There Are No Villains in Financial Crises

I think it's combination of bad information and in the back of their minds knowing 'Uncle Sugar' would bail them out. - MBC

http://meganmcardle.theatlantic.com/archives/2009/09/there_are_no_villains_in_finan.php

"... Tyler Cowen points to some evidence that banker pay wasn't at fault, either:

This "executive compensation" theory of the crisis is now the keystone of the conventional wisdom, having been embraced by President Obama, the leaders of France and Germany, and virtually the entire financial press. But if anyone has evidence for the executive-compensation thesis, they have yet to produce it. It's a great theory. It "makes sense"--we all know how greedy bankers are! But is it true?

The evidence that has been produced suggests that it is false.

For one thing, bankers were often compensated in stock as well as with bonuses, and the value of this stock was wiped out because of the investments in question. Richard Fuld of Lehman Brothers lost $1 billion this way; Sanford Weill of Citigroup lost half that amount. A study by René Stulz and Rüdiger Fahlenbrach[3] showed that banks with CEOs who held a lot of stock in the bank did worse than banks with CEOs who held less stock, suggesting that the bankers were simply ignorant of the risks their institutions were taking. Journalists' and insiders' books about individual banks[4] bear out this hypothesis: At Bear Stearns and Lehman Brothers, for example, the decision makers did not recognize the risks until it was too late, despite their personal investments in the banks' stock...

...All of these papers suggest that the search for a villain behind the crisis will ultimately be fruitless. There are two basic narratives of what happened. The first is that bankers had bad incentives: they took massive risks because the profits were so good in the up years that it was worth the risk of the bad, or because they could pass the risks onto some other sucker, or they thought Uncle Sugar would bail them out. The other narrative is that bankers had bad information: they didn't understand the risks they were taking.

Economic vandalism - Barack Obama and free trade

So much for surrounding himself with sound-minded thinkers. If he doesn't listen or, worse, doesn't understand, makes no difference who he surrounds himself with. - MBC

http://www.economist.com/printedition/displayStory.cfm?Story_ID=14450332

"YOU can be fairly sure that when a government slips an announcement out at nine o’clock on a Friday night, it is not proud of what it is doing. That is one of the only things that makes sense about Barack Obama’s decision to break a commitment he, along with other G20 leaders, reaffirmed last April: to avoid protectionist measures at a time of great economic peril. In every other way the president’s decision to slap a 35% tariff on imported Chinese tyres looks like a colossal blunder, confirming his critics’ worst fears about the president’s inability to stand up to his party’s special interests and stick to the centre ground he promised to occupy in office.

This newspaper endorsed Mr Obama at last year’s election (see article) in part because he had surrounded himself with enough intelligent centrists. We also said that the eventual success of his presidency would be based on two things: resuscitating the world economy; and bringing the new emerging powers into the Western order. He has now hurt both objectives...

...The tyre decision needs to be set into the context of a string of ominously protectionist policies which started within weeks of the inauguration with a nasty set of “Buy America” provisions for public-works contracts. The president watered these down a bit, but was not brave enough to veto. Next, the president stayed silent as Congress shut down a project that was meant to lead to the opening of the border to Mexican trucks, something promised in the NAFTA agreement of 1994. Besides these sins of commission sit the sins of omission: the president has done nothing at all to advance the three free-trade packages that are pending in Congress, with Colombia, Panama and South Korea, three solid American allies who deserve much better. And much more serious than that, because it affects the whole world, is his failure to put anything worthwhile on the table to help revive the moribund Doha round of trade talks. Mr Bush’s tariffs, like the Reagan-era export restraints on Japanese cars and semiconductors, came from a president who was fundamentally committed to free trade. Mr Obama’s, it seems, do not.

America is needed to lead... For Mr Obama now to take up the no-protection cause at the G20’s forthcoming meeting in Pittsburgh would, alas, be laughable. But if America does not set an example, no one else is likely to.

Dumb and dumber

Nor is the potential fallout from Mr Obama’s wrongheaded decision limited to trade. Evidence of a weak president being pushed leftward might cause investors to worry whether he will prove similarly feeble when it comes to reining in the vast deficits he is now racking up; and that might spook the buyers of bonds that finance all those deficits. Looming large among these, of course, are the Chinese. Deteriorating trade relations between the world’s number one debtor and its number one creditor are enough to keep any banker awake at night.

