CautiousInvestor

Big Banks: The Consensus Is Cracking

I wish King had gone further and observed that most of the policies advocated by this administration are delusional: financial reform, healthcare reform, environmental reform and pending educational reform.

Ultimately, Who Benefits from Too-Big-To-Fail

If we put aside the arguments put forth by Charles Calomiris and concentrate upon the author's headline question, it is immediately apparent in the most narrow sense its the management and the equity stakeholders of too-big-to fail institutions that most immediately benefit the doctrine. Knowing their firm is backstopped by the US Treasury, management of TBTF institutions will be inclined to take outsized risks to generate profits that will increase their bonuses and the equity values of their firms. If the risks are kept within bounds, all is well; if the risks are too great and deals fall apart, the losses will be socialized. As Volcker and Mervyn King have noted, this mentality can not be regulated away.

Where Is Main Street's Recovery?

It's increasingly a bifurcated recovery: those with jobs and those without; those in finance and those in the real economy; those employed by too big to fail institutions and those employed by you can fail; those who receive financial largess and those who pay for it; and those with political connections and those without. I've never seen economics so politicized.

Federal Reserve Exit Watch: Part 3

The more I think about this the more I am certain the Fed will take into account the financial health (profitability) of banks and incorporate this into their broader plan to tighten monetary policy and withdraw surplus liquidity from the system. Each component of monetary policy has profit implications for banks and, with all other things being equal, I'm inclined to think the Fed will leave in place....for as long as possible... those policies which most directly benefit the banks. Given what has been done for the banks thus far, this should come as no surprise.

Inflation and the Hierarchy of Needs

1) That there is relationship between bubbles and innovation is absurd; if the innovation carries value, bubbles should not be allowed to implode. I would argue twisted innovations lead to bubbles which is different than saying bubbles foster innovation.

2) Bubbles be definition are an over allocation of resources to one or more asset groups leading to an unsustainable increase in prices. As the author suggests, the Fed simply provides the liquidity and controls the intensity of the flow sluicing into the asset categories. It is, however, most convenient we have a bubble today that confers a fairly broad based wealth effect. A suspicious person could be forgiven for thinking it was engineered.

3) If banks cannot be profitable while simultaneously being prepared for a fat tail event, the business model is inherently flawed and they should either rework the model or be allowed to fail upon the event.

Can the New Pecora Commission Get Its Job Done?

It's curiously odd that Obama and team had a blueprint for financial reform before this august body held its first meeting; the jaded could be excused for thinking this is just a symbolic gesture and that the inquiry is taking place for largely symbolic reasons. Ideally, you would know what caused the crisis before prescribing a cure.

Given the widespread opportunities for embarrassment and potential accusations of fraud, I'm inclined to think those in power are anxious to move on as quickly as possible and declare a recovery rather than drilling into the facts and really understanding the underlying causes of the great recession.

The gravest economic crisis since the Great Depression has been covered in the media largely from the top down, told primarily from the perspective of the Obama Administration and large banks, and expressed in the voices and ideas of people in elite institutions more than those of everyday Americans. It's almost as if MSM coverage has been guided by the white house press office.

Those at Washington's blog believe there is a coverup and quote
William K. Black - professor of economics and law, and the senior regulator during the S & L crisis - who "says that that the government's entire strategy now - as during the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts").

Black also says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well."

New Era of Wall Street Wealth, In Part Courtesy of Washington D.C

This uniquely focused and distorted era of wealth is a product of misguided policies that have allowed a select few to prosper, made things worse for most, destabilized the economy and concentrated wealth in ever fewer hands. Failing to correct underlying problems or broadly stabilize the economy, government has made things worse by broadening gaping income disparities and (as noted by Washington's blog) by:

(1) Throwing trillions of dollars at the "too big to fails", instead of admitting that many of them are insolvent

(2) Undermining trust of nations all over the world in the American economy

(3) Failing to restore Glass-Steagall, reign in credit default swaps, or do anything else necessary to stabilize the financial system

(4) Attempting to restart high levels of leverage and securitization

(5) Failing to take real measures to decrease employment and increase manufacturing

(6) Creating an enormous debt overhang and trashing our currency

America's Multiple Choice Economy

Steve, I think we are seeing the beginnings of a statistical recovery and it may continue for some time but it's the long term structural issues which concern me. We all know about the delevering of the consumer, government borrowing crowding out private investment, increased regulation higher taxes, a falling dollar, continued weakness in housing, stubbornly high unemployment collapsing international trade, an aging workforce and other economic imbalances.

It's the unseen structural issues lurking below the radar that concern me; it's the things we can not see that trouble me because when we see them they will appear as surprises, catching us unprepared. For example, more and more US companies are undertaking R&D overseas and I just recently read that many highly educated Chinese and Indians plan to return home rather than pursue careers and/or business interests here in the states. The cost of both could be enormous but the latter could be a sea change and a game changer in terms of innovation and sources of future jobs:

"But a growing body of evidence indicates that skilled foreign immigrants create jobs for Americans and boost our national competitiveness. More than 52% of Silicon Valley’s startups during the recent tech boom were started by foreign-born entrepreneurs. Foreign-national researchers have contributed to more than 25% of our global patents, developed some of our break-through technologies, and they helped make Silicon Valley the world’s leading tech center. Foreign-born workers comprise almost a quarter of all the U.S. science and engineering workforce and 47% of science and engineering workers who have PhDs. It is very possible that some of the smart Indians who sat in the room with me holding their hand up on Columbus Day will start the next Google or Apple. Many of them will build companies which employ thousands. But the jobs will be in Hyderbad or Pune, not Silicon Valley."

