news and comment
economics

site map
C O L O U R K E 'Y

“The insertion, last month, of $250 billion of equity into American banks through TARP (a two-percentage-point addition to capital-asset ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming modest further write-offs, simple linear extrapolation would suggest that another $250 billion would bring the spread back to near its pre-crisis norm. This arithmetic would imply that investors now require 14% capital rather than the 10% of mid-2006. Such linear calculations, of course, can only be very rough approximations. But recent data do suggest that, while helpful, the Treasury’s $250 billion goes only partway towards the levels required to support renewed lending.”

the web address for this article is
https://www.abelard.org/news/economics0811.php#greenspan_banking_201208

congdon on debt deflation and bank capitalisation

2 October 2008
“That sounds trifling, hardly enough to threaten the banks' charitable donations let alone the future of capitalism. But here comes the vicious arithmetic. A drop in the value of assets of 2 per cent wipes out 40 per cent of the capital of an organisation such as a bank that is only 5 per cent owned by its shareholders. According to rules developed by international financial bureaucrats in Basle over the past 20 years, a bank that has lost a big chunk of its capital must - at least theoretically - shrink its assets to restore the sacred capital-to-assets ratio to its original level.”

the web address for this article is
https://www.abelard.org/news/economics0811.php#debt_deflation_051208

greenspan on bank reserves

“Alan Greenspan, the former Fed Chairman, told The Economist this week that banks were satisfied with capital equal to 10% of their assets in the past. Now, to soothe depositors and investors, they will need a much higher ratio - perhaps around 15%. Until they get there, through a combination of raising new capital, reducing dividends and share buybacks, and shedding assets, lending will be constrained.”

the web address for this article is
https://www.abelard.org/news/economics0811.php#bank_reserves_261108

regulation, self-regulation and fraud in the us mortgage market

Many fail to distinguish between ‘regulation’ and fraud, between good regulation and bad regulation, and between good regulation and sloppy regulation.

They fail even to attend to whom is being regulated and by what.

It was widely known that the Fannies were corrupt.

Purchasers of the toxic assets generated by the Fannies failed to exercise due diligence. Clearly, these institutions and their employees failed.

Thus, self-regulation failed in this instance.

Nobody ‘should’ buy what they don’t understand:

“Greenspan, 82, acknowledged under questioning that he had made a "mistake" in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that "a flaw in the model ... that defines how the world works." ”[Quoted from wsvn.com]

However...

I repeat: the Fannies were known to be corrupt.

Bush and McCain and others warned of the problem and tried to introduce proper regulation.

The ‘Democrats’ fought regulation every step of the way.

Warren Buffet on the OFHEO
“"QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the regulators, where were the regulators for what was happening, and can something like this be prevented from happening again?

“Mr. BUFFETT: Well, it's really an incredible case study in regulation because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that's $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.

“QUICK: Mm-hmm.

“Mr. BUFFETT: And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went--wrote 100 page reports, and they said, 'We've looked at these people and their standards are fine and their directors are fine and everything was fine.' And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350--340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn't have a word in there about themselves, and they're the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation.

“QUICK: That sounds like an argument against regulation, though. Is that what you're saying?

“Mr. BUFFETT: It's an argument explaining--it's an argument that managing complex financial institutions where the management wants to deceive you can be very, very difficult."”

Very obviously the ‘Democrats’ sought to deceive.

Do you blame the deceiver, or do you blame the victims of that deceit?
Do you blame both the deceivers and the victims in ‘equal’ measure?

the web address for this article is
https://www.abelard.org/news/economics0811.php#regulation_self_regulation_fraud_251108

too many are still confusing the banking gum-up with recession, or worse

Graph of UK gross national product 2003 - present [source: aracari]

There are several supposed ‘slowdowns’ indicated on this UK GDP graph.

I think that:

1. technical recession/s is highly likely. I’m content to use the standard definition;
2. ‘recession’ will hit the UK harder;
3. the banking gum-up is generating ‘the recession’. That is, the ‘recession’ is not fundamental;
4. the ‘the recession’ could well ease without overkill through Keynesian manipulation;
5. Keynesian manipulation could well make the UK’s situation worse over the fairly short term;
6. standards of living are also falling in the UK for other reasons;
7. the stock market and housing price contractions I regard as
   a) corrections and b) bubbles deflating;
8. too many people are failing to keep their heads.

My problem is deciding whether an asset is ‘over-valued’. That is, from my position, a matter for the markets to ‘decide’.

In the UK, Brown the Clown has inflated by at least 80% since reaching no.11 as Britain’s economics minister. House prices have risen by more like 180% in that time.

