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Geithner was correct and Krugman and Stiglitz were Right

by rootless2 Mon May 23rd, 2011 at 06:57:49 PM EST

Crossposted People's View

In the early months of the Obama administration, with the economy in  free-fall and Bush's bank bailout having poured hundreds of billions  into an apparently bottomless bank collapse, Nobel Prize winners Paul  Krugman and Joe Stiglitz among others "on the left", authoritatively and  confidently  explained that the policies advanced by the new  Administration were naive, stupid, complicit, and sure to fail abysmally  and catastrophically. The extent of the error made by these economists  and others, like Dean Baker, Simon Johnson, and Robert Reich, not to  mention all their often ludicrously ignorant followers in "progressive"  blogs  is all the more remarkable given their subsequent lack of  interest in figuring out why they were so wrong or even admitting to  error in the first place.

I was under the impression that he might bring in the voices of brother Joseph Stiglitz and brother Paul Krugman. I figured, OK, given the structure of constraints of the capitalist democratic procedure that's probably the best he could do.
-Princeton Professor Cornel West (not a hotel porter)
The  basic Krugman/Stiglitz argument was that the financial markets had  correctly priced bank assets as junk and so the biggest banks owed more  money than they could ever repay and the government should "nationalize"  them. The Administration, on the other hand, said that the financial  markets were in the grip of a panic and that arranging for temporary government  and government/private finance would calm things down at less cost to  the taxpayer. Obviously, Geithner, Obama, and Bernanke were correct and  the critics from the left were incorrect - the banks have stabilized,  the "toxic assets" purchased by government have turned out to be a great  investment, and the economy is recovering slowly, not smoldering in  ruins. But the strangest thing about the incorrect analysis of the "left  critics" is that it's based on a fundamentally right wing view of the  economy wrapped up in a bunch of pseudo-populist signifying.  The right  insists that that market price is value. The right insists that financial  markets are rational. And the right is contemptuous and derisory about  reformers.


Here's Stiglitz on April Fools Day 2009:

What  the Obama administration is doing is far worse than  nationalization:  it is ersatz capitalism, the privatizing of gains and  the socializing  of losses. It is a "partnership" in which one partner  robs the other.  And such partnerships -- with the private sector in  control -- have  perverse incentives, worse even than the ones that got us  into the  mess.
So what is the appeal of a proposal like this?  Perhaps  it's the kind of Rube Goldberg device that Wall Street loves --  clever,  complex and nontransparent, allowing huge transfers of wealth to  the  financial markets. It has allowed the administration to avoid going   back to Congress to ask for the money needed to fix our banks, and it   provided a way to avoid nationalization.
But we are already   suffering from a crisis of confidence. When the high costs of the   administration's plan become apparent, confidence will be eroded   further. At that point the task of recreating a vibrant financial   sector, and resuscitating the economy, will be even harder.
All the elements of right wing economics are in play here including the  ridiculous emphasis on "confidence" because the right wing always wants  the government to soothe the troubled nerves of the market and the conspiracy theory beloved of John Birchers. Joe Stiglitz is a smart guy and a good liberal at heart, but this argument is very much like the argument that Ron Paul made - and for a reason. Here's Krugman a week earlier.

As  economic historians can tell you, this is an old story, not that   different from dozens of similar crises over the centuries. And there's a   time-honored procedure for dealing with the aftermath of widespread   financial failure. It goes like this: the government secures confidence   in the system by guaranteeing many (though not necessarily all) bank   debts. At the same time, it takes temporary control of truly insolvent   banks, in order to clean up their books.
In fact, this is  exactly the same doomed plan that Ireland adopted so far - and with  terrible consequences.  Imagine what would have happened if the Federal  government had pushed Citibank (and it didn't need much of a push) in  2009. Citi would have dragged down BOA and WellsFargo with it (and God  only knows what would have happened in Europe). Instead of working on  the auto rescue and the Green energy investment programs and starting  the health care reform, the Administration would have been sinking in an  effort to manage $3trillion of assets and "clean up the their books".  GE capital would have followed - undoubtedly dragging down manufacturing  output - instead of investing in green automobiles and locomotive factories GE would have been battling creditors. The US government would have taken responsibility for the debts  of those banks and it would have cost hundreds of billions of dollars.  And this is not even considering the problem that the US government  didn't have the authority to seize Citigroup - it would have had to try  to pull Citibank away from the holding company and manage one part of  the monster while the other part flailed away destroying Japan's economy  and generally wreaking havoc. "Clean up their books"  - wow, everything is so simple if you ignore all practical  difficulties. One imagines Paul Krugman with green eyeshades on poring  over the Citbank books trying to make it all work out.

It's also worth noting the tone of these criticisms. We didn't get "The new Democratic President wants to do right, but this is why I disagree", we got contempt and implied accusations of criminality and Paul Krugman saying "I am in despair".

Fortunately, instead  of following the "left" plan of sinking the entire federal budget into  bank recapitalization, the Feds were able to divert TARP money to GM and  Chrysler and hundreds of smaller community banks. They were able to  focus on trying to restart the manufacturing basis of the economy. They  took the student loan subsidy away from Wall Street.  They passed a  financial reform law giving the government legal right to wind down  large non-bank financial institutions and claw back bonuses from  management. They got health care reform passed.  And they pushed a lot of the cost onto the shareholders of  the banks. Citigroup shares are worth 1/10th of their 2007 price even  though the bank itself has stayed operational.

To answer the  question of why these bright and well informed people were so wrong, we  have to understand how strange it is to see a supposedly "left wing"  critique based on financial market valuation. The administration said  that while there were bad loans and bad mortgage bonds, investors were  not making a rational assessment of the state of the market and were  caught into  the domino effect of debt during these kinds of crisis.  During the Bush/Greenspan bubble, investors borrowed money so they could  get more valuable bonds and stocks. But when the prices started to  fall, some of them had to sell right away to pay their bankers back -  and this made prices drop even more which forced more investors to sell  in a panic to pay back their loans and so on.

