Economic Darwinism

Barry Ritholtz Hits it Out of the Park

Posted in Action, Bailout, Barry Ritholtz, Obama by Economic Darwinism on June 28, 2009

If President Obama reads one interview this year on the financial crisis, it should be, without a doubt, this interview Barry Ritholtz did for Welling@Weeden:

Fix What’s Broken
Barry Ritholtz Takes Aim at What the Regulatory Proposal Leaves Out

A New Way Forward: Protests April 11

Posted in A New Way Forward, Bailout, Financial Crisis, Outrage, Protest by Economic Darwinism on April 7, 2009

A New Way Forward: Protests April 11

I don’t think they will mind my copying their page here. You can count me in.

The Idea

NATIONALIZE: Experts agree on the means — Insolvent banks that are too big to fail must incur a temporary FDIC intervention – no more blank check taxpayer handouts. (see Krugman on nationalization)

REORGANIZE: Current CEOs and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused. (see Simon Johnson on reorganizing)

DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place– new banks, managed by new people. Any bank that’s “too big to fail” means that it’s too big for a free market to function. (see Mike Lux on decentralization)

Big bankers ruined our economy and now they are gaming the political system so they can profit even more off the crisis they caused. They must be stopped.

On April 11th, 2009, the public will come out in cities across the country to express their frustration and disapproval with how our elected officials have handled the economic crisis. No one has been left unscathed; this protest is yours.

The bankers’ failure to see anything beyond short-term profit for themselves has torn this country apart and jeopardized our future. But the blame doesn’t lie only with the banks; it also lies with the U.S. government that failed to protect its citizens through regulation and oversight.

Through their blind and unconditional faith in the financial markets, the banks and the government have made us all into victims of greed gone out of control. This crisis is an opportunity for President Obama to lead the U.S. in a new direction; one that values economic growth, but protects the well-being of the public before the bank accounts of the world’s financial elite.

But, so far, the policies proposed by the Obama administration to deal with the crisis look too much like the Bush-Paulson bailouts.

At the personal level, we know that the smart thing to do with our money right now is generally the less flashy thing. Paying off our debts and saving for the future protects us from the risks we can’t afford to take in the current market. The same rules apply to the banks. This is a time for a level-headed government to step in and steer unhealthy banks away from more risky bets, and to help them stabilize in the name of economic security for America.

Nothing tells the bankers to keep on doing what they’re doing more than an endless stream of free taxpayer money. The banks know that the government considers them too big to fail; if nationalization is off the table, what incentive do they have to act in the public interest?

In a basic sense, this is a fight against corruption. Not in the sense of a quid-pro-quo (though that may be there too), but in the sense of a corrupt ideology. For the most part, the world of economists, politicians and financiers is one elite web of influence. At some point, private profit took over as the only value to consider in building an economy, and it has never subsided. This is true of the thinking from both major parties.

For example, Timothy Geithner, Obama’s Treasury Secretary and a “liberal,” was a key architect of Bush’s original bank bailout plan in his former role as Chief of the New York Reserve Bank. Under Obama, Geithner has continued to propose what sounds like more blank-check bailouts (in various disguises) and has specifically ruled out other approaches, such as temporary nationalization, because, he says, “our system will be stronger if it remains in private hands.” The necessary solutions to our economic crisis just don’t compute in the minds of the financial elite.

If our government is to take decisive action to rebuild the economy in a way that protects the public, it will require Americans to fight back against this corruption. We must organize ourselves around serious ideas to demand a new way forward or things simply will not change.

It’s not enough to patch up the current system. We need to restrict the ways that bankers can lobby and serve in the government. We need to prohibit compensation plans that encourages huge short-term risk. We have to break up any bank that’s “too big to fail” so that we can have a functional free market. We need serious reform that fixes the root causes in our political and economic system: excessive influence of banks, dangerous compensation systems, and massive consolidation that does nothing to serve the public interest. We must have an independent regulatory body that protects consumers against usury and predatory lending and shuts down any industry behavior that poses a systemic risk to our financial system.

In the same way that the bankers have manipulated politicians to act in their favor, we the people will fight for economic policies that are good for the public.

