soothed by a belief that market discipline, combined with innovative ways to reduce risk — namely derivatives like credit default swaps — would mitigate the danger. [Interesting idea here, that CDS's were thought of as a way of mitigating the risks of G-L-B and the "too big to fail" issues that might result from it. I had never heard that before, though it sounds plausible.] We now know that discipline failed and the innovations actually amplified risk greatly.
"In some cases, these big firms allowed ever more financial risk to be piled on ever-thinner cushions of capital. That helped to juice Wall Street profits, but did it really outweigh the disadvantages that are now so painfully evident in taxpayer-funded bailouts?
"If there is no proven way to reduce the systemic risk in big and interconnected firms, why should they be allowed to exist? It would take some time to dismantle them, so the government should, in the meantime, be granted the resolution authority to seize them if needed. But that should not substitute for a debate on whether such firms should be allowed to exist at all.
"The urgency to repair the financial system is mainly political. Crises create intense public awareness and with it, the opportunity for change that reform-minded officials do not want to squander. [Never waste a crisis to push through an agenda that may or may not have something to do with it.] Even lawmakers who would prefer the status quo feel the pressure to act.
"But does anyone understand with specificity what brought on the financial meltdown? Can the lawmakers and other officials charged with writing the new rules explain the transactions, interactions, norms, products and relationships that got us in this mess? Can anyone parse how much of the crisis is due to regulatory failure, how much to recklessness and greed, how much to fraud and manipulation? Why, exactly, did Goldman Sachs get $12.9 billion in the A.I.G. bailout?
Without the answers, which we do not yet have, Congress and the administration cannot be confident that they are coming up with the right reforms. [I agree with everything in this paragraph. An honest, public debate is necessary, though any that would take place would be political and nasty. Why GS got money from the AIG bailout is an excellent question.]
"It is clear, however, that there is bipartisan resistance to a thorough investigation of what caused the collapse. There have been hearings galore. But they are often little more than hazings of corporate executives and government officials. Even the illuminating hearings have not been connected in a meaningful way that will help us all understand what went wrong. [All very true. The hearing have been useless; nothing more than an opportunity for Barney Frank to display his various psychological pathologies. The Dems don't want to do anything because they are invested in the status quo. Many in the GOP are equally invested, and those who aren't are clueless, to put it charitably. The pathetic display this past Friday was a perfect example of GOP cluelessness.] [END OF QUOTE]
There's more, and I may get back to it. It's interesting to see that the left are as unhappy with Geithner as those of us on the right. Kudos to the NYT for being honest about the Geithner disaster; their attempt to soften it by starting with the pluses fools no one.
Job Losses From Obama Green Stimulus Foreseen...
For every new position that depends on energy price supports, at least 2.2 jobs in other industries will disappear, according to a study from King Juan Carlos University in Madrid. U.S. President Barack Obama’s 2010 budget proposal contains about $20 billion in tax incentives for clean-energy programs. In Spain, where wind turbines provided 11 percent of power demand last year, generators earn rates as much as 11 times more for renewable energy compared with burning fossil fuels. The premiums paid for solar, biomass, wave and wind power - - which are charged to consumers in their bills -- translated into a $774,000 cost for each Spanish “green job” created since 2000, said Gabriel Calzada, an economics professor at the university and author of the report. “The loss of jobs could be greater if you account for the amount of lost industry that moves out of the country due to higher energy prices,” he said in an interview. Spain’s Acerinox SA, the nation’s largest stainless-steel producer, blamed domestic energy costs for deciding to expand in South Africa and the U.S., according to the study.
The coming ARM explosion
A wave of resetting adjustable rate mortgages had been poised to add to the flood of foreclosures as their rates jumped.
Some 420,000 hybrid ARMs are scheduled to reset in 2009, according to the Treasury Department. A year or so ago, it seemed that many of these loans were going to see their interest rates reset to as high as 12% or more.
But then interest rates started falling, hitting lows they hadn't seen in 37 years.
"Many people are actually seeing their adjustable rates fall," said Barry Glassman, a financial adviser with Cassady & Company. "Some loans are resetting even lower than some fixed-rate loans."Adjustable rate mortgages start out with a two or three year period of low introductory rates, sometimes called "teaser rates." After that, the interest rates start to adjust according to a set schedule - sometimes as often as monthly or as little as once a year - until the mortgage is paid off.
For the most part, this was a recipe for disaster. Many homeowners took out ARMs because they couldn't afford the monthly payments that came with a 30 year fixed-rate loan. They were counting on having the value of their homes appreciate and then refinancing. Instead, home prices have plunged a record 18.2% according to the S&P/Case-Shiller index.
...The adjustments are calculated by adding what's called a margin, which is a number of percentage points agreed to when the mortgage is first issued, to an index.
The index that most hybrid ARMs are tied to is the London Interbank Offered Rate (Libor). So, homeowners whose loans are resetting will get new interest rates equal to their margins, which range from about three percentage points for the lowest risk borrowers to six percentage points for those who at higher risk, plus the current Libor rate.
In 2007 when Libor rates hovered near 6% there was a great deal of concern about so-called exploding ARMs that would jump from 7% to as high as 12%. But with Libor now at less than 2% - loans are resetting at under 8%
...when Libor rates rise again, as they inevitably will, resetting adjustable loans will inflict a great deal of pain.
...While the threat of traditional ARMs has been somewhat defused, another breed of exotic mortgage - option ARMs - will undoubtedly force more people out of their homes.
...Fitch Ratings, which rates mortgage backed securities, estimates there are about $200 billion worth of option ARMs out there, with nearly $30 billion scheduled to reset in 2009 and $70 billion in 2010.
These mortgages, also known as negative amortization loans, permit borrowers to make minimum monthly payments that don't even cover interest costs, much less any of the loan balance. Teaser rates were sometimes as low as 1%, even though the actual interest rate being charged was much higher - closer to 8%.
And most option ARM borrowers choose to make the minimum payments, which means that the difference between that and the full payment gets tacked on to the balance of the loan, so that the principal grows over time instead of shrinking.
Borrowers are permitted to make minimum payments for as long as five years (although the minimum will increase after the first 12 months), or until the balance grows to 110% to 125% on the loan's original principal. When that happens, the lender automatically turns the loan into a normal, fixed-rate, fully amortizing mortgage which require much-higher monthly payments to pay down the loan balance.
Option ARM borrowers are in for a double-whammy; jumping interest rates and ballooning balances. So a $200,000 loan, which originally only cost about $643 a month at the minimum payment, could become a $250,000 loan at 8% interest requiring a monthly payment of $1,834.
Did the Fed...
One answer:
...the Fed's artificial lowering of short-term interest rates and the resulting substitution by consumers to ARMs triggered the bubble and subsequent crisis