Tag Archives: financial crisis

Regulation and Structure: Two Paths to Reform

While lazing about the house one Sunday morning while my partner was out to lunch with a friend, I decided to take advantage of her absence to watch a documentary on the Netflix instant play (she’s not a huge fan of political or economics films, so this was a bit of a treat for me). While scrolling through the enormous selection in their database, I happened upon Michael Moore’s Capitalism: A Love Story. Now, given his propensity for ignoring nuance and shamelessly appealing to emotion, I’m generally not a huge fan of his work. However, given his influence among the statist left, I figured it’d be interesting to get a sense of his interpretation and framing of the financial meltdown, so I made a bag of pop-corn and settled in for a viewing.

All in all, I was pleasantly surprised. Sure, there were generous helpings of the shameless heart-string pulling and agenda-driven propaganda that Moore’s films are known for. However, he also does a decent job of laying out a good portion of the facts of what happened during the boom, bust, and bailouts we experienced over the last decade. In that aspect of his film, I felt like it was roughly equivalent in usefulness to Inside Job, the fantastic investigation into the financial crisis that won this year’s Academy Award for Best Documentary. Both films do a fine job of showing how the enormous fraud and subsequent politically corrupt bank bailouts played out historically; however, I also find that they fall flat in their attempts to prescribe a solution to the problems they so skilfully demonstrate.

The fixes that they advocate are representative of the overall left-liberal narrative of the financial crisis. The argument goes that, at the dawn of the millennium, the Glass-Steagall Act was repealed. This Depression-era regulation served to separate the functions of investment and commercial banks, and its repeal caused the banking sector to go on a hog-wild frenzy of complex transactions that served as a cover for an enormous wave of fraud in the mortgage market. This, in turn, resulted in an entire sector of our economy assuming the characteristics of an enormous Ponzi scheme, which came crashing down in 2008. The solution, liberals argue, is for the Federal Government to re-establish tight regulation of financial markets in order to ensure good behavior on Wall Street and prevent further calamities.

As far as it goes, I believe that this narrative has great descriptive value; the repeal of Glass-Steagall was, indeed, one of the major factors that allowed for the financial crisis to get out of control. However, I also think the purveyors of this line of reasoning fail to grasp an important piece of the puzzle. Underlying their model is the assumption that the behavior we observed during the meltdown is rooted in human nature. As a result, they believe that all financial markets will “naturally” behave in the same fraudulent manner if left unsupervised by the state.

The fatal flaw of this perspective lies in the fact that financial markets (and by extension, virtually all markets) are not primarily made up of atomized individuals, but, rather, people whose incentives and opportunities are powerfully determined by the institutions in which they are embedded. Far from being “natural” or fixed, the structures of human-created organizations can be as widely varied as the limits of the human imagination, and, in a totally free market, the ownership and incentive structures of firms would be essential factors in their performance. As a result, competition would pressure firms to organically evolve towards the structures that most appeal to consumers.

If all of that seems a bit abstract, let me provide a brief hypothetical example from the financial crisis. The Federal Government’s bailouts saved an enormous number of banks, many of which likely would have become insolvent and failed. By contrast, during the same period, only a tiny number of credit unions were in serious jeopardy, because the ownership structure of credit unions (the depositors are also the owners) steered the institutions towards more conservative, risk-averse behavior than their joint-stock cousins. Had the Feds not intervened on behalf of the banks with seven hundred billion dollars, many of those banks’ large depositors would have suffered serious losses. Furthermore, they would have noticed that their peers who’d kept their money with credit unions had not taken haircuts, and would thus subsequently view credit unions as safer places to store their deposits than banks. Credit unions would then find it easier to attract deposits, and banks would have to engage in an enormous amount of self-regulation to remain viable institutions.

As such, the effect of government regulation of financial markets (and of the economy in general) is to subsidize sub-optimally structured firms. A co-operatively owned credit union is inherently more trustworthy to a depositor than a for-profit bank, but regulations artificially level the playing field by establishing the State as a guarantor of the good behavior of banks. In good times, the shareholders of these firms reap the benefits of this subsidy; when their companies screw up, however, the whole of society often ends up paying for the inflicted damage. As a result, our economy is chock-full of firms that would succumb to more efficient, just, and trustworthy business models in a truly free market, but persist thanks to the legitimization that the state provides.

