the Banks

Rant Of The Day by Andrew Sullivan

regulation and IT

One bank’s cost is another firm’s revenue by Dan Davies

Dan Davies on the Swiss

The World Is Squared: Episode 1 – “Switzerland, Country of Joyce” by Daniel Davies

DeLong on Rowe and QE, monetary policy

THE TAPER, NICK ROWE, QUANTITATIVE EASING, AND INTELLECTUAL COORDINATION FAILURES: OVER AT EQUITABLE GROWTH: WEDNESDAY FOCUS FOR AUGUST 27, 2014/THE (NOT SO) HONEST BROKER FOR THE WEEK OF AUGUST 30, 2014 by DeLong

hedge funds and the euthanasia of the rentier

Capital Decimation Partners: slight return by Daniel Davies

Investors Pay for Hedge-Fund Illusions by Noah Smith

Innovation in Higher Ed, 1680 Edition by J.W. Mason

Makes me think of Nate Silver's Signal and the Noise and wishes he had a chapter on hedge funds.

Dodd-Frank

Tightening macroprudential policy.

Ignore the Naysayers: Dodd-Frank Reforms Are Finally Paying Off by Mike Konczal

corporate personhood

ERIC HOLDER’S MISSING DEFENDANTS POSTED BY JOHN CASSIDY

In some of the instances detailed by the Justice Department’s statement of fact, the proportion of dubious loans in a given mortgage pool went as high as thirty or forty per cent. That is what the firms who did the sampling told Citi, anyway. On reading one of the due-diligence reports, a trader at the bank wrote in an internal e-mail, “We should start praying…. I would not be surprised if half of these loans went down…. It’s amazing that some of these loans were closed at all.”

In this case, and in many others, the bank went ahead and securitized loans from the pool whose quality had been called into question. The mortgage-backed securities that Citi created were sold for billions of dollars, and all too many of them subsequently endured heavy losses as individual home owners defaulted on their loans—just as the Citi trader had predicted they would.

Where is that trader today? Where is his boss, and his boss’s boss, and his boss’s boss’s boss? About the only thing we know is that they aren’t in the dock. Nobody is, unless, of course, you follow the example of the Supreme Court and ascribe some sort of full-blown personhood to a corporation, in this case Citigroup. “Today, we hold Citi accountable for its contributing role in creating the financial crisis,” Associate Attorney General Tony West said, “not only by demanding the largest civil penalty in history, but also by requiring innovative consumer relief that will help rectify the harm caused by Citi’s conduct.”

Ahem. The best possible spin on the settlement is that it represents a belated but promising step-up in the effort to hold some individual bankers accountable. Holder insisted that nothing in it precludes the bringing of criminal charges. Perhaps the inter-agency group of investigators and prosecutors that brought this civil case will now press ahead and use the evidence they uncovered to go after the traders and supervisors who were responsible for the “wrongdoing,” and the senior bank executives to whom they reported.

reach for yield

Back on the Grid and Ready to Talk Financial Oversight and Human Nature by Jared Bernstein

Liquidationism in the 21st Century by Krugman

Bill Maher on Real Time on HBO described some conservative lies as Zombie lies, they won't die, like trickle-down economics.

Krugman on the BIS:

Throughout the annual report, balance-sheet problems are treated as if they were equivalent to the kind of real structural problems the bank used to claim were at the root of our troubles. That is, they’re treated as a good reason to accept a protracted period of high unemployment as somehow natural, and to reject artificial stimulus that might alleviate the pain.

From 2011

Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt. 

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

euthanasia of the rentier

The Rentier Would Prefer Not to Be Euthanized by J.W. Mason

Here’s another one for the “John Bull can stand many things, but he cannot stand two percent” files. As Krugman says, there's an endless series of these arguments that interest rates must rise. The premises are adjusted as needed to reach the conclusion. (Here's another.) But what are the politics behind it? 

I think it may be as simple as this: The rentiers would prefer not to be euthanized. Under capitalism, the elite are those who own (or control) money. Their function is, in a broad sense, to provide liquidity. To the extent that pure money-holders facilitate production, it is because money serves as a coordination mechanism, bridging gaps — over time and especially with unknown or untrusted counterparties — that would otherwise prevent cooperation from taking place. [1] In a world where liquidity is abundant, this coordination function is evidently obsolete and can no longer be a source of authority or material rewards. 

