Links 9/10/09

Ex-AIG adviser who practiced voodoo on victims gets 12 years for fraud Investment News (hat tip reader Scott)

DoctoRx Comments on the President’s Healthcare Speech and Goes Where Few Politicians Have Gone Before DoctoRx

Tactical Error: Health Care vs Finance Regulatory Reform Barry Ritholtz

Delivering a brilliant healthcare speech Ed Harrison

Buyers of Huge Manhattan Complex Face Default Risk New York Times. The assumptions on their ability to kick people out of rent-stabilized and controlled apartments were wildly unrealistic, and the aggressive tactics they used to try to meet their goals were often beaten back (NYC has tough housing judges). So they are reaping what they deserve.

Tracking the Consumption Decline Menzie Chinn

A tale of two inflations Tim Iacono

Antidote du jour:


Why Economists Rarely Say Bad Things About the Fed

Silly me. Here I thought the main reason that the economics profession had not only missed the crisis, but for the most part, gave the Fed a free pass on its colossal policy errors, was that everyone drank the same Kool-Aid, theory-wise.

It turns out that the Fed is not someone to cross, at least if you are a young academic. From Huffington Post:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found…

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

Trade Tensions With China Quietly Escalating

When trade volumes tanked in the later part of 2008, quite a few observers expected a rise in protectionism. We haven’t seen a Smoot-Hawley analogue, a wide ranging measure that elicits retaliation. But that does not prevent policy makers from more targeted forms of gamesmanship.

Trade has retreated from front-burner coverage due to the modest recovery in activity. However, what is noteworthy is that most other surplus countries have seen a much greater fall in their surpluses than China. Moreover, some argue that the stabilization and improvement in trade activity is due to government stimulus, and as those programs tail off (and some are even now), trade volumes could give up their recent improvement.

So the situation is more fraught than it might appear. It should therefore not be a surprise that there is a fair bit of jousting on the trade front. One is a proposal is a de facto ban on Chinese tires. I would be surprised if this gets done, but then again, the Bush administration backed steel quotas. From ChinaDaily (hat tip reader Michael):

The proposal by a United States workers union to ban Chinese-made tires has US President Barack Obama bouncing between two very precarious positions.

The high-level tariffs, which would effectively impose a ban, will keep Chinese tire imports off US roads, strip 100,000 local laborers of their jobs and potentially spark a series of special taxes by other nations and regions.

On the one hand, Obama threatens to sour China-US relations…But on the other hand, Obama is wary of enraging the unions who support the case…

The proposed tariffs arose out of a petition brought by the United Steelworkers Union, which represents half of American tire makers. The International Trade Commission in April announced that tire imports from China had disrupted the US industry and proposed a three-year program of import relief, with a 55-percent-tariff on Chinese-made tires in the first year, 45 percent in the second and 35 percent in the third. Last Thursday, the US Trade Representative sent the recommendations to Obama…

Chinese tires have been “targeting the budget and no-brand replacement tire market for US consumers with severe budget constraints,” a sector that the US tire makers gave up long ago and are unwilling to enter again, said China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters in a letter to President Obama…

But the Chinese government will not turn away from issues that will harm the interests of Chinese industries. Officials from the Bureau of Fair Trade for Imports & Exports with the Ministry of Commerce said China has prepared an assortment of plans for countering different possible results from the Obama administration.

“We will surely protect local tire manufacturers from being hurt when needed,” they said.

China will likely take retaliatory measures against the US industries. The Tire Industry Association has petitioned China to launch restrictive measures.

The US had narrower anti dumping case about eighteen months ago, involving coated paper, where the facts seemed pretty clear cut, yet it came to naught.

More from Bloomberg:

The pipe case, the largest so-called countervailing duty complaint filed against Chinese-made products, was brought by the United Steelworkers union; U.S. Steel, the largest U.S.- based steelmaker; U.S. operations of Evraz Group SA, Russia’s second-largest mill; and Pennsylvania-based Wheatland Tube Co.

After the ruling is published in the Federal Register, importers of the product — known as oil country tubular goods — will have to deposit duties of the assigned amount, pending a final ruling later this year by the Commerce Department and a separate decision by the U.S. International Trade Commission.

