Ransome

Volcker's Wake Up Call: Spread the Word

A problem with innovative products is they replaced money. They were treated like gold. No one looked past the AAA rating. 99% of salesmen of these products could not explain them. They were intentionally complex and opaque.

There are two issues, one involves what went wrong and the other what have we discovered. These issues are different. What went wrong was a sliver of what we have discovered. When one cluster bomb goes off, you don't leave the rest hanging around because they have not harmed anyone.

Once the issues were identified, massive amounts of money were applied, applied in a way that have aggravated many people. Then everyone sat back and waited for the economy to correct itself. It has been a long wait. The export of manufacturing and trade imbalances were sitting in plain sight. The Asian excess savings and galloping economies were well known. Over the top US consumer debt was well known and encouraged. Now we are going to learn about a jobless recovery that supply-side economics can not fix. We have learned that wealthy people do not create jobs and trickle down is a fable. We are going to learn that only taxation can tame the wild animal spirits and focus money back toward Main Street investment. Give a millionaire another million and he will gamble, not invest. He will create no jobs. We have 600 Trillion notional value derivatives. How many jobs are being created with the money protecting them and at risk?

Hank Paulson told everyone that TARP was going to allow banks to lend and credit flow. Others said the banks were insolvent. An insolvent bank has a hard time lending. Once the cash infusions took place, the banks needed to re-capitalize and they took the route where short term money could be used, trading. The economic climate is too unstable for long term lending.

I would be spending a lot of time examining trade imbalances and trying to understand them. We require a wide range of jobs and they need to be widely distributed as people are not that mobile. Every city should have a business and tech incubator campus that can be placed outside of town. We should consider producing more food locally and have year round farmers markets. We should be beefing up the education system with more volunteers that have knowledge to share with an emphasis on technical training for all ages. We need more community health clinics because health care via the private sector will be unaffordable.


On Dec 16 01:10 PM Cambrian Capitalist wrote:

> The premise that financial innovation has not improved global productivity
> or economic growth is wrong.
>
> The simplest example of financial innovation facilitating economic
> growth involves the following: If I was a large corporation that
> wanted to construct a new office building in Manhattan with an initial
> budget of $2 billion, who is going to give me a construction loan?
> When can I transform that loan into a commercial mortgage? What will
> the costs of this financing be? The point is there are only a few
> financial institutions that can comfortably assume the risk of such
> an enterprise on a standalone basis. Because of the specific risk
> of such activity and the lack of potential competition at this level,
> it is highly likely that the financing costs associated with this
> venture will be very high. Without securitization, which allows banks
> to spread the specific risk of these activities around to a broad
> pool of investors, these activities would never get off the ground.
>
>
> Further illustration of this point is when the CEO's of money center
> banks were called in front of Congress. Congressmen would ask them
> why they were pulling back their lending activity to which the CEO's
> would respond that their individual companies had expanded their
> lending activity. They were not lying. The answer to why aggregate
> lending activity had declined was because the securitization markets
> (i.e. mortgage pass-throughs, CDO's, RMBS, CMBS) was frozen and were
> liquidating. At their peak in 2007 the securitization markets were
> almost as large as the aggregate level of conventional credit assets.
> The point is that credit can no longer flow into the economy in the
> absence of functioning securitization markets. These markets are
> essential to the optimal allocation of financial resources in the
> United States and the world. Glass-Steagall is and was irrelevant
> to the hazards involved in the freezing of securitization markets.
> The central issues that drove the credit meltdown were derived from
> agency conflicts, and the improper incentives created by government
> involvement in subsidizing the overproduction of housing stock.<br/>
>
> Recreating Glass-Steagall is tilting at windmills thinking.

Is Dubai's Default a Black Swan Event?

Most likely the banks have off-loaded the debt and protection on unsuspecting investors. Won't they be surprised. It is more like Russian Roulette. It is why casino capitalism and opaque risk sharing are destabilizing. The Black Swans are yet to come, which is the real source of panic when it hits the market..

The Coming Consequences of Banking Fraud

I will take a contrary opinion. I don't think they know what they are doing. It is simply crisis management. My views have changed since reading the recent articles at Bloomberg about the Lehman collapse.

In other words, if you call GS and ask for a crisis solution, they will give a GS solution. They are not geared towards saving the economy, they are geared toward succeeding at financial capitalism. If Paulson called a distressed homeowner, he would have been given different advice. The main thrust of the crisis solution was focused on the middlemen. The middlemen have little effect on the economy. The faulty or toxic products they created had an enormous effect on the national and global economy but that was not the focus, it was propping up, writing down securities, moving securities, a bookkeeping exercise with respect to the real economy. All the "secret" movement of money and securities are bookkeeping exercises to manage the colossal leverage and interconnectedness that would burn down the house if rules were followed and activities transparent.

It's the millions of people being displaced or losing jobs that is wrecking the economy. It is the investors and borrowers that got creamed and ignored. The fact that GS can now make money algo trading has not helped the economy one bit.

This is simply crisis management with attendant information control. Folks are nervous that a AAA plan will go bankrupt tomorrow mostly because the "problem" has spread in so many directions and into so many sectors that can not be controlled as simply as giving a bunch of money to AIG. The complexity and interconnectedness has been stunning. Every player has been fined tuned in the art of financial capitalism and not remotely geared to undo or fix problems. In financial capitalism you never look back, you look for new opportunities, whereas forest firemen are always looking back. These crises are not planned, it is the result of recklessness and a gross lack of foresight while living in the moment. Once you and the herd are swept up and can hear the roaring of the falls around the bend, it is too late.

Besides, gold gave us a lot of problems during the Long Depression. Stability comes from a Real Bills Doctrine but folks at SA don't want stability. Financial capitalism withers away and Industrial capitalism requires folks to make money the hard way, where value is exchanged for value and those adding the most value are rewarded. Financial capitalism appears to be adding value but moving money from pocket to pocket for a fee is not.

What I really think is going on is the monetarists, and there are plenty, are trying to salvage their relevancy while in crisis management mode. It turns out that if folks have the freedom to make the best choice, it is often results in following the herd over the falls.

How the U.S. Banking System Was Madoffed by the FASB

If we have a CDO cubed made up of several tranches of 10,000 ALT-A loans that were originated under different standards such a NINJA, how do you value it? Perhaps the securities are too complex. Our financial products are so complicated that risk cannot be assessed. Theoretically, you did not need to assess risk carefully if you could buy protection. Look at the results of AIG mis-assessing risk. Will this become the norm? No one will touch these things unless at a steep discount because of their structure. These securities were not meant to be held by the broker dealers, hence the shoddy origination standards.

Correct me if I am wrong but M2M establishes the rough value of a company and is used to determine capital requirements. How do you determine capital requirement and assess risk with M2Myth? Both will become important in the future with respect to Regulators. Where are the examples of securities that are grossly mis-priced using M2M? Certainly by now they have a track record of returns so why not M2Model? Why change the accounting?