Given all of this, the proper response is not, as Moore and other liberals would have it, to create new reams of regulations. While creating temporary stability, such a regime would simply serve as a fig-leaf for the abuses and dishonesty that stems from the very structure of many presently existing businesses. Instead, we should go to the root of the problem and eliminate the entire regulatory regime. By opening up competition between different kinds of firms and forcing them to fully internalize the costs of their behavior, consumers would begin to take into account the structure of a business when deciding where to deposit their money, buy their groceries, etc. The best that regulators can hope to do is curb the worst excesses of fraudulent and exploitative behavior; by contrast, fully freeing our markets will finally provide us with the opportunity to witness the flowering of an economy that truly works for all of us, not just a handful of well-connected plutocrats.

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Great Ron Paul Interview.

The U.S. will never pay back the money it has borrowed… and yet people keep buying T-Bills. Gah!

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A Devastating Piece From “The Nation” on California

It’s been clear for quite some time that California’s an economic basket-case, but this article really brought home the subjective reality of it.  The descent from first-world privilege to third-world destitution ain’t a pretty prospect…

“The outlook for next year and the year after is worse,” says veteran California observer and journalist Peter Schrag, over a BLT lunch at a casual-but-chic cafe in the Berkeley foothills. “The stimulus money goes away. The tax increases [passed in February 2009 after weeks of acrimonious debate] expire. If we’re up shit creek now, we’re going to be further up shit creek two years from now.” Since the state, unlike localities, cannot declare bankruptcy, if its tax revenues continue to wilt it will have no choice but to dramatically scale back its spending on big-ticket items such as education, healthcare and prisons.

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A bit of history…

The below video was shot on March 31, 2009, when myself and a few other folks picketed Citizens Bank in protest of its parent company’s receipt of $3.3 Billion as a counterparty of AIG.  Unfortunately, Linux lacked a decent video editor at that time, so the footage has been languishing on my hard-drive ever since.  That all changed recently when I was introduced to OpenShot video editor…it’s still under development, but already is head and shoulders above anything else the platform has to offer.  To celebrate, I cut together the below video: enjoy!

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The Deep Insanity of Our Global Financial System

Elites seem to have always forced their underlings to build useless things. One has to wonder how much the construction of the Egyptian Pyramids cost the ancient Egyptian economy in terms of sacrificed consumption? All of those peasant workers weren’t spending their days growing food to provide their children with better nutrition or building boats through which to facilitate trade. Instead, they were piling up giant rocks for the gratification of their hereditary master.

We like to think that, living as we do in a post-Enlightenment era in which the legitimacy of royal rule is a faded memory, that such foolery is a thing of our past. Now we say we live in an egalitarian society in which everyone has an equal shot at success, right? The follies of irresponsible elites forcing their starving underlings to build them useless monuments is surely a thing of the past…

…Except that is exactly what the global economic boom has been. I’ve been following this for the past few years, and so have developed the thick, cynical crust of a bearish doomer. However, the past few weeks have truly brought things to a whole new level; a level at which the power dynamics that are usually hidden from view are now slipping out into the sunlight. It’s truly terrible to behold.

The first case in point is Dubai. It’s boom was Las Vegas x10, fueled entirely by speculative money and the importation of cheap South-Asian labor. Property values soared, and a powerful building boom bubbled up. While America and Britain’s housing booms were widespread, Dubai absorbed an unimaginably large amount of resources to build luxury goods and buildings for which the demand was entirely bubble based. Now that the bubble is collapsing, the future of the half-mile tall tower that is nearing completion is in doubt, and thousands of foreigners are fleeing the country, abandoning what property they’ve accumulated in order to avoid debtor’s prison (they still have that in Dubai). As Dubai’s insane development has no economic (as opposed to speculative) reason to exist, most of what has been built will likely be abandoned. The tragedy is twofold; first, that literally hundreds of billions of dollars worth or resources that could have been productively employed in a manner that would have added to the wealth of society have been squandered building a giant playground in the middle of the desert that will soon cease to exist. Striking a profoundly ironic chord, the palm tree shaped island (the largest man-made island in the world), is rumored to be sinking. Millions of man-hours and billions of dollars have been devoted to the construction of a giant Nothing, while the world economy rots from the inside out. This photo-essay on Dubai is particularly moving.