Chinese officials have spent the past months trying to head off tariffs for the steel pipes and the separate case brought by the United Steelworkers union against Chinese auto tires.

“If there is really such a decision, China’s Commerce Ministry will have a formal response,” Wang Baodong, a spokesman for the embassy in Washington, said in a telephone interview. “On these anti-dumping charges, the Chinese government has been very clear.”

The EU is not happy with how China is behaving and the UK would like to turn up the heat a bit too, as reported in the Telegraph:

The Business Secretary, on a visit to Beijing to boost UK-China trade links, also warned on Tuesday that future “tension and disagreement” between China and the EU was inevitable as the trade deficit between China and Europe continues to grow….

Trade relations between Europe and China are under increasing strain, with a series of opinion polls showing that the European public is growing steadily more intolerant of China’s unfair trade practices.

Last week, the European Union Chamber of Commerce in China released a report containing 600 pages of complaints by European businesses which had fallen victim to China’s myriad hidden way of discriminating against foreign businesses..

Lord Mandelson said that while such trade was vital to reinvigorating Britain’s economy, there needed to be “constant dialogue” to keep up “legitimate pressure” on China’s government to open its markets more fully.

However, he said he did not agree with growing calls from some quarters of the EU for the need to take a tougher stance with Beijing, saying that constructive – as opposed to “conditional” - engagement was in the bests interests of both parties.

“China would say ‘we are a big, complex, fast-growing economy and you have to be patient, give us time’. I understand this, but equally China must understand when we in Europe feel we are being too hard done by.

“These things will even out over time, but in the meanwhile this is going to spark some tension and disagreement, but all of this must be managed because it is in all our interests to see China growing. We would all pay a colossal economic price if China was to fail economically.”

Whether these disputes continue to simmer or escalate into something worse depends on domestic employment in major economies. Were it to worse much, the pressure to Do Something would become intense.

Guest Post: The Economy Will Not Recover Until Trust is Restored

By George Washington of Washington’s Blog.

A 2005 letter in premier scientific journal Nature reviews the research on trust and economics:

Trust … plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country’s institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success.

Forbes wrote an article in 2006 entitled “The Economics of Trust”. The article summarizes the importance of trust in creating a healthy economy:

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you’ve persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust–now imagine trying to arrange a mortgage.

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

“If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia,” ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country’s income. ***

Above all, trust enables people to do business with each other. Doing business is what creates wealth. ***

Economists distinguish between the personal, informal trust that comes from being friendly with your neighbors and the impersonal, institutionalized trust that lets you give your credit card number out over the Internet.

Similarly, market psychologists Richard L. Peterson M.D. and Frank Murtha, Ph.D. wrote in October:

Trust is the oil in the engine of capitalism, without it, the engine seizes up.

Confidence is like the gasoline, without it the machine won’t move.

Trust is gone: there is no longer trust between counterparties in the financial system. Furthermore, confidence is at a low. Investors have lost their confidence in the ability of shares to provide decent returns (since they haven’t).

And two professors of finance write:

The drop in trust, we believe, is a major factor behind the deteriorating economic conditions. To demonstrate its importance, we launched the Chicago Booth/Kellogg School Financial Trust Index. Our first set of data—based on interviews conducted at the end of December 2008—shows that between September and December, 52 percent of Americans lost trust in the banks. Similarly, 65 percent lost trust in the stock market. A BBB/Gallup poll that surveyed a similar sample of Americans last April confirms this dramatic drop. At that time, 42 percent of Americans trusted financial institutions, versus 34 percent in our survey today, while 53 percent said they trusted U.S. companies, versus just 12 percent today.

As trust declines, so does Americans’ willingness to invest their money in the financial system. Our data show that trust in the stock market affects people’s intention to buy stocks, even after accounting for expectations of future stock-market performance. Similarly, a person’s trust in banks predicts the likelihood that he will make a run on his bank in a moment of crisis: 25 percent of those who don’t trust banks withdrew their deposits and stored them as cash last fall, compared with only 3 percent of those who said they still trusted the banks. Thus, trust in financial institutions is a key factor for the smooth functioning of capital markets and, by extension, the economy. Changes in trust matter.