Credible experts from all over the political spectrum agree that the current bank bailouts are failing. Our blog gathers the most forward thinking thought on our economy and political situation. Prominent experts are highlighted in the blog with the best snippets of their arguments. We will be reaching out to top economists for their take on the economy and to post their arguments on this blog.

You can make the difference. Take this opportunity seriously, email your friends, find your rally and go with them.

Please find out more about what the economic experts are saying — our blog collects the most relevant info. For more information or to write in your thoughts, please go to the forum discussion.

The Rallies:

A New Way Forward is made up of national protests that will take place all over the country in major cities on April 11, 2009. This site was set up to help people and groups organize around a progressive approach to economic recovery in a ground up, localized organizing effort. People from all backgrounds will come together to influence national policy and organize their own rallies in their own city on April 11.

The site allows anyone to sign up their city for a rally and begin working out the details with other local protesters in designated forums. Though each rally will be executed differently by different groups of people, the website provides a national community that will help draw attention, support and resources to the local efforts.

We have put together a guide to organizing protests with people around your state — this guide is meant to help spread out the responsibilities. We will use all the resources available to us for organizing, publicizing, and protesting. For organizing, go to the forums. For publicizing, we recommend FaceBook, Twitter, your local message boards and libraries, reaching out to unions and churches. For protesting, we suggest keeping up to date with the national protest by getting on our email lists.

The IMF Put

Posted in Bailout, IMF, Outrage, The Baseline Scenario by Economic Darwinism on April 5, 2009

The Baseline Scenario is a fine new economics blog albeit coming at things from the perspective of “The Ivory Tower.” It is great they put their thoughts out there though because those working in the markets can help them see things from the perspective of “The Markets” (and vice versa). That’s not to say either side has all the answers, but it is always good when smart people from different backgrounds interact with a common goal.

In a recent article, Simon Johnson points to an interview where he discusses the G20’s pledge of over $1 trillion to the IMF.

simon-johnson-imf

Here are some relevant quotes with my highlights in bold:

Johnson: The idea is that IMF loans are different from the past. In the past, you got an IMF loan when you were absolutely desperate. As the UK was in the middle of the 1970s. Now, the IMF is trying to reach out to countries with very very big loans. Ok. Much bigger than before. Before you get into trouble. And the point is, that’s the time to turn your policies around. And with all respect to Gordon Brown and his ministers, they need some help right now. Your economy, the UK economy, is in big trouble. I’m not saying the IMF is the magic bullet, but I think the IMF, the G20 is saying, and the G20, of course, a force mobilized by Gordon Brown for early warnings for coming in before it is too late, the IMF is telling you, the IMF is offering, let’s say, to be part of the solution rather than part of the problem. For all countries, and Europe is the place which really needs this assistance right now.

Snow: Previously, the IMF has moved in when countries go bust. This seems to presume, in some way the IMF could be proactive. Spot trouble in the early lines, and say, right, we’re coming in.

Johnson: Well, the IMF always spots trouble early on, I can assure you. Those messages are not well received by the people in power and the IMF is not welcomed. What the G20 is trying to do, and I think this is very much an initiative from the Obama administration, is give the IMF so much money, so much financial firepower, they can actually come in and give you a really big loan, not on a zero conditions basis, but on some pretty reasonable conditions that will give you some breathing space that allow you to ride through a big housing price collapse, for example, and some fiscal adjustment you’re going to have to make. So these won’t be the tough programs of the IMF of the old days which didn’t have that much cash so they had to really force you or help you force a fast adjustment. This can be a gentler, easier IMF, different strategy, a lot more money, but you still have got to get serious about sorting out your own economic house.

Snow: Simon Johnson, thank you very much indeed for talking to us. As you’re still here, Lord Mandleson, I don’t mean to bounce you, but he did say, I mean some of it can even come here.

Mandleson: Well, I don’t think we’re going to be top of the queue for IMF resources, but I think he makes an incredibly important point here. We are de-stigmatizing going to the IMF

Snow: De-Callahan-izing.

Mandleson: Well, we’ve already heard Mexico today say they are going to draw on these reserves, these special drawing rights that are being created. Now, previously…

Snow: There is no shame going to the IMF anymore.