As an example:  when Geithner was running the Federal Reserve of NY (FRBNY), AIG faced  immediate bankruptcy and to prevent that the FRBNY essentially purchased  a pile of "toxic assets" from AIG for about $24billion - this was the  so-called Maiden Lane III transaction. The assets were unsellable at the  time. "The infallible market" had judged them valueless. Since then,  however, the AIG assets have paid back $12billion in interest and  principle and the remaining part now has a market price of as much as  the original investment.  Those "toxic assets" were worth something like  30% more than the purchase price even though at the time they had a "market  value" of near zero. This is one of the transactions that Stiglitz was  calling a transfer of public wealth into private hands.   AIG shares are  about 1/40 of 2007 price - the shareholders lost almost everything -  and the Feds look like they will get most of their money back (Paulson and Bush began by giving AIG $85billion in loans so it's a long haul).

And Krugman and Stiglitz were hardly alone with  their "market value" argument. The "left" and "progressive" blogs have been full of strange stories about the need for "mark to market" and the horror of the Federal Reserve printing money,  and other staples of the right since the crisis started. I think that what we are seeing is the final collapse of the old left - just a few decades after the collapse of communism. With socialism either discredited or absorbed into the mixed systems that dominate the world economy and with the disintegration of the old alliance between left wing intellectuals and the traditional labor movement, "the left" has been reduced to a social club of disgruntled professionals allied with a media/academic "style" that has nothing to do with class, social justice, or effective politics. What we get from them is not change we can believe in, but a mix of right wing populism and  elite technocracy in drag.

Display:
I take a number of issues with this view of events.

First, the notion that restructuring the banks would have been "more expensive" is, well, simply false.

The only things the government is on the hook for during a restructuring of an insolvent bank are the insured deposits - and those are de facto sovereign liabilities to begin with, even if they are not counted as such in official national accounting. Every other bank liability can, should and routinely is given a haircut, which can go all the way to 100 % in the case of severely mismanaged banks.

So a bank restructuring does not increase sovereign liabilities at all, if you do it by the book. The second effect of a bank restructuring is to reduce the total private debt burden in the economy. Ceteris paribus, a lower private debt burden gives you a faster (and, for those who care about such things, "cheaper") recovery, since the private sector requires less deleveraging to get out from under it.

Second, failing to restructure the banks kept the upper management in place that created the panic in the first place. This is a serious economic problem - these people are demonstrably incapable of performing the planning functions that their positions involve. It is a political problem - these people are in the habit of buying politicians, which is a sort of activity that it really doesn't do to actively encourage if you want to retain a functioning democracy. And it is a problem for the rule of law, since there's a noticeable overabundance of crooks in that group.

Third, restructuring is not at all practically or technically difficult. It is a completely routine operation that every financial regulator in the OECD had experience with within living memory at the start of the crash.

The way you do it is that you take all insured deposits and all assets and put them in the Good Bank. Then you take all other liabilities and put them in the Bad Bank along with any equity in the Good Bank. Then you go over the Good Bank's books with a fine-toothed comb, and sift out all the shit assets, putting them in the Bad Bank as you find them. This process can, admittedly, take a while, but is not time-critical, because every liability retained by the bad bank should be presumed lost - anything that the creditors and shareholders get out of the bad bank is a windfall gain. When you've gone through the Good Bank's books and sifted out all the crap, you Ch. 7 the Bad Bank, and sell off the Good Bank.

The FDIC takes dozens of banks into receivership every year even in good times. There is nothing mysterious about it, except for those Very Serious People who are being deliberately obtuse when discussing those banks that rent politicians wholesale.

Fourth, taking banks into receivership is precisely what Ireland did not do. It is, in fact, completely the opposite of what Ireland did. What Ireland did was issue a blanket guarantee in the expectation that this would be sufficient to avoid having to take the banks into receivership (because taking the banks into receivership would have involved decapitating the upper management that happened to be Fianna Fail drinking buddies).

You may argue that doing a proper restructuring of banks that rent politicians wholesale is politically difficult and that the Obama administration had better things to spend its political capital on. Those claims are not prima facie unreasonable. I would disagree, but it's not my country so you don't really need my agreement.

But that is not the case you are making here, except in an extremely roundabout way when you talk about all the good things the administration has done instead of dealing with your hypothetical (and, by all historical evidence, somewhat exaggerated) practical difficulties of restructuring.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 23rd, 2011 at 08:55:19 PM EST
"First, the notion that restructuring the banks would have been "more expensive" is, well, simply false."

In practice, costs of FDIC takeovers have averaged 25% of asset base.
Here is what happened in the Swedish program Krugman cites as a model

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt's conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation's 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html

So a bank restructuring does not increase sovereign liabilities at all, if you do it by the book.

But in practice, that is hard to do - and Krugman specifically suggests he leans towards paying off all bonds. Imagine the USA telling China, singapore and Gulf oil sovereign investors that their bonds are worthless. Interesting theory. In any case defaulting on bank debt is not what Krugman proposed

Second, failing to restructure the banks kept the upper management in place that created the panic in the first place

BOA and Citi management were forced out.

Third, restructuring is not at all practically or technically difficult. It is a completely routine operation that every financial regulator in the OECD had experience with within living memory at the start of the crash.

Size makes a difference. The RTC restructuring of a much smaller set of smaller US banks cost a fortune and took years.  Krugman's error was assuming restructuring of $100M banks was the same as $1T banks.
Citibank with 1.2trillion is assets is not the same as the East River Bend Community bank - or even Wachovia.