Another shocking example of this horrifying logic is China’s empty city. They built a whole city, but its almost entirely unoccupied due to the fact that it doesn’t have any concrete economic reason to exist; it’s essentially an expensive, labor intensive resource dump.  The thought of what those wasted resources could do in the hands of productive individuals is absolutely staggering; the twisted logic of such economic stimuli makes me want to strap the G-20 heads of state to a Clockwork Orange-style indoctrination chair and force them to read the Wikipedia entry on the Parable of the Broken Window.

Essentially, we’re living in a world where a decision made by the monetary policy elites (artificially cheap credit) ignited a boom in which the easiest way to make money was to destroy, rather than create, value. A small class of speculators made enormous amounts of money while the rest of us are left holding the bag. Maybe it’s an inherently human tendency to want to destroy rather than create wealth; perhaps such booms and busts are a sublimation of the impulse to wage war. In any case, when the Egyptians built the pyramids, they knew their work was the result of their submission to the threat of force. Our “pyramid” builders, on the other hand, believed that the houses, condos, and half-mile tall buildings that they dumped their money into were, in fact, the best use that money could be put to as determined by the workings of the ” free market”. They didn’t realize that, as long as central banks exercise their control, they’re is no free market, and their economic behavior is no less determined than that of an Egyptian serf hauling a rock up a ramp. Until the government’s monopoly on the issuance of currency is broken, economic incentives are set in the board room at the Federal Reserve; which is not reassuring given the number of horrendous problems those policies are responsible for (the housing bubble through low interest rates, the consolidation of the banking industry through the Too Big to Fail subsidy, etc.). Every year we live without free banking and competing currencies deepens the hole from which we must ultimately extract ourselves. At least the Egyptian had something sturdy to show for their servitude; our “pyramids” are already crumbling into the sea…

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The Structure of Collapse

I came across this amazing article on the Vermont Commons blog, and was quite impressed.  It’s by Dmitry Orlov, the author of Reinventing Collapse (a book that, using the Soviet collapse as a model, develops a framework through which to understand the contemporary decline of the American Empire).  Aside from being quite insightful from both an economic and sociological perspective, it also has some absolutely fabulous quotes.  A few especially delicious excerpts:

The breakdown of public order would be particularly dangerous in the US, because of the large number of social problems that have been swept under the carpet over the years. Americans, more than most other people, need to be defended from each other at all times. I think that I would prefer martial law over complete and utter mayhem and lawlessness, though I admit that both are very poor choices.

 

The market mechanism works well in some cases, but it doesn’t work at all when key commodities become scarce. It leads to profiteering, hoarding, looting, and other pernicious effects. There is usually a knee-jerk reaction to regulate the markets, by imposing price controls, or by introducing rationing. I found it quite funny that the recent clamoring for re-regulating the financial markets was greeted with cries of “Socialists!” Failing at capitalism doesn’t make you a socialist, any more than getting a divorce automatically make you gay.

 

One thing that makes political collapse particularly hard to spot is that the worse things get, the more noise the politicians emit. The substance to noise ratio in political discourse is pretty low even in good times, making it hard to spot the transition when it actually drops to zero. The variable that’s easier to monitor is the level of political embarrassment. For instance, when Mr. Nazdratenko, the governor of the far-east Russian region of Primorye, stole large amounts of coal, made strides in the direction of establishing an independent foreign policy toward China, and yet Moscow could do nothing to reign him in, you could be sure that Russia’s political system was pretty much defunct.

 

In the US, there is a gradual surrender of sovereignty, as sovereign wealth funds buy up more and more US assets. That sort of thing used to be considered akin to an act of war, but these are desperate times, and they are allowed to do so without so much as a nasty comment. Eventually, they may start making political demands, to extract the most value out of their investments. For instance, they could start vetting candidates for public office, to make sure that we remain friendly to their interests.