They quote a Nobel laureate economist on the subject:

“Virtually every commercial transaction has within itself an element of trust,” writes economist Kenneth Arrow, a Nobel laureate. When we deposit money in a bank, we trust that it’s safe. When a company orders goods, it trusts its counterpart to deliver them in good faith. Trust facilitates transactions because it saves the costs of monitoring and screening; it is an essential lubricant that greases the wheels of the economic system.

Americans clearly don’t trust the big banks and financial companies.

The Financial Giants Don’t Trust Each Other, Either

Indeed, as leading economists have pointed out, the big financial institutions don’t even trust each other, because they know that all of the other companies might have hidden toxic assets in SIVs, overvalued their assets, gamed their books, or otherwise tried to bury their problems.

For example, Anna Schwartz - co-author with Milton Friedman of the leading monetarist book on the Great Depression - told the Wall Street Journal:

We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates…This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is “the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue”…

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in “A Monetary History,” the country and the Federal Reserve were faced with a liquidity crisis in the banking sector…

But “that’s not what’s going on in the market now,” Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers — “all these exotic securities that the market does not know how to value.”

“Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up. We don’t know whom to lend to because we don’t know who is sound.”

As financial writer Will Hutton says:

“Such was the break down in trust and sense of panic that some of the most familiar names in British high street banking would not lend to each other at all or, at best, just overnight. Instead, the Bank of England had to supply tens of billions to banks who found the normal sources of funds blocked.

Unless there is a radical and government-led change in ownership, structure, regulation and incentives so that the principles of fairness are put at the heart of the Anglo American financial system - proportionality of reward and fair distribution of risk - there is no chance of the return of trust and integrity upon which long-term recovery depends.”

Princeton economist and former Secretary of Labor Robert Reich agrees that Wall Street’s biggest problem right now is the collapse of trust:

The problem is, government bailouts, subsidies, and insurance aren’t really helping Wall Street. The Street’s fundamental problem isn’t lack of capital. It’s lack of trust. And without trust, Wall Street might as well fold up its fancy tents.

Reich also writes:

Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing.

Why? Because the underlying problem isn’t a liquidity problem. As I’ve noted elsewhere, the problem is that lenders and investors don’t trust they’ll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years — the derivatives, credit default swaps, collateralized debt instruments, and so on — has undermined all notion of true value.

Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks’ capital adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital.

(For more on credit default swaps, see this).

In other words, I would argue that our economy is not fundamentally stabilizing (notwithstanding a couple of temporary “green shoots”) because the government and the financial giants are taking actions and releasing data which encourage more distortion and less trust.

The crisis will deepen unless honest and transparent accounting is used, investments become transparent and understandable again, and the government stops gaming the system for the benefit of the big boys.

As John Carney writes:

“We’re probably making things worse. Allowing insolvent institutions to fail and requiring worthless and worth less assets to be fully written down would provide transparency to the market. Instead, we’re dedicated to the post-Lehman proposition of “Never Again.” The various programs of our government continue to obscure asset pricing and conceal insolvency. This means that you can’t trust the market to tell you which firms are failing.

Twisting the arms of bankers to lend to institutions that may be insolvent is a recipe for deepening the crisis. We’ve just been through a period of malinvestment–we spent too much borrowed money on junk. Borrowing more to spend on junk only digs us in deeper.

Bank lending won’t get going again until trust in the markets can be restored. Fighting a Great Depression era problem probably won’t help. More transparency, which means more write-downs and failures, is probably necessary if we’re going to get through this. Unfortunately, we’re still sailing in the opposite direction.”

(For more on allowing insolvent institutions to fail, see this)

Happy Talk: Then and Now

It is true that consumers and small investors drive a large portion of the economy. And it is true that consumers and small investors, in turn, are largely driven by their perception of what is happening.

But I would also argue that all of the happy talk in the world won’t turn the economy around when the fundamentals of the economy are lousy, or there has been a giant bubble and vast overleveraging, or there has been massive fraud, or the government has gone so far into debt that it has formed a black hole.

Happy talk did not work during the first couple of years of the Great Depression, once the speculative bubble and leverage of the Roaring 20’s burst, leading to the inevitable crash.