Fourth, taking banks into receivership is precisely what Ireland did not do
I don;t think that's accurate - they did so in a chaotic manner. But I note again that the US at the time of the crisis had no legal framework for closing down large non-bank financial institutions like citigroup. The FDIC was designed for domestic banks and had not been updated to post Citibank realities.

http://curiouscapitalist.blogs.time.com/2009/03/09/how-much-of-citigroup-could-the-fdic-actually-tak e-over/

This is not really rocket science and Krugman's willful refusal to take it into account is sad.

by rootless2 on Mon May 23rd, 2011 at 10:08:38 PM EST
[ Parent ]
Size makes a difference.

No, the part of the operation that depends on size is not time-critical.

I don;t think that's accurate - they did so in a chaotic manner.

Now, this is an empirically testable claim. I cannot find any indication anywhere that Ireland has taken any bank other than Anglo-Irish into receivership. If you are better informed than I, please have the kindness to divulge your sources.

But I note again that the US at the time of the crisis had no legal framework for closing down large non-bank financial institutions like citigroup.

Ch. 7 bankruptcy works fine for everything that's not a bank and that you don't need to save. Ch. 11 works fine for anything that's not a bank and that you need to save. Unlike the automakers, none of these institutions had large corporate pension plans that you needed to save from haircuts. (They may have had generous pension plans, but not of the sort you want to save.)

Bondholders to an insolvent institution have no right to expect anything from the state. Depositors do. But if you have depositors you're under FDIC jurisdiction, unless there have been some even more appalling cock-ups in the US legislature than I was aware of. Though after thirty years of uninterrupted right-wing rule, that's certainly not a possibility I am prepared to discount...

The FDIC was designed for domestic banks and had not been updated to post Citibank realities.

Non-domestic operations are - what is the word - ah, yes "not your problem."

As a citizen of the recipient continent I appreciate your generosity on behalf of your fellow citizens. But as an economist I really must question the wisdom of bailing out British and German banks with the full faith and credit of the American dollar.

I can see why you may have wanted to honour debts to China and OPEC (Singapore, not so much). But (1) China holds mostly sovereign bonds and (2) as you yourself point out, the assets were not so shitty that those debt could not be paid after wiping out the European creditors. Who are, well, not your problem, and whom there is no compelling geopolitical reason - other than class solidarity - for an American financial regulator to keep alive.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 04:47:02 AM EST
[ Parent ]
No, the part of the operation that depends on size is not time-critical.

I can't imagine how you argue this in such a context - with many billions of CDS's floating around, a vast pile of unstable counterparty wacky contracts all falling all over the world and you think that winding down Citigroup+BOA+WellFargo could have been done in a deliberative manner?

Now, this is an empirically testable claim. I cannot find any indication anywhere that Ireland has taken any bank other than Anglo-Irish into receivership. If you are better informed than I, please have the kindness to divulge your sources.

"Four of the six banks are already fully, or mostly, nationalized."
http://online.wsj.com/article/SB10001424052748703806304576234180828120692.html

In the other thread you claim this is not receivership, but I think you are splitting hairs. The banks have been effectively nationalized - as Krugman suggested. The terms may have sucked, but Krugman didn't discuss terms. And as noted, the Swedish rescue that Krugman cites as a model involved full payment of bank debts - something Krugman specifically mentions. "Receivership" implies nothing about the consequences to bondholders  although in FDIC practice bondholders are getting paid. If Krugman had proposed a massive writedown of senior bondholders, that would have been an interestingly radical proposal - but it's not the proposal he made and it would have been dismissed.

As for C7 bankruptcy, you are mixing moral concerns with practical ones - as if the banking system were based on some coherent moral system in the first place. It is not. And your proposals are grossly impractical ones that the civil servants running the central bank would have been irresponsible to consider. Among the FRB concerns was that AIG bankruptcy would trigger forced liquidation of hundreds of billions of dollars of pension assets insured by AIG. It's all very well to talk tough, but the consequences of allowing the finance sector to become both too large and too centralized cannot be evaded by just pretending it didn't happen.

From my point of view, the international banking system starts as a morally indefensible and economically damaging system of capital misallocation.  One could and probably should argue for a radical change in the system, but to pretend that there is an "ordinary" moral and legal code governing this system that could have been applied with justice and without catastrophic consequences seems to me to be a very peculiar analysis indeed.

Non-domestic operations are - what is the word - ah, yes "not your problem."

Maybe in some theory, but not in the actual world. The idea that US regulators could or should have acted in blithe disregard of the effects of their actions on other countries makes no sense and certainly is not without enormous legal repercussions. Given the sheer irresponsibility of the ECB, the FRB was the beacon of sanity.

by rootless2 on Tue May 24th, 2011 at 09:29:25 AM EST
[ Parent ]
I can't imagine how you argue this in such a context - with many billions of CDS's floating around,

Resolving them is not an urgent matter. Relieving the insolvent institutions of their commercial banking functions is the urgent matter in a bank resolution. Once you've done that, you can let the structured products division rot in a bankruptcy court somewhere for however long it takes the lawyers to go through it.

"Four of the six banks are already fully, or mostly, nationalized."
http://online.wsj.com/article/SB10001424052748703806304576234180828120692.html

"Nationalisation" and "bankruptcy" are not the same thing.

Also, when did the Wall Street Journal become a paper of record?

In the other thread you claim this is not receivership, but I think you are splitting hairs.

No, I'm splitting haircuts. That is the difference between a bankruptcy and a bailout.

And as noted, the Swedish rescue that Krugman cites as a model involved full payment of bank debts - something Krugman specifically mentions.

I cannot speak to Krugman's position - I find that he has taken several different ones over the course of the crisis. But Stiglitz has never been in favour of guaranteeing the liabilities of insolvent institutions. In point of fact, his single most concrete policy recommendation for countries facing financial crises is to decapitate bank bondholders sooner rather than later (this is the sort of stuff he learned watching Summers and Rubin fuck over most of Asia, so he knows what he's talking about...).