Now, were houses ‘under-valued’ in 1997 when the Clown started at no.11?
Or, is the hedging value of holding housing to offset the idiocies of the Clown a reasonable premium on prices?
Or, was the shortage of property as house formation numbers climbed (and large ‘illegal’ immigration continued) sufficient to explain the surplus increase?
Or part thereof?
Or, was it merely idiots looking at lower interest payments and failing to calculated real long term costs?
Or, was a bubble under-way, a bubble perhaps ridden by ‘speculators’.

In my view, you can never make those judgements definitively, and certainly not in advance. Idiots have been ‘predicting’ housing price ‘collapse’ for several years. If you do that long enough you’ll be correct some day maybe. I thought the prices ‘too high’ for more than 8 years, so I got out of the market. The prices went up and up and up for several years after.

I remain very content ☺ now they’re going down.

No-one knows how far that will go, or how long it will take. I advised getting out of the UK stock market more than 8 years ago.

I am risk averse. I do not ride bubbles. Most people cling on until it’s ‘too late’.

The markets are my lodestone, not comforting fairy tales to make people believe they understand what they do not. Markets are the sum total of individual decisions.

Clearly, large numbers of people are less inclined to regard stock and housing prices as optimistically as they did a few months back. That is what ‘corrects’/changes pricing.

But are ‘people’ correct? Was the high of house pricing about right for the socialist mess in the UK?
Will the house prices just take a breather and then start rising again? I don’t know. Among other matters, it will be government meddling that will answer that.

Assessing government meddling is a major part of (my approach to) pricing.

There is plenty of speculation that a good slice of the USA stock price meltdown is based on a fear of socialistic increases in capital gains taxes now that there is a crazy due in the White House.

related material
fanny mae and freddie mac - a history

the web address for this article is
https://www.abelard.org/news/economics0811.php#recession_confusion_231108

why chapter 11 bankruptcy is good for business, good for the economy and good for jobs [2nd link] - the auroran sunset

Solid and interesting primer:

“Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

“As a society, we have very little to show for this $465 billion. . . . Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.”

the web address for this article is
https://www.abelard.org/news/economics0811.php#chapter_eleven_221108

squeeze hits china - 67,000 factories close in 6 months

“Government statistics show that 67,000 factories of various sizes were shuttered in China in the first half of the year, said Cao Jianhai, an industrial economics researcher at the Chinese Academy of Social Sciences. By year's end, he said, more than 100,000 plants will have closed.

“As more factories in China shut down, stories of bosses running away have become familiar, multiplying the damage of China's worst manufacturing decline in at least a decade.

“Even before the global financial crisis, factory owners in China were straining under soaring labor and raw-material costs, an appreciating Chinese currency and tougher legal, tax and environmental requirements. When the credit crunch took hold -- prompting Western businesses to slash orders for Chinese goods and bankers to curtail loans to factories -- many operations were pushed over the edge.”

the web address for this article is
https://www.abelard.org/news/economics0811.php#china_squeeze_041108

greenspan and bernanke warning against systemic problems with the ‘demo’ mess at fannie mae and freddie mac

Of course, the ‘Democrats’ worked very hard to head off regulation of the GSEs [government-sponsored enterprises], while McCain and other Republicans worked to regulate, and thereby head off, the systemic mess.

Obama was a major beneficiary of the Fannie Mae slush fund operated to head off regulation.

It’s amazing that anyone trusts Obama or the ‘Democrats’ with the economy!

Here’s the latest poll on Congressional approval: 9%!

Alan Greenspan, February 2004:

“Given their history of innovation in mortgage-backed securities, why do Fannie and Freddie now generate such substantial concern? The unease relates mainly to the scale and growth of the mortgage-related asset portfolios held on their balance sheets. That growth has been facilitated, as least in part, by a perceived special advantage of these institutions that keeps normal market restraints from being fully effective.

“The GSEs' special advantage arises because, despite the explicit statement on the prospectus to GSE debentures that they are not backed by the full faith and credit of the U.S. government, most investors have apparently concluded that during a crisis the federal government will prevent the GSEs from defaulting on their debt. An implicit guarantee is thus created not by the Congress but by the willingness of investors to accept a lower rate of interest on GSE debt than they would otherwise require in the absence of federal sponsorship.