As economist Irving Fisher pointed out (as recounted by economist Steve Keen):

Hobbled by this naive belief in equilibrium, the economics profession was as unprepared for today’s crisis as it had been for the Great Depression. Now that the crisis is well and truly with us, all conventional “neoclassical” economists can offer is the hope that the crisis can be overcome by a good, strong dose of confidence.

From [Irving] Fisher’s point of view, such a belief is futile. In an economy with an excessive level of debt and low inflation, he argued that confidence was irrelevant–and in fact dangerously misleading, as he knew from painful personal experience.

University of Maryland professor economics professor and former Chief Economist at the U.S. International Trade Commission Peter Morici wrote in 2006:

The speculative frenzy of recent years is causing a major adjustment, and the happy talk of realtors is prolonging the process. The absence of realistic analysis about the extent of overvaluation is characteristic in an industry that sees nothing but an upward progression for values, but houses like any other asset can be overpriced.

Things are likely to get worse before they get better.

Morici was pointing out that there was a bubble in housing, and happy talk would not keep the bubble from bursting.

As Washington Post business writer Steven Pearlstein predicted in August 2007:

Despite the happy talk from Washington and Wall Street investment houses — eerily reminiscent, by the way, of the early days of the savings-and-loan crisis of the late ’80s — these shocks [the subprime and credit crises] will have serious consequences …

And economist James Galbraith is saying now (just as his father economist John Kenneth Galbraith said 50 years ago) - that “happy talk” won’t solve the crisis.

Indeed, the chair of the congressional oversight committee of the bailouts (Elizabeth Warren) and the senior regulator during the S & L crisis (William Black) both say that hiding the true state of affairs and trying to put a happy face on an economic crisis just prolongs the length and severity of the crash

Donald W. Riegle Jr. - former chair of the Senate Banking Committee from 1989 to 1994 - wrote (along with the former CEO of AT&T Broadband and the international president of the United Steelworkers union) wrote recently:

It’s almost as if the [Obama] administration is opting for a rose-colored-glasses PR strategy rather than taking a hard-nose look at actual consumer and employment figures and their trends, and modifying its economic policies accordingly.

In short, happy talk and fake confidence-building exercises (like the stress tests, which Time Magazine called a con game) don’t work.

Efforts to Instill False Confidence Will Backfire

Indeed, I believe that trying to instill false confidence will actually backfire on Summers, Geithner, Bernanke and the boys and make the crisis worse.


Well, initially, as Yves Smith points out:

Team Obama has made it clear that it sees restoring confidence as paramount, when anyone with consumer marketing experience will tell you that advertising campaigns that make exaggerated claims about the product often don’t simply fail (as in customers see through the hype) but often backfire (buyers discount future ad messages about the product). The press has had a manipulated feel, with readers on sending news stories that have misleadingly positive stories with Panglossian headlines and upbeat initial paragraphs that are often undercut by other material in the same article.

So in our new branding, “the economy is no longer in a freefall” has become “recovery.” The self-congratulatory tone among US financial regulators (who should instead be engaging in serious self-recrimination for failing to foresee and prevent this crisis) is premature.

In addition, psychologists say that - until government and business leaders prove they can behave responsibly, and until the perpetrators of financial fraud are held accountable - real trust will not be restored and the economy will not recover

For example, one of the leading business schools in America - the Wharton School of Business - has written an essay on the psychological causes and solutions to the economic crisis. Wharton points out that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:

According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. “Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG.” The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. “Normal expectations of what is safe and dependable were abruptly shattered,” Sachs noted. “As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred.”

People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.

He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. “She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.

“By no means a sophisticated economist, she knew … that some people had become fantastically wealthy by misusing other people’s money — hers included,” Sachs said. “In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished.”

Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to “hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again.” In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.

Note that Sachs urges “hold[ing] the perpetrators of the economic disaster responsible.” In other words, just “looking forward” and promising to do things differently isn’t enough.

Are the “perpetrators of the economic disaster” being held accountable?

So far, Obama, Summers, Geithner, Bernanke and the crew have tried to paper over the cause and severity of the financial crisis, instead of honestly addressing them. They haven’t lifted a finger to hold anyone accountable (other than a Madoff or two), but have actually thrown billions of dollars at the perpetrators (or else appointed them to government posts).