As for C7 bankruptcy, you are mixing moral concerns with practical ones

No, I am not.

The practical imperatives are

  1. Ensure the continued operation of the clearing system.

  2. Restore commercial banking functions as soon as practical. This is most easily done by splitting clearing and commercial functions off into Good Banks, and capitalising them if that is required.

  3. Ensure that any resulting exchange rate adjustments happen on your own time table, rather than the money markets'. This was not an issue for the US this time around, though.

  4. Ring-fence and proceed to write off the bad debt, so it does not create an unnecessary drag on the productive economy.

  5. Decapitate the management of insolvent institutions, because they have proven themselves incompetent. It is simply not possible for a bank to become insolvent unless someone, somewhere in the organisation has been criminally negligent.

All of this is completely standard due regulatory diligence. There is nothing mysterious or difficult about any of it.

And your proposals are grossly impractical ones

They are completely standard, run-of-the-mill bank resolutions, such as are undertaken every year somewhere in the OECD. The size of the total organisation does not matter to the difficulty of doing this, only the size of the clearing and commercial functions (which were and remain comparatively small in the relevant banks).

Among the FRB concerns was that AIG bankruptcy would trigger forced liquidation of hundreds of billions of dollars of pension assets insured by AIG.

There is nothing wrong with insolvent private pension funds that cannot be solved with better public pensions.

Now, you may argue that the administration had better things to spend its political capital on than pension reform. But that is not self-evident, and so should not be taken as read.

Less radically, redefine the rules for when pension funds have to liquidate AIG-insured assets, in order to prevent distress selling. While not precisely routine it would not have been unprecedented, and it would not have put the federal government on the hook for Morgan's toxic waste.

It's all very well to talk tough, but the consequences of allowing the finance sector to become both too large and too centralized cannot be evaded by just pretending it didn't happen.

No, it actually can.

It may be politically unpalatable to do so, but then you need to be making a case based on subjective political priorities rather than attempt to make a case based on economic realities. Because there was no economic reality that prevented anybody from putting AIG through ordinary bankruptcy proceedings.

The idea that US regulators could or should have acted in blithe disregard of the effects of their actions on other countries makes no sense and certainly is not without enormous legal repercussions.

Of course they shouldn't act with disregard for the consequences in other countries. But fucking over Deutche Bank would not be a disservice to the European Union. Quite the contrary, actually.

And while internationalism is a commendable attitude, the fact remains that the US government has a responsibility to look out for the interests of its own citizens before and beyond the interests of its foreign creditors. Failing to live up to that responsibility is not commendable.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 10:57:22 AM EST
[ Parent ]
Resolving them is not an urgent matter. Relieving the insolvent institutions of their commercial banking functions is the urgent matter in a bank resolution. Once you've done that, you can let the structured products division rot in a bankruptcy court somewhere for however long it takes the lawyers to go through it.

Nice theory but there were actually laws involving failure to promptly pay on those obligations. In practice, those divisions belong to the same legal entity.

I cannot speak to Krugman's position - I find that he has taken several different ones over the course of the crisis.

Krugman NEVER called for defaulting on bondholder debt.

But Stiglitz has never been in favour of guaranteeing the liabilities of insolvent institutions.

So how was his "temporary nationalization" going to work?

In point of fact, his single most concrete policy recommendation for countries facing financial crises is to decapitate bank bondholders sooner rather than later (this is the sort of stuff he learned watching Summers and Rubin fuck over most of Asia, so he knows what he's talking about...).

First, he would not have had to learn that watching Summers and Rubin, he could have seen what his own institution, the IMF was doing to third world nations. It's kind of appalling how easily those buried in the sewer are able to sell the story that they smell sweet and it's only someone else at fault for the odor.  It's remarkable that Stiglitz who won a nobel prize for pretending that Kenyan sharecroppers are exploited only due to information asymmetry has been able to get away with his handwaving approach for so long - or it would be remarkable if the field had any intellectual integrity at all.

Second, Stiglitz did not explain how he expected "temporary nationalization" to work, but since the US was able to avoid nationalization without assuming bondholders debt and by making shareholders take the hit, it's kind of beside the point.

No, it actually can.

It may be politically unpalatable to do so, but then you need to be making a case based on subjective political priorities rather than attempt to make a case based on economic realities. Because there was no economic reality that prevented anybody from putting AIG through ordinary bankruptcy proceedings.

What is it that distinguishes "economic reality" from "political priority"?  Economics takes place in a political context. Certainly the US financial crisis could have been resolved in a different way if Obama had declared the Supreme Soviet in session and sent in the army, but within the political system of the US, what you propose would have caused catastrophe.

Of course they shouldn't act with disregard for the consequences in other countries. But fucking over Deutche Bank would not be a disservice to the European Union. Quite the contrary, actually.

Well, the US regulators and officials did assume that Germany would not reboot under the Bavarian Soviet Republic anytime soon, but you correctly point out that if the US had been willing create financial collapse in the EU and engage is open hostility with the German government, they could have chosen to do so.

And while internationalism is a commendable attitude, the fact remains that the US government has a responsibility to look out for the interests of its own citizens before and beyond the interests of its foreign creditors. Failing to live up to that responsibility is not commendable.

And so they chose not to take the entire world economy down at once or take the risk of such an event.

Look, one can make a consistent argument for world revolution or one can make a consistent argument for reform within the existing system. But if you are going to champion such institutions as bankruptcy courts, you cannot do so, call for massive abrogation of international agreements and conventions as well as domestic laws and political realities while remaining coherent.

by rootless2 on Tue May 24th, 2011 at 11:30:13 AM EST
[ Parent ]
Nice theory but there were actually laws involving failure to promptly pay on those obligations.