Mandleson: Previously, it was a bit embarrassing. It was slightly shameful to be going to the IMF. That I think is being eliminated from the new approach that is being put in place today and I think it is very very…

Snow: So there would be no shame in Gordon Brown going if it had to be done.

Mandleson: John, I don’t think we’re going to be at the top of the queue as I’ve said.

Snow: But you didn’t say we wouldn’t be in the queue, though.

Mandleson: I don’t think we’ll be in the queue either. But look, look at the seriousness of this. I mean, it’s absolutely right, in some countries in central and eastern Europe there is quite some distress. And it is true that some of the resources that are now being invested in the IMF will need to be targetted in Europe, but not Europe alone.

This is worrisome. Paulson’s Bazooka turned out not to be big enough to fix the US financial crisis, so now they are giving the IMF an ICBM. There should be stigma when getting bailed out. There should be punitive terms. Just because the IMF now has “a lot of money” doesn’t mean they should loosen their standards and loosen the terms and conditions. Just the opposite. They should treasure the new $1 trillion as if it was the last stack of ammunition remaining on the planet, as it may soon be. Easy credit was one of the primary causes of the current financial crisis and now we are about to offer easy credit on an international scale.

We need to let failed households feel the pain of over consumption, we need to let failed corporations feel the pain of overdependence on easy credit, and we need to let countries suffer for irresponsible policies. The IMF should be there, as it always has been, to impose harsh terms and conditions on any salvage mission. Just because they’ve been given a huge increase on their credit card limit does not mean they should reduce punitive lending conditions.

The Greenspan Put, became the Bernanke-Paulson Put, and when that was not good enough, we now have the IMF Put. When is it going to end?

“The Biggest Travesty of Capitalism”

Posted in Bailout, Geithner, Outrage by Economic Darwinism on April 5, 2009

[HT: The Big Picture]

One reason people have not yet become outraged by what Geithner is doing is that the entire situation is complex. Many people I know sense that they should be outraged, but do not know exactly what they should be outraged about because they do not understand it. Any little bit that can be done to help explain things is extremely welcome. The following video follows Einstein’s philosophy

Everything should be made as simple as possible, but not simpler.

It is a pretty good explanation of Geithner’s plan for toxic assets. The plan is a complete travesty and I hope the administration realizes that it is not the right thing to do before it is too late. Please have a look

Tagged with: , ,

Dear Jack DeSantis and your $1,000,000.00 bonus

Posted in America, Bailout, Change, Executive Compensation, Obama, Outrage, The Big Picture by Economic Darwinism on March 25, 2009

Dear Mr Jake DeSantis,

I am writing in response to your recent Op-Ed published in the New York Times that was thinly veiled as a resignation letter.

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P.

What did you do? It must have been a pretty awesome year to receive a seven figure bonus. You are aware that most CEOs outside of the hyperinflated finance industry make less than that, right?

In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

Did you ever consider that perhaps you could afford to forgo your bonus this year because you received ridiculous unwarranted bonuses every year for the past 11 years? That is quite noble of you to make such a grim sacrifice.

I take this action after 11 years of dedicated, honorable service to A.I.G.

Wait. You worked in finance, right? Honorable service? I’m sure the troops in Iraq and Afghanistan appreciate that. What makes you think you are entitled to describe yourself as honorable? Who are you trying to kid?

I can no longer effectively perform my duties in this dysfunctional environment

Yeah, when things get tough and the money machine stops pumping, it’s time to head for exit. It’s the only honorable thing to do.

Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid.

I think you might have done well for yourself by reading your letter out loud one time before publishing it. Do you see how ridiculous this is? “Honorable service” ? “Duty”? Come on, man. You got rich milking pension funds and university endowments. Don’t try coming off as a hero. You are no hero.

Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

Does that include the commute time to your mansion in Greenwich? How many days, really, in the past 11 years were you in the office more than 12 hours? The markets open at 9:30am and close at 4:oopm.  That is 6.5 hours, what were you doing the rest of the time? Just so you know, drinks after the closing bell doesn’t count as “work”.

The profitability of the businesses with which I was associated clearly supported my compensation.