Indeed, William Black says that “the [government's] entire strategy is to keep people from getting the facts”.

Economist Dean Baker made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can:

The current craze in DC policy circles is to create a “systematic risk regulator” to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.

The key fact that everyone must always remember is that the story of the collapse was not complex. We did not need great minds sifting through endless reams of data and running incredibly complex computer simulations to discover the underlying problem in the economy. We just needed some people who understood the sort of arithmetic that most of us learned in 3rd grade.

If the people at the Fed, the Treasury, and in other key positions had mastered arithmetic, and were prepared to act on their knowledge, they would have taken steps to stem the growth of the housing bubble. They would have prevented the bubble from growing to the point where its inevitable collapse would bring down both the U.S. economy and the world economy…

We didn’t need some super-genius to solve the mystery. We just needed an economist who could breath and do arithmetic. But the DC policy crowd tells us that if only we had a systematic risk regulator this disaster could have been prevented.

Okay, let’s do a thought experiment. Suppose we had our systematic risk regulator in 2002. Would this person have stood up to Alan Greenspan and said that the country is facing a huge housing bubble the collapse of which will sink the economy?…

Alan Greenspan said that there was no housing bubble; everything was just fine. Would our systematic risk regulator have said that Greenspan was nuts and that the whole economy was a house of cards waiting to collapse?

Anyone who believes that a risk regulator would have challenged the great Greenspan knows nothing about the way Washington works. The government is run by people who first and foremost want to advance their careers.

And, the best way to advance your career in Washington is to go along with what everyone else is saying. If that was not completely obvious before the collapse of the housing bubble, it certainly should be obvious now.

How many people in government have lost their jobs because they failed to see the bubble? How many people even missed a promotion? In fact, the top financial officials in the Obama administration, without exception, completely missed the housing bubble. One might think it was a job requirement.

This lack of accountability among economists and economic analysts is the core problem that must be tackled. Unless these people are held accountable for their failures in the same way as custodians and dishwashers, there will never be any incentive to buck the crowd and point out looming disasters like the housing bubble.

The reality is that we have a systematic risk regulator. It is called the Federal Reserve Board. They blew it completely. We will do far more to prevent the next crisis by holding our current risk regulator accountable for its failure (fire people) than by pretending that we somehow had a gap in our regulatory structure and creating another worthless bureaucracy.

Remember also that the Wharton study pointed out that “the public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11.”

Trying to put a happy face on a grim situation, continuing to do things which are transparent attempts to instill false confidence, and leaving in power the people who caused the crisis reinforces the market’s convictions that (1) government and business leaders are behaving irresponsibly instead of addressing the fundamental problems and (2) there is no accountability.

So people’s trust declines still further, thus substantially delaying any chance of a sustainable economic recovery. In other words, by trying too hard to instill confidence, the powers-that-be actually undermine it and exacerbate the financial crisis.

So What Will Help?

Keeping quiet about how bad things are won’t help. As numerous leading independent economists and financial experts agree, the three things that will help are:

  1. Honestly addressing the causes of the crisis;
  2. Honestly addressing the necessary - if bitter - medicine needed to get out of the crisis; and
  3. Holding responsible those who caused the crisis.

Postscript: Time Magazine notes:

Traditionally, gold has been a store of value when citizens do not trust their government politically or economically.

In other words, the government’s political actions affect investments, such as gold.

It is interesting to note that Americans no longer trust their politicians, the justice system, their ability to obtain liberty, or the media. Americans know that the boys launched the war in Iraq (which will end up costing $3-5 trillion dollars) based upon justifications which turned out to be untrue. Many Americans have read that the government imported communist Soviet Union torture techniques and then said “we don’t torture”. Many Americans also know that the government spied on American citizen (even before 9/11 … confirmed here and here) while saying “we don’t spy”, and that the government apparently planned both the Afghanistan war (see this and this) and the Iraq war before 9/11.

This is an economic, not a political, essay. But I think the lack of trust in government concerning political issues poses an interesting question. Specifically, is it possible that the American people’s distrust of the government concerning the above-described issues also bleeds over into a lack of trust in the government’s economic actions and statements? In other words, if people discover that a government is lying about political issues, do people trust the government’s pronouncements about economic issues less?