 

the existence of finance and credit, of consumer society, and of government-imposed law and order has allowed society, in the sense of direct, mutual help and of freely accepting responsibility for each others’ welfare, to atrophy. This process of social decay may be less advanced in groups that have survived recent adversity: immigrant and minority groups, or people who served together in the armed forces. The instincts that underlie this behavior are strong, and they are what helped us survive as a species, but they need to be reactivated in time to create groups that are cohesive enough to be viable.

Ant there’s plenty more; check it out.

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An interesting take on the unemployment situation…

Contrary to the predictions of the sanguine experts, last week the official unemployment rate broke into the double digits (while Shadow Government Statistics‘ alternative measures are showing a rate above 20%, e.g. near Great Depression levels).  With that in mind, I was really impressed with this article from the Las Vegas Sun about how, in Las Vegas, the situation is getting so desperate that citizens are joining illegal migrant workers in trying to find casual day labor.  The article is very well written, and incisively points to the narrowing of the gap between third world workers and the “labor aristocracy” (to quote Hobsbawm) of the first world.  As Las Vegas is at the epicenter of the housing bust, I wouldn’t be suprised if the appearance of this phenomenon there is but the leading edge of a larger trend that will begin making itself known across the country.  As the fiscal crises of the States deepen and the “stimulus” crack wears off, Home Depot parking lots might start getting a lot more crowded…

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Citigroup starting to show cracks in their post-bailout whitewash…

According to an excellent post by Mish, Citigroup has just raised the rates on 2 MILLION of their credit cards to 30%, regardless ofthe holder’s credit rating.  Not only does this indicate that Citigroup needs to raise revenue quickly due to bad news concerning their $1.1 trillion worth of “shadow assets“, but it also means that:

Citibank’s average yield year-to-date (consumer and plastic) was about 12%.  But they’re suffering 10% defaults, making their true margin about 2%.  That’s still a positive number…. if it’s accurate.

This spread, of course, has a lot to do with previously-issued fixed-rate 12.99% cards (they and everyone else had a lot) that were handed out like candy to everyone and their brother, frequently with $10,000, $20,000 or even $50,000 credit lines.

Huge numbers of small business owners – especially sole proprietors – use these cards as a means of financing operations.  They relied on that 10 or 12% interest rate, and most of them have huge balances outstanding.

I have since confirmed that this letter is not just going to people who have had credit “challenges”.  Indeed, this appears to be a blanket change on the part of Citibank.  I now have multiple copies from people who assert that they have 750+ FICOs and have never missed a payment on this or any other obligation – the “paragon” of so-called “responsible” credit use.  All of the letters are identical.

The problem should be obvious – for someone with one of the 12.99% cards that is now 30%, this is a radical change that more than doubles monthly interest expense.  Of those who have sent me copies of this letter and disclosed their previous rate, none were over 20%, meaning that these changes represent 50% or greater interest rate increases.  If you’re anywhere near the edge of being unable to pay, this will shove you off the bridge and into the deep, shark-infested water of bankruptcy.

In other words, Citigroup is sucker-punching the economy in a desperate bid to stay solvent.  If the consumer response to this move continues to build, we might be looking at the double-whammy of  a slew of small business and personal bankruptcies (which will trash fourth quarter unemployment and GDP figures), followed by another government bailout of Citi which would further weaken global confidence in the dollar by forcing the Feds to sell even more bonds into an already flooded market.  This will be an interesting story to follow in the next week as Citi’s PR machine inevitably starts trying to spin it to make it look like they’re not up sh*t creek without a paddle.

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A new article on the Free Press Supports the Credit Union Alternative to the Too Big To Fail Banks

Why isn’t Obama turning to the Credit Unions?
by Bob Fitrakis & Harvey Wasserman
May 12, 2009

As hundreds of our hard-earned billions are being poured into corrupt, greed-driven, lethally inefficient banks, the Administration, Congress and corporate media have studiously avoided the one sector of the banking industry that actually works—the credit unions.

Throughout the United States there are hundreds of these people-powered banks that have succeeded and prospered while all around them the traditional banking has collapsed into ruin, taking our general economy with them.

Why?

Because unlike those private banks, the America’s 10,000 not-for-profit credit unions are controlled by the people who deposit their money there. Loans are made only to members. The deposits are federally insured, and investments are monitored by the depositors and, allegedly, by federal regulators.