More concretely: It may well be true that markets for, say, mortgage-backed securities are more likely to behave erratically when interest rates are very low. But in a world of low interest rates, what function do those markets serve? Their supposed purpose is to make it easier for people to get home loans. But in a world of very low interest rates, loans are, by definition, easy to get. Again, with abundant liquidity, stocks may get bubbly. But in a world of abundant liquidity, what problem is the existence of stock markets solving? If anyone with a calling to run a business can readily start one with a loan, why support a special group of business owners? Yes, in a world where bearing risk is cheap, specialist risk-bearers are likely to go a bit nuts. But if risk is already cheap, why are we employing all these specialists? 

The problem is, the liquidity specialists don’t want to go away. From finance’s point of view, permanently low interest rates are removing their economic reason for being — which they know eventually is likely to remove their power and privileges too. So we get all these arguments that boil down to: Money must be kept scarce so that the private money-sellers can stay in business. 

It’s a bit like Dr. Benway in Naked Lunch: *

“Now, boys, you won’t see this operation performed very often and there’s a reason for that…. You see it has absolutely no medical value. No one knows what the purpose of it originally was or if it had a purpose at all. Personally I think it was a pure artistic creation from the beginning. 

“Just as a bull fighter with his skill and knowledge extricates himself from danger he has himself invoked, so in this operation the surgeon deliberately endangers his patient, and then, with incredible speed and celerity, rescues him from death at the last possible split second…. "

Interestingly, Dr. Benway was worried about technological obsolescence too. “Soon we’ll be operating by remote control on patients we never see…. We’ll be nothing but button pushers,” etc. The Dr. Benways of finance like to fret about how robots will replace human labor. I wonder how much of that is a way of hiding from the knowledge that what cheap and abundant capital renders obsolete, is the capitalist?

EDIT: I'm really liking the idea of Larry Summers as Dr. Benway. It fits the way all the talk when he was being pushed for Fed chair was about how great he would be in a financial crisis. How would everyone known how smart he was -- how essential -- if he hadn't done so much to create a crisis to solve?

[1] Capital’s historic role as a facilitator of cooperation is clearly described in chapter 13 of Capital.

 * where Steely Dan got its name.

creeping nationalization of the financial system

Creeping Nationalisation by Frances Coppola

It's All But Official: There is No 2% Inflation Target by David Beckworth

Interesting response by Andy Harless

economic tradeoffs?

Financial Stability and Monetary Policy: Happy Marriage or Untenable Union? by John C. Williams

Baker on HFT

High Speed Trading and Slow-Witted Economic Policy by Dean Baker

By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.

There are many complicated ways to try to address this problem, but there is one simple method that would virtually destroy the practice. A modest tax on financial transactions would make this sort of rapid trading unprofitable since it depends on extremely small margins. A bill proposed by Senator Tom Harkin and Representative Peter DeFazio would impose a 0.03 percent tax on all trades of stocks, bonds, and derivatives. This would quickly wipe out the high-frequency trading industry while having a trivial impact on normal investors....

Our Summers of Discontent*

Refereeing the Neil Irwin Bette Midler Debate on Larry Summers by Dean Baker

Things are getting hot and heavy as the battle for Fed succession moves into the second half. Earlier this week, the Washington Post's Fed reporter, Neil Irwin, decided to go head to head with Bette Midler over some unflattering tweets about Larry Summers and his prospects for becoming Fed chair. As a public service, Beat the Press is refereeing the exchange. 

Ms Midler led off with the tweet: 

"HUH. The architect of bank deregulation, which turned straitlaced banks into casinos and bankers into pimps, may be next Head Fed: Summers." 

Irwin took issue with this by pointing out that the Clinton administration, as well as the Bush administration, were filled with proponents of deregulation. This would be people like Robert Rubin, Alan Greenspan and Timothy Geithner. Based on this background Irwin doesn't think it's fair to call Summers "the architect of bank deregulation."

We at Beat the Press have to call this one mostly for Midler. After all, Summers is known to be a forceful character, not just a shrinking violet who sits in the corner of the room. Regulation fans everywhere remember how Summers denounced Raghuram Rajan as a financial luddite for raising the possibility that deregulation might lead to instability in the financial system at the Fed's big Greenspanfest in 2005. 