Really? What special skills did you bring to the table? What did you do that someone else could not have done? Were you personally responsible for bringing in all that money? Should the guy on the assembly line make seven figure bonuses too because of the business he is associated with?

I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

Are you seriously asking us to feel sympathy for you? What is your net worth now? How many tens of millions? Do you think you honestly deserve to make 20 times what your parents made? Were you really adding that much more value to the economy than a couple of teachers? Wake up. You were a truck driver driving a truck loaded with gold and got paid based on the value of the cargo. Anyone could have done what you did.

I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust.

It is this sense of entitlement coming from you and others like you that contributes to the brewing outrage felt by Americans. Keep it up.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

Don’t let the door hit you on the way out.

Geithner’s Plan: Initial Thoughts

Posted in Action, America, Bailout, Bernanke, Geithner, Greenspan, Obama, Protest by Economic Darwinism on March 23, 2009

Here are my initial thoughts while they are still fresh. From the Wall Street Journal:

No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.

So far so good. But why did we borrow too much? Because we could. Why could we? Because the Fed held rates too low on the short end and oil exporting countries and Asian savers (supposedly) kept longer maturity rates anchored. When he says “we borrowed to much”, he must be referring to his predecessors at the Treasury as well as the Fed.

The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises.

Hold on one second. Working families and viable businesses do have access to credit. Just not at ridiculously unreasonably low yields that do not incorporate risk premia. Anyone who can put 20% down payment on a house should have no problem getting a mortgage even today. Businesses that need a loan may need to pay higher rates that are dependent on what the lender perceives the risk to be. That is how it should be. What he seems to be saying is that we want to give away free credit as if risk premia is a thing of the past. That is precisely what Greenspan and Bernanke have done for the past 20 years and is a primary reason why we are in the situation we are in. I’m worried. I hope it gets better from here.

We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure.

My gut is beginning to twist. You have got it wrong Mr Geithner. You are not “stabilizing the housing market”, you are using taxpayer money to keep house prices artificially inflated and out of reach of responsible people who chose not to purchase because it was obvious to them house prices were ridiculously high. Now those same people are subsidizing your flawed ideas. Someone please save us from you and your cronies.

By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today — making it less likely that the more negative economy they fear will take place.

Why are lower interest rates the objective? Interest rates can be decomposed roughly into a primary “risk free” rate, a “credit risk” premium, and “inflation” premium. By keeping rates low, which of these are you ignoring? You are already manipulating the “risk free” component through quantitative easing and now you are trying to manipulate the “credit risk” component. That credit risk component is critical for the healthy functioning of the credit markets. Without it, you are just going to create another bubble. You are not even thinking about inflation risk. Sorry if I seem to be losing my patience, but I am.

Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates.

And you are also seeing another spike in borrowers who fail to even make their first mortgage payments. Refinancing mortgages at low rates completely ignores credit and inflation risk (you will learn about that soon enough). Mortgage rates should not be artificially lowered. If anything, you should reduce the principal and face the reality that home prices are unsustainably inflated. Oh wait. You cannot do that because principal reductions would impact the senior tranches of those CDOs your friends on Wall Street own so much of. What was I thinking?

This is good for homeowners, and it’s good for the economy.

That may or may not be, I think not, but those that will benefit with absolute certainty are the big banks and hedge funds. Nice try.

The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined.

Please someone help us. President Obama. Please. Help us. The last thing the Federal Reserve should be doing is encouraging more securitizations. Securitizations are a massive sink hole of economic health. It enriches the middle man and has the potential to lead to irresponsible lending and credit bubbles. Imagine that. Please consider going back to the good old days of responsible banking, where loans stay with the lender. If you ask one of your advisers whether securitizations are detrimental, they are likely going to say “No. Of course not.” Once they say “No” ask them, “Did you foresee this crisis?” If they say “Yes” and can verify it, then perhaps you should listen to them. Otherwise, take it from me. Securitization is not something the Fed should be encouraging right now.

However, the financial system as a whole is still working against recovery.

Maybe I’m just upset now and automatically disagreeing with everything you say, but I even disagree with this statement. What if it is you that are working against recovery? What if the markets are trying to find a sustainable equilibrium? What if markets are actually correcting themselves and prices should be lower? When you artificially try to keep rates unsustainably low and consequently try to keep prices artificially high, maybe it is you that is working against recovery. Think about that.