Not Uncle Sam's problem. The Bad Bank retains an equity stake in the Good Bank, minus any sovereign capitalisation. If the creditors want prompt payment, then they are welcome to accept firesale liquidation of the Bad Bank, rather than hold out for the best possible price. I frankly don't give a shit - those creditors are unimportant.

In practice, those divisions belong to the same legal entity.

Unless the rules for FDIC-insured deposits have been rewritten by some Republican who was high on acid while I wasn't looking (which I cannot, of course, rule out), there are special rules for everything important.

I just have a somewhat narrower definition than you seem to have of what bank activities are important.

So how was his "temporary nationalization" going to work?

Like this.

First, he would not have had to learn that watching Summers and Rubin, he could have seen what his own institution, the IMF was doing to third world nations.

Well, he was at the World Bank. But let's not let little details like facts and historical events get in the way of a good rant...

It's remarkable that Stiglitz who won a nobel prize for pretending that Kenyan sharecroppers are exploited only due to information asymmetry has been able to get away with his handwaving approach for so long - or it would be remarkable if the field had any intellectual integrity at all.

Eh, beats Rubin's, Summers, Geithner's and Greenspan's performance. Stiglitz is a centre-left-ish economist, as orthodox economists go. That's more than can be said for any of the above.

What is it that distinguishes "economic reality" from "political priority"?

You can't print hard currency, and you cannot conjure up steel by congressional fiat. To name two real economic constraints.

but within the political system of the US, what you propose would have caused catastrophe.

Yes, if you assume as a matter of course that J.P. Morgan and AIG are above the law, then it is impossible to put J.P. Morgan and AIG through bankruptcy like you would any other insolvent bunch of chronic fuck-ups and corrupt criminals.

Making that sort of assumptions without justifying them is called "begging the question."

but you correctly point out that if the US had been willing create financial collapse in the EU and engage is open hostility with the German government, they could have chosen to do so.

What hostility to the German government? "German banks" and "German government" are not, quite, coterminous, whatever the situation may be on your side of the Pond.

And so they chose not to take the entire world economy down at once or take the risk of such an event.

There was no such risk. AIG had no creditors of any importance to the global clearing system, which is what can take out the global economy. German and British stupidity and incompetence might have taken out the German and British economies, but there was no material contagion risk beyond that.

But if you are going to champion such institutions as bankruptcy courts, you cannot do so, call for massive abrogation of international agreements

And those would be what agreements, precisely? I do not recall any international treaty specifying that a country is liable for the bad bonds of insolvent private firms within that country.

But perhaps you are better informed than I?

conventions as well as domestic laws and political realities while remaining coherent.

Then you need to make a case based on domestic law and political reality, instead of begging that question. Simply saying "bondholders can't be touched. Morgan can't be touched. Goldman can't be touched," and pretending that these are self-evident facts of life is uncompelling.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 11:54:23 AM EST
[ Parent ]
Unless the rules for FDIC-insured deposits have been rewritten by some Republican who was high on acid while I wasn't looking (which I cannot, of course, rule out), there are special rules for everything important.

Until the passage of the Financial Reform bill there was no legal authority to unwind non-banks like Citigroup and AIG and selectively abrogate their obligations.

And you may not give a shit about the repercussions of blowing off e.g. China on senior bonds or the interesting legal question of deciding how pay some senior bondholders and not others, but that doesn't mean such questions go away. Clearly, even Krugman understood that what he proposed involved making the US government assume responsibility for a large chunk of bank debt. My argument is that Geithner's policy, which avoided such a route was faster/cheaper/better. You appear to be arguing that at least Stiglitz was really proposing a radical wipe out of much of the banking system - but I certainly Krugman was not and Stiglitz's claim that nationalization would be temporary and no big deal indicates he was not either.

What hostility to the German government? "German banks" and "German government" are not, quite, coterminous, whatever the situation may be on your side of the Pond

The willingness of the German government to allow major German banks to suffer the consequences of their stupid lending is something I had not learned about until just this moment. Can you point me to a fuller explanation?

I'm not at all arguing Morgan is untouchable - I'm arguing that Geithner's approach which avoided the US taking responsibility for bank debt was a lot smarter and cheaper than the nationalization schemes proposed by the supposed leftists.

There was no such risk. AIG had no creditors of any importance to the global clearing system, which is what can take out the global economy. German and British stupidity and incompetence might have taken out the German and British economies, but there was no material contagion risk beyond that.

If I'm reading this correctly, you are asserting that collapse of the 3rd and 5th biggest economies in the world in the midst of a global bank panic and economic collapse would not have created risk of material contagion. Is that really what you want to assert?

SG and the French banking regulator informed FRBNY that any delay in clearing AIG CDS would trigger default triggering bankruptcy. That would have triggered legal requirement for pension funds to liquidate holdings - in the middle of a panic - which would have put a large number of US pension funds into bankruptcy. This is what "systematically important" means - not that one cares deeply about Goldman-Sachs, but that the pensions of millions of ordinary people would be destroyed by financial bullshit.

by rootless2 on Tue May 24th, 2011 at 12:17:56 PM EST
[ Parent ]
Until the passage of the Financial Reform bill there was no legal authority to unwind non-banks like Citigroup and AIG and selectively abrogate their obligations.

There is no selective abrogation involved in a Good Bank/Bad Bank resolution. The Bad Bank retains full equity stake (minus any sovereign buyout to capitalise the Good Bank), so there is no confiscation involved.

And you may not give a shit about the repercussions of blowing off e.g. China on senior bonds

You have made that claim several times. I have yet to see you actually provide a reference. OPEC, I can believe, but China's exposure to US toxic waste is not common knowledge.

or the interesting legal question of deciding how pay some senior bondholders and not others,

Uh, some bondholders get a free handout, because they are important. That's not a basis for complaint by those who do not get a free handout. The unimportant ones (which is the vast, vast majority) are paid in the perfectly ordinary order of seniority.

and Stiglitz's claim that nationalization would be temporary and no big deal indicates he was not either.