Summers was a big actor in pushing the deregulation agenda. He deserves credit for his work. If we change Midler's tweet to read, "an architect of bank deregulation," she is 100 percent on the mark. 

Next Midler tweeted: 

"Larry Summers, Mr. De-Regulation, has never stepped forward to say..."Oops! My bad!" Five years of a world wide recession, and not a peep." 

Irwin doesn't dispute this one: no apologies from from Summers. We'll call that a draw.
Then we have Midler tweeting: 

"Larry Summers, a HUGE ADVOCATE of higher exec pay and bonuses for execs whose firms received billions in federal bailouts during the crisis." 

Irwin takes serious issue with this one. He assumes that this refers to the scandal around the hundreds of millions paid out in AIG bonuses even as the company was being kept on life support by the taxpayers. Irwin clearly takes Summers' side here: 

"In the wake of outcry over bonuses to AIG employees, for example, Summers said that the admnistration was trying to stop the bonuses but legally couldn’t. 'Secretary Geithner courageously has gone after these bonuses and will continue to go after these bonuses in a very aggressive way, but we can’t suspend the rule of law and we can’t put the whole economy at risk,' Summers said in a CNN interview. 'It is wrong to govern out of anger . . . we can’t let anger stop us from taking the steps that are necessary to maintain the stability of the financial system, keep credit flowing.' Not quite the same as being a huge advocate." 

We're not buying Irwin's line here. First it is not clear that this is Midler's point of reference. Summers was an advocate of the no questions asked bailout from day one, lobbying the Democratic caucus in September of 2008 to approve the TARP. At that moment, the market was passing judgement on the banks and prepared them to send them to the dustbin of history. 

If there was to be a bailout Congress could have imposed any terms it liked. Instead, Summers insisted that Congress just give up the money with no real conditions, otherwise we would have a second Great Depression. (Sorry, this is nonsense. The first Great Depression was not caused by a financial crisis alone at its start, but rather a decade of inadequate response. Summers surely knows this.) 

Even in the AIG case it is not clear the government could not have forced the bonuses to be taken back. It controlled the flow of money to the company, which it could have ended at any time. Faced with its literal demise, it is likely that the top execs at AIG could have forced substantial reductions in bonuses across the board. 

It's striking that Summers was so concerned about the "rule of law" in this case but seems to show little evidence of concern for the rule of law when it comes to pensions for workers in places like Detroit and Chicago. One could reasonably conclude from his behavior in this and other instances that Summers thinks that high CEO pay and bonuses, even at bailed out companies, is just fine. Beat the Press calls this one for Midler. 

So there you have it, Midler wins 2-0-1. 

Addendum: 

It's possible that in calling Summers a huge advocate of higher exec pay, Midler was referring to the accounts reported in Ron Suskind's book, Confidence Men: Wall Street, Washington, and the Education of a President. In this book, Suskind reports accounts of Summers discussing the market as a tool that exposes natural inequality. In other words, he believed that the large gaps in income that we see reflect differences in intelligence and skills.
That is certainly a plausible reference for Midler's tweet and would provide another reason to score the exchange for Midler.

---------------------------
*Our Summers of Discontent by Maureen Dowd.

Yglesias reverses himself on Glass-Steagall.

DeLong retweets a tweet bashing Dowd's column by Ashak Rao.

the next Fed Chair

Central banking: still a man’s world by Gillian Tett

I'm Not Wild About Larry by Rana Foroohar

S.&P. Seeks Dismissal of U.S. Suit Over Rating of Mortgage Debt

Fed Still Owes Congress a Blueprint on Its Emergency Lending

Biggest Borrowers graphic

2. Citigroup (US)       $58 billion 

3. Royal Bank of Scotland (UK)      $58 billion

4. Citigroup (UK)        $50 billion

6. UBS (Switzerland)    $35 billion

8. Deutsche Bank (Germany)     $30 billion

10. Dexia (Belgium)      $25 billion

This was in addition to TARP. Citigroup should have been nationalized. And we still have the crappiest recovery since the Great Depression.

Banks Borrow Way Too Much: A great new book argues that the finance industry’s love of debt endangers the whole economy. by Yglesias

On the Geithner Legacy by Mike Konczal

How Tim Geithner Saved the Banks—with Ben Bernanke's Help by Matt O'Brien

Sometimes I wonder if Dean Baker/Atrios/Matt Taibbi are right and we should have let the whole thing crash and burn thereby ridding us of the parasitic financial sector. I do believe that Obama should have flipped/nationalized Citigroup as he did with the auto makers.