I don’t know the answer, but analyzing the possibility could provide a researcher with an interesting project (or a PhD candidate with a potential doctoral thesis).

Further Confirmation That Real Bank Reform is Dead on Arrival

The Financial Times tonight reports that Goldman CEO Lloyd Blankfein made “startling” remarks in Germany, for instance, that a lot of banking activity is rather thin on redeeming social value. Oh, and he admitted bankers might be paid too much, too.

Gee, with revelations like that, what might he to ‘fess up to next? That some employees have substance abuse problems? That bankers take clients to strip clubs? The mind simply boggles.

Admitting to something that everyone knows is hardly a confession. particularly when it is as watered down as this one:

Mr Blankfein said: “The industry let the growth and complexity in new instruments outstrip their economic and social utility as well as the operational capacity to manage them.”

One senior European banker said Mr Blankfein’s speech was clearly geared to his audience.

Many German banks filled their balance sheets with asset-backed securities bought with cheap short-term funding in a strategy that unravelled spectacularly when funding dried up last year. “Germany has an open wound,” said the banker.

“Blankfein was clearly trying to placate the locals and show some kind of contrition. But I agree with what he said – these were silly bets and they were absolutely useless.”

Acknowledging that some products had become too complex, Mr Blankfein said: “We have a responsibility to the financial system which demands that we should not favour non-standard products when a client’s objective and the market’s interests can be met through a standardised product traded on an exchange”….

The Goldman boss, who himself received total compensation of more than $70m in 2007, said multi-year bonuses should be outlawed and senior staff should receive large proportions of pay in stock, rather than cash.

These are all non-concession concessions. The idea of moving credit default swaps to exchanges (which is the candidate under consideration) is likely to prove to be a non-starter. I was initially a big fan of the idea of either shutting them down or moving CDS to exchanges, but the more I have had to look into them, neither looks like a good option so I am now leaning towards strangling them slowly by regulating them aggressively. It is disheartening that there is no good, simple, surgical solution.

There are very few CDS that trade actively, I am told only about 50 names, and even those are probably not traded enough on a daily basis for moving them to an exchange to be viable (the very fact that CDS aren’t even actively traded enough for them to be included in Bloomberg and Reuters feeds). Skeptics should read Donald MacKenzie’s An Engine, Not a Camera, on how much uneconomic activity by Chicago exchange members was required to get a some financial futures contracts going. And this was a business the community wanted to succeed. Conversely, the dealers have good reason not to make heroic efforts.

Second, even if an exchange were to get going, or ISDA did succeed in creating more standardized contracts, the fact that the reform proposals on the table allow dealers to trade OTC is an exception you can drive a truck through. The profit model is intact, and everyone understands that.

Recall also that Goldman, unlike JP Morgan, did not try renegotiating the repayment terms of its TARP warrants. So Goldman is now trying to play statesmanlike, and will let everyone else engage in more public piggy behavior. All Goldman has to do is look better than its peers, which isn’t hard (well, save the government capture bit, that is kind of hard to disguise).

Churchill once said, “In war, resolution; in defeat, defiance; in victory, magnanimity”. If there was any possibility of real reform, Blankfein would not even go as far as making gracious-sounding but empty concessions. By contrast, it’s cheap, easy, and prudent to make nice noises when you have nothing to lose. So all we have is clever posturing to diffuse some ire, and the FT is treating it with more dignity than it deserves.

A Shot Across the Bow (Debtors’ Revolt Watch)

Even though there has been an increasing level of revolutionary saber-rattling in comments, it’s hard to see what the outlet for the anger against the banking industry will be. The brief surge of letter-writing, e-mails, and calls to Congressmen to forestall the TARP proved useless. But Americans don’t go to the barricades or do general strikes, much the less put heads on pikes.

But this sort of revolt does fit, that of a debtors’ strike. It doesn’t require violence or even public assembly.

The first test of public mood will be whether this video (hat tip Karl Denninger via reader Scott) goes viral.

If you do decide to go this route, check your state’s statue of limitations on this type of debt. And even after that time has passed, if you establish a new relationship with the institution (as in get a new credit card or open a bank account), my understanding is that they can reactivate the obligation. Of course, anyone who gets in this sort of fight would presumably never want to do business with that institution again, but a lot of retailers and affinity groups have cards that are operated by one of the big credit card issuers, so you need to be careful.