And America needs China for a lot more than T-bonds. Any hope of securing a climate-change agreement at Copenhagen in December on a successor treaty to Kyoto will require close co-operation between America and China. So does the work of negotiating with North Korea on its nuclear weapons. And as for Iran, where America is keen to seek a fresh round of UN sanctions in the hope of forcing it to scrap its nuclear programme, China holds a power of veto at the Security Council. Under the relevant trade laws, Mr Obama had the absolute discretion not to impose the recommended tyre tariffs on the grounds of overall economic interest or national security. Given everything that is at stake, his decision not to exercise it amounts to an act of vandalism.

The promised bland - Barack Obama marks a year since the collapse of Lehman Brothers with a speech to Wall Street

I'd say The Economist is falling out of love with President Obama - MBC

http://www.economist.com/daily/news/displaystory.cfm?story_id=14444100&fsrc=nwl

"...produced plenty of elegant phrases but little that was new, and quite a bit that was confusing...

...much of what Mr Obama said was disingenuous. He included some helpful words on the responsibility borne by homeowners for taking risks they could not afford. But he also urged banks to bring financial services to those currently outside the financial system, and put the consumer-protection agency first on his list of reforms. He said that the cost of future failures would fall on shareholders and creditors. But it is far from clear that he will force money-market funds, a major source of bank funding, to give up their promise to return their capital to investors intact...

...the casual listener to Mr Obama’s oratory might conclude that the crisis occurred because there were no regulations, that big banks would be allowed to fail in the future and that the proposed constraints of finance will create a new age of prosperity. (They would also think that the incomprehensible decision on Friday to impose tariffs on Chinese tyre imports was designed to save free trade.) The truth is far messier. Reform is badly needed, but people will still be greedy, banks will still need saving and a more stable system will entail less credit flowing through it. Mr Obama is eloquent but too often he does not tell it like it is..."

Daily Pfenning 9/16/2009

http://www.dailypfennig.com/

"...Retail Sales for August were quite strong, and showed signs that the move was more than the Cash for Clunkers program, and Back to School buying... There are quite a few people/ economists/ analysts out there now jumping on the President's bandwagon that the recession is over based on this report... For those of you at home keeping score, Retail Sales for August printed at +2.7%!...

... wonder if all those people wearing the President endorsed end of the recession rose colored glasses ever stopped to wonder if gas purchases might have helped trump up this figure? Well, I did, you knew I would! And I found that rising gasoline prices sent service station receipts up 5.1% in the month. If we had journalists like we used to have, they would have known to go look at the rising gas price component of the report, since just last week the Trade Deficit jumped by 16% in one month due to rising oil prices...

...Speaking of the Fed and inflation... David Galland, who writes daily letter regarding the goings on in the world called "Casey's Daily Dispatch", and can be found here: http://www.caseyresearch.com/casey-services/free-publications/caseys-daily-dispatch/ , had this to say yesterday regarding this subject of the Fed and inflation...

"Reason Magazine... current edition, had a couple of items that I thought were especially interesting. Ironic, actually.

The first was about a comic book the Fed has published discussing inflation, as well as defending its autonomy. You can view it by following the link below. What you should find interesting is that they make several clear mistakes in describing inflation – for instance, by saying that if the price of oil goes up, that causes inflation. And on the very first page, they state that “The dictionary defines inflation as a substantial and continuing rise in the general price level.”

But that is not what the dictionary says – every entry I checked always includes “… related to an increase in the volume of money,” or words to that effect. Kind of scary, when the organization charged with fighting inflation doesn’t actually know what it is.

You can read the comic yourself here, straight off the New York Fed’s website. http://ia301540.us.archive.org/2/items/gov.frb.ny.comic.inflation/gov.frb.ny.comic.inflation.pdf

...The Chinese government has told Chinese companies they do not have to honor derivatives and commodity futures contracts made with Western financial institutions.

What does this do to the institutions that wrote these contracts with China, ... It's going to hurt... And it's going to hurt bad... But, nobody really knows just how many or how much risk is out there... But, if one day you wake up and hear on the news that the financial markets here are melting down once again, you'll be able to say...

...Big Al Greenspan was back in the news last night... ("In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value." quote by Alan Greenspan, from an article written in 1966 entitled "Gold and Economic Freedom")

Any way... Big Al was back in the news, and said that he's worried that lawmakers will hamper the Fed's efforts to rein in its monetary stimulus, and that inflation might "swamp" the bond market. See, how Big Al is sticking up for the Fed, and putting down the groundwork now, to blame lawmakers when inflation is soaring on the other side of the recession?..."