I also believe that we won't get bailouts the next time around, so we'll see how it plays out.

Wall Street thanks you for your service, Tim Geithner by Dean Baker

Treasury Secretary Timothy Geithner's departure from the Obama administration invites comparisons with Klemens von Metternich. Metternich was the foreign minister of the Austrian empire who engineered the restoration of the old order and the suppression of democracy across Europe after the defeat of Napoleon. 

This was an impressive diplomatic feat – given the widespread popular contempt for Europe's monarchical regimes. In the same vein, protecting Wall Street from the financial and economic havoc they brought upon themselves and the country was an enormous accomplishment.
During his tenure as head of the New York Fed and then as treasury secretary, most, if not all, of the major Wall Street banks would have collapsed if the government had not intervened to save them. This process began with the collapse of Bear Stearns, which was bought up by JP Morgan in a deal involving huge subsidies from the Fed. 

The collapse of Lehman Brothers, a second major investment bank, started a run on the three remaining investment banks that would have led to the collapse of Merrill Lynch, Morgan Stanley, and Goldman Sachsif the Fed, FDIC, and treasury had not taken extraordinary measures to save them. Citigroup and Bank of America both needed emergency facilities established by the Fed and treasury explicitly for their support, in addition to all the below market-rate loans they received from the government at the time. Without this massive government support, there can be no doubt that both of them would currently be operating under the supervision of a bankruptcy judge. 

Of the six banks that dominate the US banking system, only Wells Fargo and JP Morgan could conceivably have survived without hoards of cash rained down on them by the federal government. Even these two are questionmarks, since both helped themselves to trillions of dollars of below market-rate loans, in addition to indirectly benefiting from the bailout of the other banks that protected many of their assets. 

Had it not been for Geithner and his sidekicks, therefore, we would have been permanently rid of an incredibly bloated financial sector that haunts the economy like a horrible albatross. 

Along with the salvation of the Wall Street banks, Geithner also managed to restore their agenda of deficit reduction. Even though the economy is still down more than 9 million jobs from its full employment level, none of the important people in Washington is talking about measures that would hasten job creation. 

Instead, the focus is exclusively on deficit reduction, a process that is already slowing growth and putting even more people out of work. While lives are being ruined today by the weak economy, Geithner helped create a policy agenda where the focus of debate is the budget projections for 2022.

Wall Street’s Bad Investment Decision by Krugman

Get What You Pay For? Not Always by Eduardo Porter

September’s housing figures may be a sign of a recovery by Neil Irwin

Here’s the thing, however: The overbuilding of houses during the boom years, while real, was not extraordinary by historical standards. The underbuilding of houses has been far greater than the excess housing construction during the boom relative to demographic trends. 

That means that other factors are probably major culprits in the housing weakness of the past four years: A terrible job market that has made people unwilling or unable to get a mortgage, an overhang of foreclosures that has kept the market for houses from clearing and extreme caution by banks and other lenders that has made it hard to get mortgages. 

Now each of those trends seems to be healing. Few would argue that a return to the housing bubble days of 2005 is attractive, but what if, over the coming year, housing returned to its longer-term trend? 

In the second quarter of 2012, residential investment was 2.39 percent of GDP. As a rough estimate of the longer-term trend for that number, let us use its average level for the entire decade of the 1990s: 4.07 percent. (Using the 1990s is a bit arbitrary; even using various other base lines yields similar numbers.) 

If residential investment converged to that longer-term average, it would add 1.7 percentage points to overall growth in the coming year.

(via Dean Baker)

Baker is right, this good article helped elucidate the subject for me. I was confused by DeLong's graphs which showed now recovery in the housing sector. As Irwin writes, it's because of an overhang of foreclosers and a lack of demand for new housing. So DeLong's graph isn't showing that that there's a lack of demand overall, but that the housing market isn't clearing. That's true but there is also a lack of demand overall. A Fed targeting NGPD would fix this.

Simon Johnson on Citi, too-big-to-fail banks, Sheila Bair and Fed governor Tarullo

Forcing frequent failures by Steve Randy Waldman