For the most part, their decisions are made democratically. Their boards of directors are elected. Increasingly those decisions have been oriented funneling resources into new green industries whose future is bright, and that actually serve that public rather than raping it.

To be sure, there are those credit unions that are plagued with problems. Like all institutions, they all have their flaws. As creatures of the democratic process, they are capable of making wrong decisions while driving those involved stark raving mad.

But by basic mandate, credit unions are ACCOUNTABLE, a concept almost completely lacking from those mega-banks “too big to let fail.”

In fact, Obama’s fiscal 2010 budget contains $234.6 billion in Community Development Financial Institution funds. Some $113 billions is earmarked for “financial issues in underserved communities,” according to the Treasury Department, along with another $80 million for the new Capital Magnet Fund aimed at “enhancing investments in affordable housing opportunities for the very poorest Americans.” This money, says a May 7 Treasury Department release, “should be a boon to Credit Unions.”

The numbers are a great improvement over the Bush era. But they pale alongside the torrent of cash slushing into failed private banks.

Since the founding of the first true credit unions in Germany beginning in 1852, the institutions have spread throughout Europe, India and North America. The first came to the US in New Hampshire in 1909.

Edward A. Filene, the Boston merchant whose famous basement offered bargain clothing to working people, Basic principles include the idea that only members can borrow money from a credit union, and that the loans must be “prudent and productive.” Because loans involve the money of a close-knit group, and must be approved by members whose money is at risk, the credit unions are a model of how the banking system might be remade.

On average about 10 of the nation’s 10,000 credit unions fail each year. Because depositors’ money is federally guaranteed, they may lose their bank, but not their deposits.


Originally published by The Free Press (http://freepress.org).

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A gem from the CFL Listserve

Contact Welch, and tell him to support HR 1207!!!

Tidal Wave of Bullshit Threatens Capitol!
Source traced to Democratic Congressman’s Office

UPI: Washington- a tidal wave of political bullshit threatens to inundate large portions of the nation’s capitol, according to public health and safety authorities.

Its origin appears to be the Congressional office of Vermont Democratic Congressman Peter Welch, 1404 Longworth House Office Building.

The flood of bovine fecal matter erupted when one of Rep. Welch’s constituents called to ask the Congressman to cosponsor a bill, HR 1207, to require a first-ever audit of the Federal Reserve Board.

“The Fed is creating trillions of dollars out of thin air to bail out all sorts of failing financial institutions,” said the constituent who declined to give her name to avoid retribution. “I should think our Congressman would welcome the opportunity to shine the light of transparency into this dark corner.”

“But no,” she continued. “His staff started spewing out evasive bullshit about the bill, and now the situation is apparently totally out of control. I’m glad I live 600 miles north of this disaster zone.”

DC health authorities reported that the Congressman’s office has been cordoned off and the flow seems to be weakening. “There’s only so much bullshit that a Congressman and his staff can generate, and apparently this one is at the end of his supply,” said one sanitary technician who spoke anonymously because he was not allowed to use “Congressman” and “bullshit” in the same sentence without losing his position.

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The Negative Financial News Just Keeps on Coming

Bank of America and Citibank have both emerged from their “stress tests” requiring substantial infusions of new capital.  If it cannot raise the required $34 billion via other venues, BoA might be forced to transform the preferred stock that the government currently owns under TARP into common stock.  Preferred stock is basically a loan with a high dividend, while common stock is the vehicle of corporate ownership; such a transformation would essentially be a nationalization of a substantial chunk of BoA’s equity.  Read more here.

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My letter to the editor published in Vermont Commons

Vermont Commons, our state’s independent-minded state-wide newpaper, has just published a letter to the editor that I wrote in support of the Bank Users Strike.  The next month should be an exciting month for the bank users strike, as we gear up to really get the word out over the course of the summer.  In the next few weeks we will likely be having some actions against TARP and AIG bailout beneficiaries, and will be announcing a meeting soon to plan out some strategies for the next few months.  In the meantime, please sign the bank users strike pledge if you havn’t already.  Every person who joins is one less person whose hard-earned savings are subsidizing the banks that have been blackmailing our political leaders and undermining the sustainability of our economy.

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