“Because Fannie and Freddie can borrow at a subsidized rate, they have been able to pay higher prices to originators for their mortgages than can potential competitors and to gradually but inexorably take over the market for conforming mortgages. This process has provided Fannie and Freddie with a powerful vehicle and incentive for achieving extremely rapid growth of their balance sheets. The resultant scale gives Fannie and Freddie additional advantages that potential private-sector competitors cannot overcome. Importantly, the scale itself has reinforced investors' perceptions that, in the event of a crisis involving Fannie and Freddie, policymakers would have little alternative than to have the taxpayers explicitly stand behind the GSE debt. This view is widespread in the marketplace despite the privatization of Fannie and Freddie and their control by private shareholders, because these institutions continue to have government missions, a line of credit with the Treasury, and other government benefits, which confer upon them a special status in the eyes of many investors.”
—
“The Federal Reserve is concerned about the growth and the scale of the GSEs' mortgage portfolios, which concentrate interest rate and prepayment risks at these two institutions. Unlike many well-capitalized savings and loans and commercial banks, Fannie and Freddie have chosen not to manage that risk by holding greater capital. Instead, they have chosen heightened leverage, which raises interest rate risk but enables them to multiply the profitability of subsidized debt in direct proportion to their degree of leverage. Without the expectation of government support in a crisis, such leverage would not be possible without a significantly higher cost of debt.”
—
“As always, concerns about systemic risk are appropriately focused on large, highly leveraged financial institutions such as the GSEs that play substantial roles in the functioning of financial markets. I should emphasize that Fannie and Freddie, to date, appear to have managed these risks well and that we see nothing on the immediate horizon that is likely to create a systemic problem. But to fend off possible future systemic difficulties, which we assess as likely if GSE expansion continues unabated, preventive actions are required sooner rather than later.”

Ben Bernanke, March 2007

“Financial crises are extremely difficult to anticipate, and each episode of financial instability seems to have unique aspects, but two conditions are common to most such events. First, major crises usually involve financial institutions or markets that are either very large or play some critical role in the financial system. Second, the origins of most financial crises (excluding, perhaps, those attributable to natural disasters, war, and other nonfinancial events) can be traced to failures of due diligence or "market discipline" by an important group of market participants.

“Both of these conditions apply to the current situation of Fannie Mae and Freddie Mac…”
—
Measures to Reduce the Systemic Risk of GSE Portfolios...

“I have argued today that the size and the potentially rapid growth of GSE portfolios, combined with the lack of market discipline faced by GSEs, raise substantial systemic risk concerns. How should this issue be addressed? In recent years, the Federal Reserve Board has laid out three essential elements for the effective regulation of the GSEs that we believe would mitigate those concerns while promoting more effectively the important public purposes that they serve (Greenspan 2004; 2005b; 2006). First, the GSE regulator should have the broad authority necessary to set and adjust GSE capital requirements in line with the risks posed by the GSEs. Second, the GSEs should be subject to a clear and credible receivership process, a process that would establish that both shareholders and debt holders of a failed GSE would suffer financial losses. Third, the GSEs’ portfolios should be anchored firmly to a well-understood public purpose approved by the Congress.

“The concentrated and potentially volatile nature of the GSEs’ portfolios, together with the lack of market discipline on GSE activities, makes ensuring adequate capital--the first element--especially important. To ensure the safety and soundness ofthe GSEs and to reduce systemic risks, the GSE regulator should have capital authority that is on a par with that of the bank regulators. For example, the GSE regulator should have clear authority to establish and modify both the minimum and the risk-based capital standards for the GSEs. Moreover, the GSE regulator should be able to adjust capital requirements quickly and as needed to address developing or foreseeable concerns, rather than being required by cumbersome procedures to wait until after the damage has been done. A strong capital base would significantly reduce the implicit subsidy and incentive problems that now distort GSE investment decisions (Lucas and McDonald, 2006), while also increasing their safety and soundness.

“The establishment of a clear and credible GSE receivership process, the second element, is needed to create market discipline for these companies. Reform legislation should establish (1) a well-defined and mandatory process for placing a GSE in receivership and (2) a method for resolving a GSE once it is placed in receivership. Both parts are necessary for the receivership process to be meaningful and credible. Market participants should clearly understand that, once certain conditions arise, regulatory forbearance will be impermissible and a GSE receivership will be established. Importantly, the GSE receivership process should include a mechanism for ensuring that both the shareholders and creditors of a failed GSE will bear financial losses. Only if GSE debt holders are persuaded that the failure of a GSE will subject them to losses will they have an incentive to exert market discipline.

“Third, the GSE portfolios should be anchored to a clear and well-defined public purpose. Tying the portfolios to a purpose that provides measurable benefits to the public would help to ensure that society in general--not just GSE shareholders--receives a meaningful return in exchange for accepting the risks inherent in the portfolios. Moreover, defining the scope and purpose of the portfolios in this way would reduce the potential for unbridled growth in those portfolios while avoiding the imposition of arbitrary limits or caps.”

For much more detail on the ‘Democrats’ corruption machine that was Fannie Mae.

[Ben Bernanke is the current Chairman of the Federal Reserve Bank - the Fed. He took over from Alan Greenspan.]

the web address for this article is
https://www.abelard.org/news/economics0811.php#greenspan_bernanke_warnings_031108

email email_abelard [at] abelard.org

© abelard, 2008, 03 november
all rights reserved

variable words
prints as increasing A4 pages (on my printer and set-up)