Or that he does not regard bondholders as important to the American political economy.

That may be false as a matter of political tactics, but it is certainly correct as a matter of securing the material provisioning of American society.

The willingness of the German government to allow major German banks to suffer the consequences of their stupid lending is something I had not learned about until just this moment. Can you point me to a fuller explanation?

Again, why is that the American taxpayer's problem? How much is Angela Merkel's approval worth?

If I'm reading this correctly, you are asserting that collapse of the 3rd and 5th biggest economies in the world in the midst of a global bank panic and economic collapse would not have created risk of material contagion. Is that really what you want to assert?

The British economy did not collapse? In what alternate version of history?

The German economy didn't only because they've exported the collapse to the PIGS. I have yet to see any evidence that this is preferable in terms of minimising and alleviating real hardship.

[Bankruptcy] would have triggered legal requirement for pension funds to liquidate holdings

Why?

Inasmuch as those holdings were AIG securities, yes, I can see why that would be a problem. But my understanding is that AIG was simply insuring those securities the pension funds held. In that case, it would be a purely domestic US political decision to force the pension funds to sell.

(Incidentally, the pension funds could have been bailed out instead of AIG. Unless this was Unpossible for some reason?)

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 12:35:23 PM EST
[ Parent ]
See page 10 for an introduction - and recall that the author of this report was deeply hostile to Treasury and FRB management.

http://www.sigtarp.gov/reports/audit/2009/Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counter parties.pdf

and for example
http://china-wire.org/?p=3300

and
http://www.sinocast.com/readbeatarticle.do?id=54000

by rootless2 on Tue May 24th, 2011 at 12:53:37 PM EST
[ Parent ]
The first does not speak of AIG exposure in any country that the US had any material reason to bail out (the only foreign country named at all is France, and given the French stance it would have been perfectly reasonable to tell them to go whistle for their money altogether).

The second talks about China purchasing common stock. I was not aware that you believed it the US Treasury's job to place a floor under the price of any common stock owned by a foreign sovereign?

The third is about quasi-sovereign Fannie and Freddie bonds.

What, precisely, is this supposed to prove, again?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 01:03:23 PM EST
[ Parent ]
i'm short on time, but let's go over the AIG

  1. AIG owed SG
  2. SG threatened and the French government backed them up that any attempt at delay or haircut would trigger default
  3. FRB noted that AIG in bankruptcy would trigger automatic requirements to dump "wrapped" pension funds at many US companies plus additional problems in money market.

(1) -> (2) -> (3)
by rootless2 on Tue May 24th, 2011 at 01:14:33 PM EST
[ Parent ]
So bail out the pension funds instead of bailing out AIG.

That has to be cheaper: You'll effectively be guaranteeing only a fraction of the AIG portfolio.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 04:11:41 PM EST
[ Parent ]
No you don't get it: AIG offered insurance

http://www.gbophb.org/sri_funds/articles/WhatIsaStableValueFund.asp

and your solution has to be something that the Fed could have done - quickly.

by rootless2 on Tue May 24th, 2011 at 04:40:31 PM EST
[ Parent ]
They called it insurance, it wasn't.

And AIG was undercapitalised for it.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 24th, 2011 at 04:57:40 PM EST
[ Parent ]
This is not the CDS but a secondary effect. AIG offered insurance, real insurance, to so-called "stable funds" which are long term investors like pension funds. The insurance covers things like long term interest rate changes. This is old style and regulated insurance. FRB lawyers said that if AIG defaulted on CDS and was forced into bankruptcy, the regulation on the pension funds would trigger because they funds would be relying on insurance from a bankrupt firm event though, in theory, AIGFP was separate from AIG's regulated insurance subsidiaries. Thus, companies like vanguard which managed pensions for IBM etc. would have to liquidate pension holdings in a hurry - which, of course, would have further panicked the markets.
 
by rootless2 on Tue May 24th, 2011 at 05:18:00 PM EST
[ Parent ]
So offer the funds to transfer all their honest, above-board, regulated insurance to the Fed, at the same terms.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 05:32:21 PM EST
[ Parent ]
They could have rewritten all the state pension regulations at the same time.

Not only would that have been simple on its own, but consider that they had the assistance of the superbly competent Bush administration.

What you seem to be stuck on is a belief that the financial system and laws (a) made sense (b) were just and (c) gave regulators infinite span. However, it appears actually that the banking system is an organized system of repression in which the powerful elements of society exercise social control and expropriate wealth from the rest of society and what limited justice and sense that has been imposed over time and via bitter social struggles on that system is far far from perfect.

by rootless2 on Tue May 24th, 2011 at 06:01:17 PM EST
[ Parent ]
What you seem to be stuck on is a belief that the financial system and laws (a) made sense (b) were just and (c) gave regulators infinite span.

No, I just want to force you to make a clear and above-board distinction between the best policy available to a monetary production economy and the best policy available to a third-wayer with shaky parliamentary support. You keep hop-skipping between the two - whenever you're pressured you retreat to "but that's politically difficult," and whenever you feel emboldened you return to "so what happened is the best that could possibly have been done."

You framed the discussion in terms of the former, so I responded in terms of the former. If you want to have a discussion of the latter nature, then I will have to bow out, since that involves a number of trade-offs that touch upon policy areas that I have neither experience nor expertise in.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 06:29:35 PM EST
[ Parent ]
"Well, he was at the World Bank. But let's not let little details like facts and historical events get in the way of a good rant.."

My mistake. It was the world bank, which we know has cherished the humanity, dignity, and prosperity, of all people, no matter where they were and which world bank project robbed them of their living, stole their land, saddled their nation with absurd debt for projects that destroyed the environment and enriched off shore banks and arms dealers. Mea culpa.

by rootless2 on Tue May 24th, 2011 at 12:21:18 PM EST
[ Parent ]
If you want to play "six degrees of separation from the World Bank," we can do that.

