Archive for the ‘Tim Geithner’ Category

I am enjoying the goings-on in Dubai tremendously.  It’s like the field mouse of an economics drug trial: take every extreme symptom, jam it into one place of absolutely no global consequence, and then try to figure out the cure.

Suppose you had a tiny country that decided it wanted to be important.  Playing on confusion with its oil-rich neighbors, it goes out and borrows a lot of money to build buildings.  Taking the Paris Hilton strategy that if you insist on your caricature long enough others will eventually believe it, the country makes a big show of people piling into the buildings.  Real estate developers, the ultimate momentum players, pile in.  The country goes the offshore tax haven route – no income taxes – and throws in absolutely no labor standards to ensure that construction can proceed on whatever blistering pace can be achieved by malnourished Thais and Pakistanis welding in 115F heat.  Eventually it hits the wall – for reasons completely beyond its control, at some point people look around and realize they have the world’s largest Potemkin village.  There is no market.  The locals are preposterously corrupt.  Islam is not compatible with the hedge fund lifestyle.  What then? (more…)

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In the category of a stopped clock being right twice a day, the Senate seems to have come up with a compelling piece of bank regulation. I don’t like its chances to get passed, but it would be great for the nation:

WASHINGTON — Senate Democrats circulated a plan Tuesday that would impose sweeping curbs on the Federal Reserve, posing the biggest legislative challenge to the central bank in decades and illustrating how divided Capitol Hill remains about the future of financial regulation.

The move is part of a broader 1,136-page proposal by Senate Banking Committee Chairman Christopher Dodd aimed at rewriting how financial markets are overseen. It would create a single banking regulator, a powerful council of regulators to monitor systemic risks to the economy and a Consumer Financial Protection Agency to write and enforce rules on products such as mortgages and credit cards.

This bill has a number of good ideas, and one excellent principle: the Fed should be independent, even when it doesn’t want to be. (more…)

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Hand it to the UK.  Under pressure from the wonks in Brussels – I suppose there is something to being ruled by unaccountable political science PhDs – the government has taken the first, halting steps toward breaking up three of its largest financial institutions:

The British government — spurred on by European regulators — is set to force the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.

A for effort, and as Simon Johnson quite optimistically suggests, perhaps this could nudge the Bernanke/Summers/Geithner crew to reconsider its determination to preserve the corporate forms of America’s major financials.  But is this really the best way to go about it? (more…)

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Not many people like the idea of breaking up financial institutions, but if I have to be part of a tiny minority, I’ll take this one:

“People say I’m old-fashioned and banks can no longer be separated from nonbank activity,” Mr. Volcker said, acknowledging criticism that he is nostalgic for an earlier era. “That argument,” he added ruefully, “brought us to where we are today.”

He may not be alone in his proposal, but he is nearly so…

Still, a handful side with Mr. Volcker, among them Joseph E. Stiglitz…“We would have a cleaner, safer banking system”

Is separating Boring from Exciting finance really that difficult? (more…)

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Luigi Zingales has an excellent article for National Affairs that tries to place what has been so special about the American economic system…and why it is particularly vulnerable today:

Capitalism has long enjoyed exceptionally strong public support in the United States because America’s form of capitalism has long been distinct from those found elsewhere in the world — particularly because of its uniquely open and free market system. Capitalism calls not only for freedom of enterprise, but for rules and policies that allow for freedom of entry, that facilitate access to financial resources for newcomers, and that maintain a level playing field among competitors. The United States has generally come closest to this ideal combination — which is no small feat, since economic pressures and incentives do not naturally point to such a balance of policies. While everyone benefits from a free and competitive market, no one in particular makes huge profits from keeping the system competitive and the playing field level. True capitalism lacks a strong lobby.

That’s why it is such a shame that a government that should know better is so determined to ignore Stiglitz, Volker, and Johnson. (more…)

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The basic story is tragic if common: person eats food, person gets sick from food.  In this case, the person was a young Minnesota dance instructor named Stephanie Smith, and the food was ground beef processed by Cargill in Wisconsin from sources in Nebraska, Texas, South Dakota, and Uraguay and contaminated with the E.coli bacteria, and sold at the local Sam’s Club.

People have been getting sick from food for all of human history; no doubt we were getting sick from food before we could fairly be said to be a species.  Even with the best intentions, it will probably continue.  But the diseases of the modern food supply – E.coli, salmonella, etc – are not inevitable.  They wouldn’t exist at all – and Stephanie Smith wouldn’t be in a wheelchair – if our government functioned properly.  These microbes are the canaries in the coal mine of a dysfunctional bureaucracy. (more…)

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The Kansas Supreme Court has given, if not the green light, at least a very long yellow to people who want to try to drag out foreclosure processes with versions of the “show the note” strategy:

[I]n the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable.
“The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).


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Turf War Run Wild

The FDIC is nearly out of cash, the victim of almost a hundred bank failures this year and a few particularly large ones last year.  Now, that shouldn’t be too big of a problem (it may be a symptom of a problem) in and of itself; after all, the FDIC is a government agency, and the Federal government is still solvent.  As Sheila Blair put it in the dark days of March:

To be sure, we won’t run out of money. We’re 100 percent backed by the full faith and credit of the United States Government. No depositor has ever lost a penny on an insured deposit. And that is not going to change.

The only detail to be worked out is exactly how the FDIC plans on funding the shortfall to its fund:

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.


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Johnson and Kwak hit the big time: a Washington Post column on the anniversary of the Lehman failure.  Like most people, they take the position that letting Lehman fail was a mistake.  It is a curious read side by side with Cochrane and Zingales’ Wall Street Journal piece, which includes this blast from the already-cloudy past:

[Cochrane Chart]

Note, as they do in the article, that the S&P 500 was higher on September 19, 2008, than it was on September 12, 2008. (more…)

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Courtesy of Calculated Risk, a fantastic example of the government’s inability to grasp the root cause of our economic woes:

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress…”They’re probably going to need a bailout at some point because they’re making loans in a riskier environment,” says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. “…I’ve never seen an entity successfully outrun a situation like this.”

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

When you find yourself in a hole, stop digging.  Except the Bernanke/Summers/Geithner team, who seem to believe you try to dig your way through to the other side of the earth.  Call it the Martingale Strategy of government finance.


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