Misreading the Iranian Situation

George Friedman has been right on so many of these you have to pay attention. - MBC

http://www.stratfor.com/weekly/20090915_misreading_iranian_nuclear_situation?utm_source=GWeekly&utm_medium=email&utm_campaign=090915&utm_content=GIRtitle

"...the Israelis have Obama in a box. Obama promised them that if Israel did not take a military route, he would deliver them crippling sanctions against Iran. Why Obama made this promise — and he has never denied the Israeli claim that he did — is not fully clear. It did buy him some time, and perhaps he felt he could manage the Russians better than he has. Whatever Obama’s motivations, having failed to deliver, the Israelis can say that they have cooperated with the United States fully, so now they are free by the terms of their understanding with Washington to carry out strikes — something that would necessarily involve the United States...

...When we speak to people in Tehran, Washington and Moscow, we get the sense that they are unaware that the current situation might spin out of control. In Moscow, the scenario is dismissed because the general view is that Obama is weak and inexperienced and is frightened of military confrontation; the assumption is that he will find a way to bring the Israelis under control.

It isn’t clear that Obama can do that, however. The Israelis don’t trust him, and Iran is a core issue for them. The more Obama presses them on settlements the more they are convinced that Washington no longer cares about Israeli interests. And that means they are on their own, but free to act.

It should also be remembered that Obama reads intelligence reports from Moscow, Tehran and Berlin. He knows the consensus about him among foreign leaders, who don’t hold him in high regard. That consensus causes foreign leaders to take risks; it also causes Obama to have an interest in demonstrating that they have misread him.

We are reminded of the 1962 Cuban Missile Crisis only in this sense: We get the sense that everyone is misreading everyone else. In the run-up to the Cuban Missile Crisis, the Americans didn’t believe the Soviets would take the risks they did and the Soviets didn’t believe the Americans would react as they did. In this case, the Iranians believe the United States will play its old game and control the Israelis. Washington doesn’t really understand that Netanyahu may see this as the decisive moment. And the Russians believe Netanyahu will be controlled by an Obama afraid of an even broader conflict than he already has on his hands.

The current situation is not as dangerous as the Cuban Missile Crisis was, but it has this in common: Everyone thinks we are on a known roadmap, when in reality, one of the players — Israel — has the ability and interest to redraw the roadmap. Netanyahu has been signaling in many ways that he intends to do just this. Everyone seems to believe he won’t. We aren’t so sure."

Recovery? Middle Class Tax?

This talk now of income tax on middle class sounds foreboding to me. Biden claims we've gone from near depression to recovery from recession. However, Geithner says it's too early to say economy is in recovery. Now Bernanke says recession is 'very likely over' but it won't feel like it. Geez guys, anyone got a firm position on this or are you all just guessing, AGAIN?

And you've got to admire President Obama saying 'the success of organized labor and the American middle class are essential to the future prosperity of the country'...'the revitalization of the U.S. economy depends on better lives for working class Americans...' (Dear Captain Obvious, please tell us what you are doing to make this happen!)

Of course he wouldn't be pandering to the Unions who helped get him elected. - MBC

http://www.google.com/hostednews/ap/article/ALeqM5jEzYsWgiG-OzwRXulLCZlcXBUoAAD9ANQ1E00

"...On the budget deficits, Geithner said, "I think Americans understand we have an unsustainable fiscal position. We have to bring these deficits down over time." He said the country must "get our fiscal house in order" and stressed that Obama is vehemently opposed to a general income tax increase for people who make under $250,000 a year.

The secretary said that while things are better than they were a year ago, "I would say there's no recovery yet. We define recovery ... as people back to work, people able to get a job again, businesses investing again ....and we're not at that point."

"We're going to do what it takes to get this economy going again," he said. "We're going to look carefully at any sensible program."

Health Care

Has President Obama very effectively cornered Congress and set them up to be scapegoat in coming healthcare reform vote? His speech promised deficit neutrality, which just about everyone agrees is next to impossible, at the same time promising to insure those previously uninsurable due to preexisting expensive diseases.

He's had a lot of beautiful words but been pretty vague on details, leaving Congress to hold the bag and he can stand above and say, "I tried", and blame all kinds of people for why this didn't get passed. He's a very special politician, got to give him that. - MBC