Links 9/9/09

Detached gecko tails dance to their own tune PhysOrg

Germany’s payroll bailout pays political dividends Globe and Mail

China Wants Our Real Estate! Clusterstock

When Wall Street nearly collapsed Fortune. Funny, I told my mother to make sure she had enough cash on hand to cover a month of expenses, but did not do the same myself.

More mortgage servicers will be sued: Ohio attorney general Reuters

Retail Hiring Shift May Show Growing Confidence in Recovery versus Temporary Hiring Shows Job Rebound Isn’t Imminent: Chart of Day, both Bloomberg. DoctoRx points out the Pangloss watch elements of the nominally upbeat first article.

Dick Fuld of collapsed bank Lehman Brothers says ‘his mother loves him’Telegraph

Bank Firing of Counsel Is Examined New York Times

Antidote du jour:


Why Do Consumers Accept Debit Card Abuse?

This blog normally steers clear of the consumer finance space, except when it is amusing or has macroeconomic effects. But once in a while I cannot contain myself.

Why does anyone have a debit card? I am deadly serious about this question. Not long ago, I switched banks, going from one end of the spectrum to the other. I had been with US Trust, which has great service if you are doing anything complicated and can live with their 9-5 schedule, but costly if your needs are more plain vanilla. They were bought by Bank of America, the good people all left, and I figured if I was going to be with a regular retail bank, I might as well go with one that was cheap, had 24/7 service and good branch hours, and I wound up at Commerce Bank, now TD Bank.

Commerce tried foisting a debit card on me. It took some doing to get an ATM card instead. I do not know why people use debit cards, so perhaps readers can explain this mystery to me.

If your wallet is stolen, someone can pretty quickly drain your account and even go into overdraft. Unlike credit cards, where your losses are limited, you have no recourse. Having had my wallet taken more often than I care to recount and having had the perps run up truly impressive credit charges charges in a mere 10 minutes the last instance (they seem to be getting more savvy over time), the last thing I would want to carry is a debit card. The ATM pin affords you some protection; you have none with a debit card.

Now that would seem to be a sufficient reason not to carry a debit card. Then we have the fact that banks charge particularly aggressive over-limit fees on debit cards. From the New York Times:

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

Peter Means’s bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward.

So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge…

This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.

In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.

I don’t get it. Debit cards are inferior to ATM cards (less security) and in some cases, higher fees (at my bank, if you have a line of credit established, you do not incur an overdraft charge if you go into the credit line). So why does anyone have a debit card? Is this a perverse example of behavioral economics, where the bank offers the worst “opt in” alternative (debit card) and consumers have to take the energy to opt out and get the better products?

And these debit cards, which ten years ago were deemed to be losers for the industry, have been redesigned into cash cows:

Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation’s largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.

Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year’s end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.

Yves here. But we are already getting the usual defenses:

Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.

“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.

Yves here. I bet you he does not keep a running balance on his checking account. Back to the story:

Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

Yves here. Garbage in, garbage out. Does not distinguish between debit card overdrafts and check overdrafts. The two are mingled. Back to the story:

For years, banks had covered good customers who bounced occasional checks, and for a while they did so with debit cards, too. William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer — and charge consumers for each transgression.

“You are doing them a favor here,” said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.

Yves here. Favor? Banks are not in the favor business. This is an insult to the reader’s intelligence. Here is a key bit:

But many of the nation’s banks have found that overdraft fees are easy money. According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent. Banks now cover two overdrafts for every one they reject…

Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.

Just wait. The next argument in defense of these practices will be that it is cheaper than payday lending.

Links 9/8/09

Google Books: A Metadata Train Wreck Language Log

Migrants hit by global downturn BBC

President procrastinator Financial Times. Ouch.

In August, QE hit the economy UK Bubble

Nice Depiction of a System in Decline John Robb

In August, QE hit the economy UK Bubble

Interest rates ‘could rise sharply early next year’ Telegraph. In contrast to our post on deflationistas looking less extreme of late.

LSE backs high-frequency traders Financial Times

Exclusive: Fuld says being “dumped on” for Lehman failure Reuters

Antidote du jour:

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