Record Deficit May Dash Obama's Big Plans

We should all be thankful that the US is on the verge of bankruptcy; the only constraints limiting Obama's left leaning tendencies are fiscal constraints being imposed by international capital markets. Were these not in place, Obama would widen the sweep of progressive Jacobin change and accelerate its implementation. Our disastrous fiscal health may be the very thing that saves us from Obama colluding with congress and imposing his malignant dream (nightmare for those who are not union members and work) on our vulnerable economy.

How Washington's Policymakers Are Damaging the U.S. Economy

Politicians are led by election cycles that makes their thinking very short term in nature; any economic problem must be addressed immediately. And It is better to try to fix a problem in the short-term than to actually fix it in the long-term.

In addition to policies that amplify instability which increases the implicit discount rate, thereby stimulating immediate consumption, low interest rate policies discourage savings and encourage consumption. And through the identity that savings must equal investment, investments are reduced when savings are reduced. Taken to together all of these policies encourage consumption and discourage investment and savings; this is exactly the opposite of how long term wealth is created.

I don't think this is terribly well understood but comports with congress and election cycle economics. For them, wealth is winning the next election.

Why We'll Be Seeing Stimulus 2.0, 3.0, 4.0, 5.0, Etc. (Until the Great Implosion)

China, European governments, Japan and oil-rich nations have gone with the U.S. and its currency because of its military might, conservative budget policies, stable political system and rule of law.

It's no accident that as (1) government shirks fiscal responsibility and expands its footprint upon the economy (2) perception grows that the US government views the constitution and contract law as an inconvenience and (3) politics becomes increasingly partisan and divisive, the de facto reserve currency of the world....the fiat dollar.... is depreciating. It's all tied to gether.

As I have noted earlier, we are rapidly approaching the point where national debt equals GDP; many prominent economists view this as the practical limit for governement borrowing primarily because of rising debt servicing costs.

We will soon hit a wall and be forced to contain further increases in spending. Global capital markets will step in and impose the financial discipline that should have been imposed by our craven congress.

A Weak Dollar Benefits Chinese Exports

Actions by Thailand, Malaysia, Hong Kong Taiwan and Singapore are being taken to slow the pace of the dollar's decline with the secondary objective of repricing their currency values versus China’s, since China has pegged the renminbi against the dollar. Meanwhile, China is gaining market share in international trade and expanding its share of international reserves, making the US every more dependent upon China as a creditor.

The Underlying Size of U.S. Economy

Yesterday John Mauldin's piece included fiscal multipliers and the long and short of it is that Chritina Romer used a multiplier of 1.6 to calculate the employment increases that would result from the stimulus package.

Robert Barro of Harvard, however, argues that long-term peactime multipliers are closer to zero and during war they may be around .6. The reason they are not 1 is that increases in government spending are accompanied by frictional losses and crowding out of private investment.

A more recent sudy determined that in the US the short-term impact of fiscal spending was .6 and the longer-term impact was 1.2. The differences have to do with debt levels, exchange rate mechanism, degree of economic openess and type of government spending and other structural factors; since the 1980's spending multipliers have been contracting.

The irony is that we will fund these brilliantly designed spending programs with taxes increases; taxes have a mutiplier of 2 or 3, meaning if you increase taxes 1% it will be accompanied by economic contraction two or three times the size of the tax increase. Reducing taxes would have the opposite effect.

Not surprisingly we have the worst mix of fiscal policies because we are more interested in transfering wealth than creating wealth.

EPS Beat Rate at 85%

With stubborningly high unemployment, continuing concerns about weak final demand, flexibility in accounting standards and limits to cost cutting, I should think top line revenue would be sharing the spotlight with earnings. From the S&P site it appears as if operating earnings are expected to fall 6% yoy while revenues are expected to fall 14% yoy. How are reported revenues stacking up against estimates?

Nominal vs. Real Gains

Not only that they are raising fees because there is less competition - it's almost as if this whole crisis was planned. That's the "Wall Street" economy, but as you peruse these reports and listen to what is happening on the commercial side of banking i.e. the "Main Street" economy, it's very poor. Unfortunately for most of the banks that are going to be reporting in the next few weeks they have little to do with Wall Street and are more of the traditional type of banks... so it won't be such a pretty picture for them. As for all other sectors I don't know how many more weeks/months we can be surprised by the same news.
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Perhaps it was planned and who better to do it than the denizens of Wall Street who populate Treasury, the Fed and other regulators. When speaking of nominal versus real gains, it has now taken on a multitude of possible meanings: real bank earnings versus reported earnings, Wall Street earnings versus Main street earnings, inflation adjusted earnings versus real earnings and nominal earnings versus currency adjusted earnings. It's, as I have said before, a fun house mirror room full of distortions and illusions, allowing the anointed elite to see and report as they see fit.