Summers, zero. Geithner, one. Rubin and Bubbles, a half.

And I'll note that whatever the World Bank's crimes during Stiglitz' tenure, they pale in comparison to the way Summers, Rubin and Greenspan fucked over Russia. The only things left standing when they were done were Gazprom and the secret police.

Now let's play six degrees of separation from the Koch Brothers (because Goldman and Morgan would be too easy).

Your serve.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 05:51:38 PM EST
[ Parent ]
Oh please. Which part of the Russia policy under Clinton don't you like? The part during the period when Stiglitz was head of Clinton's council of economic advisors or the part  when Stiglitz was head of the World Bank?

Oh, the policy was probably designed by a 3rd rank employee within Treasury!?? Come on.

If you want to blame Russia or East asia crisis on someone, how about the Scienes Po graduate who imposed what remains ECB orthodoxy during his tenure as IMF managing director?

by rootless2 on Tue May 24th, 2011 at 06:19:55 PM EST
[ Parent ]
Oh please. Which part of the Russia policy under Clinton don't you like?

The part where they sent incompetent fuckwit ideologues to Moskva who advised Yeltsin to privatise and deregulate.

Those incompetent fuckwit ideologues have names, and their recommendations are part of the public record. Go look it up.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 06:32:54 PM EST
[ Parent ]
Jeff Sachs? Not a Treasury employee.
by rootless2 on Tue May 24th, 2011 at 09:28:39 PM EST
[ Parent ]
 and found described in detail here:

  (Google books)  Wedel, Shadow Elite, chapter five,

  The Privatizers:

  "The city was Moscow, the year 1994, and the plans grand: to transform the new Russia." ...

  Interested readers may follow the link, then, click on 'Table of contents' and 'chapter five' The Privatizers:

http://books.google.com/books?id=uKYFX3ap-CQC&printsec=frontcover&dq=Shadow+Elite&hl=fr& amp;ei=zCDdTbiFEYaw8gP1wpX8Dw&sa=X&oi=book_result&ct=result&resnum=1&ved=0CCoQ6A EwAA#v=onepage&q&f=false

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 11:40:26 AM EST
[ Parent ]
  From the diagram of interrelationships in described in chapter five, (page 115)

CHUBAIS - HARVARD PLAYERS
Interconnections of key actors through organizations (early 1990s)

(key members)

  Harvard Institute for International Development:

 Andrei Schleifer
 Jonathan Hay
 Anatoly Chubais
 Dmitry Vasiliev
 Maxim Boycko

 Gore - Chernomyrdin Commission :

 Andrei Schleifer
 Jonathan Hay
 Anatoly Chubais
 Dmitry Vasiliev

 (Russian) State ¨Property Committee (in Russia the `GKI'):

Andrei Schleifer
Jonathan Hay
Anatoly Chubais
Dmitry Vasiliev
Maxim Boycko

(Russian) Federal Securities Commission (supposed analog to the U.S. S.E.C.) :

Andrei Schleifer
Jonathan Hay
Anatoly Chubais
Dmitry Vasiliev

  Russian Privatization Center :

 Andrei Schleifer
 Jonathan Hay
 Anatoly Chubais
 Dmitry Vasiliev
 Maxim Boycko

  First Russian Specialized Depository :
    (depository maintains the records of mutual fund investors' holdings)

 Andrei Schleifer
 Jonathan Hay
 Dmitry Vasiliev


"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 12:05:33 PM EST
[ Parent ]
 

   (from page 117-118) The Shadow Elite

 ...

Enter Larry Summers

  It is highly unlikely that the Chubais-Harvard Partners could have pulled off what they did on the American side without their friend Lawrence (Larry) Summers being highly placed in the U.S. government.  Earlier a Harvard faculty member, later president of Harvard, (and still later head of president Obama's National Economic Council), Summers became perfectly positioned to be the partners' patron and protector when Bill Clinton took office in 1993.  Having served as chief economist of the World Bank from 1991 to 1993, Summers held the posts of undersecretary, deputy secretary and finally secretary of the Treasury through much of the 1990s.  At Treasury, Summers played the principal role in designing U.S. and international economic policies.  Even as undersecretary for international affairs, Summers was responsible for designing Treasury's country-assistance strategies and for formulating and implementing international economic policies (7)

     Andrei Shleifer was a protogé of Summers and on intimate terms with him.  Their relationship began in the 1970s with Summers as Schleifer's mentor and professor (Schleifer credits Summers with inspiring him to study economics) , and continued in walks on the beach at Truro on Cape Cod, where their families vacationed together.  In addition to being close friends, the two were co-authors, joint grant recipients, and faculty colleagues and allies at Hravard.  Schleifer's wife, Nancy Zimmerman, a specialist in the high-finance area of global,  fixed-income securities markets, was frequently consulted by Summers and David Lipton.  (Lipton had been Summers's deputy at Treasury responsible for eastern Europe and the former Soviet Union, and earlier Sach's side-kick and vice president of Jeffrey D. Sachs and Associates.)   Summers reportedly dubbed the quartet "our little word". (8)

     In 1992 Schleifer became project director of the Harvard Institute's Russia project.  When a rivalry between Sachs and Schleifer ended their working relationship, to hear observers tell it, the Harvard project became Schleifer's baby, while Sachs continued his relationship with Gaidar.  Meanwhile, in 1991 Hay had been named a senior legal advisor to Russia's new privatization agency, the State Property Committee, and the following year he became the Harvard Institute's on-site director in Moscow and the institute's public face there.  From here on, Schleifer and Hay were the key drivers of the project. (9)

  (by Janine R. Wedel; Basic Books, 2009)

 



"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge
by proximity1 on Wed May 25th, 2011 at 12:40:21 PM EST
[ Parent ]
The FDIC was designed for domestic banks and had not been updated to post Citibank realities.