Market prices for many assets held by financial institutions — so-called legacy assets — are either uncertain or depressed.

No. No. No. If you want a market price, there is a certain way to get it. Try to sell it. The price you get is the market price. What does it even mean for a market price to be depressed? Based on what? If anyone is depressed, it is me after reading this. President Obama. I beg you. Help us. Get rid of these people.

With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

I would say the credit that is available carries an appropriately high cost due to the risk involved with lending in this environment. That is as it should be and trying to change that is unnatural.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors.

Who do you think you are trying to fool? My goodness! The FDIC is begging for money. Where are they going to get it from? You of course. The Federal Reserve is quickly turning into a sovereign wealth fund. The money is coming from you. And you are us, remember? The capital is coming from taxpayers who had nothing to do with this mess. I’m sure they will be happy to learn about that. Believe me, I will do what I can to inform them.

These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

That is wonderful. You are going to raid pension funds now. If you are a retiring baby boomer, all I can say is too bad for you. Sorry mom! I hope pension funds learned their lesson to stay away from structured products. If you do not understand something, do not invest in it. Pension funds, for your own sake and for those who depend on you, please do not participate in this monster.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

Curioser and curioser. What rabbit hole are you living in? How can you say that with a straight face? Of course the government is going to end up overpaying for these assets. Hopeless.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets.

By creating a market that does not exist now, you are playing Market God and unnaturally selecting those who will survive and those who do not. Maybe there is a good reason the market does not exist now. Maybe the market should not exist. The market sets asset values, not you. Let the market continue to dictate prices. If the markets says the asset values are lower than you think they should be, so be it. Who do you think you are?

The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

It will also allow banks to throw hail Mary passes with taxpayer dollars.

The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses.

Are those the only two options? Whatever happened to Pre-Privatization or Receivership or whatever you want to call it? This entire farce is insulting.

Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

Has anyone actually proposed “hoping banks … work these assets off over time”? I would have some nice words for such a person. Don’t you see that your proposal will have the same result as the Japanese experience? You are artificially propping up insolvent institutions with special funds. The outcome will be the same. Let them perish and level the playing field so that healthier species can replace them.

Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses — large and small — across this nation.

I believe he is sincere here. I believe that Tim Geithner may not actually be sinister, but hell is full of people with good intentions. This proposal is a colossal mistake and should be rejected. If President Obama will not see it, then I hope the fury taking root across this country will force Congress to do something to stop this debacle.

We have already seen that where our government has provided support and financing, credit is more available at lower costs.

What makes you think this should be the motivation? Credit at unsustainably low costs was the cause of this mess. I fail to see how it will get us out of it.

Our nation deserves better choices than, on one hand, accepting the catastrophic damage caused by a failure like Lehman Brothers

Do you really believe this? I mean, really? I suppose you do, which is scary. Scary!  There was no catastrophic damage caused by Lehman Brother’s failure. If anything good has happened to date, it is that Lehman and Bear Stearns failed. The damage was there already done. The disease (of excess credit) was already coursing through the veins of the entire financial system. The death of one organ did not cause the damage. The death of one organ was a symptom of the disease. Purging these decaying organs was necessary to prevent gangrene from setting in. What you are suggesting is analogous to an embalming. Konnichiwa zombi ginkou!

In conclusion…

I am extremely disappointed.

The common theme and the common error throughout Geithner’s proposal is that credit is too expensive, rates are too high, and asset values are too depressed. The reality is that asset values are what they are. If no one wants an asset, its price goes down until it becomes attractive enough to reconsider. Throwing billions of dollars at unattractive assets with the purpose of artificially inflating their price is completely irresponsible and wasteful on a grand scale.

America, you need to care about this. You are surely facing your own problems like we all are and I understand the last thing you want to think about is some yahoos in Washington D.C., but these guys are hurting you. They are hurting your children and more than likely they are hurting your grandchildren. Both born and unborn. Take notice and if you are as upset about this as I am, then do something. Let your representatives know how unhappy you are. At this point, I think they are the only ones who can put a road block down before this train leaves the station.