The EU and its member states individually are not even up to the task of imitating the FDIC, let alone handling "internationally active" banks.

It might be possible to blame the Basel Accords for applying market fundamentalism and quantitative fetishism to "harmonization of capital requirements for internationally active banks". We now have a generation of bank regulators and supervisors who really do believe that "transparency, disclosure and market discipline" is all the supervision you need. "Market failure" and "control fraud" are not part of their language.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Tue May 24th, 2011 at 05:02:00 AM EST
[ Parent ]
The worldwide effect of the EU banking industry is something that has not really been explored. The US deregulation had bad effects, but DB was the largest issuer of US CDOs during the peak year - and issued many of the worst ones, SG was the biggest owner of AIG credit default swaps as part of its irresponsible "regulatory arbitrage" and so on. The interesting question is what failures of policy and regulation lead to DB investing in businesses selling fraudulent loans in Kansas instead of e.g. wind power plants in Europe.

 

by rootless2 on Tue May 24th, 2011 at 09:41:48 AM EST
[ Parent ]
rootless2:

Here is what happened in the Swedish program Krugman cites as a model

Standing shoulder-to-shoulder with the opposition center-left, Mr. Bildt's conservative government announced that the Swedish state would guarantee all bank deposits and creditors of the nation's 114 banks. Sweden formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly real estate, that the banks held as collateral.

http://www.nytimes.com/2008/09/23/business/worldbusiness/23krona.html

Well, the press conference part is correct, and the institutional part too. But it was quite different form the Irish solution.

This is largely form memory, so details might be revised. But there was a program called kapitaltäckningsgarantin that banks had to apply for participating in. During the applicaiton assets and debts were checked and if found to not be long term viable, the bank was bought according to the valuation. Not all banks applied.

In the end among the big banks only Nordbanken (partially governmentally owned before the crisis) and Gota bank was taken over. The good parts were merged to a new Nordbanken, which meant that there was a governmentally owned, guaranteed fresh bank that could start lending.

Checking wikipedia for costs.

Finanskrisen 1990-1994 i Sverige - Wikipedia

Bankernas kreditförluster mellan 1990 och 1993 var, enligt professor Johan Lybeck, 179 miljarder kronor, varav skattebetalarna stod för 65 miljarder - främst till Nordbanken och Götabanken. 50 miljarder kronor fick bankernas ägare stå för genom lägre avkastningar medan bankernas kunder genom sämre sparräntor och högre låneräntor antas fått stå för det resterande.

179 billion SEK in total costs, 65 from taxes to banks, 50 from owners and 64 from the customers of the banks in lower deposit interest and higher loan interests. I think it is important to note here that the cost to the economy is not the same as the cost for the state. A larger cost for the customers would have hit even harder among businesses balancing on the brink during the recession.

The crisis was ended in 1994 and from then on the Swedish government has sold off the stocks in Nordbanken (today after a number of fusions, Nordea).

When it comes to the blanket guarantee (if applied for) I think one should note that the banking of 1990 was probably simpler and better understood by the central bank then todays. Swedens banks had lsot on real estate speculation within the country and the central bank would have known that. Meaning that in the worst case the government ended up with a lot of real estate.

But looking at the costs of the banking crisis misses a big point, the blanket guarantee was not to save banking, it was to save Swedish exports like wood and paper products, metall and electronics from being hurt by their payment system being suspected of going broke. Or so the the central bank says in its post-crisis evaluation, where they also note that Sweden as an export-driven economy in highly competetive areas were in a worse position then for example Norway.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue May 24th, 2011 at 08:41:49 AM EST
[ Parent ]
The key point is that the Swedish model pushed by Krugman involved paying bondholders.
by rootless2 on Tue May 24th, 2011 at 08:54:41 AM EST
[ Parent ]
The Swedish model as practised by the Swedes involved going through bank balance sheets, sorting out the bits that the government's auditors thought were viable, splitting them off and guaranteeing those. that is substantially different from the Irish model, whatever official noises are made for the benefit of the crack ferrets on the money markets.

Whether that was also the Krugman model is a different question, on which I reserve judgement.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 11:02:04 AM EST
[ Parent ]
Not according to the NYTimes. The government guaranteed first - and there was little risk because bank assets were Swedish real-estate.
by rootless2 on Tue May 24th, 2011 at 11:38:45 AM EST
[ Parent ]
And Izvestia is, of course, a wholly reliable paper of record that always gets such niceties right, and never fall for propaganda...

I'll have to go with askod's expertise over Izvestia's here.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 11:56:37 AM EST
[ Parent ]
then it should be easy for you to point to a report on senior Swedish bank bondholders who got hammered.

Interestingly enough, bondholders have paid serious penalties in only a few high profile cases during this crisis: Bear-Stearns, Lehman, GM, Chrysler. For CIT (not the same as Citi).

by rootless2 on Tue May 24th, 2011 at 12:37:19 PM EST
[ Parent ]
In the end, two big banks were taken over.

Nordbanken was undercapitalised but still had capital. A difference that the stockholders were largely forced to accept (by selling to the government at the governments price). Gota bank on the other hand was broke, so it becomes more interesting. Gota bank was sold for one SEK to Nordbanken so that the government could consolidate its ownership.

Apparently Gota issued bonds to the tune of one billion SEK shortly before they went belly up. As far as I can find out, those investors (including Volvo) tried to sue to retrieve some (on the basis of false information), which clearly implies that they were not compensated.

Banken grundlurade storföretag - Göteborgs Posten

När bankerna var på obestånd var det inte bara småföretagen och låntagarna som blev lidande. Även Sveriges största placerare, där bland annat Volvo ingår, blev grundlurade av Gota-gruppens moderbolag, Gota AB. Vad som finns kvar av Gota-gruppen ingår numera i Nordbanken.
I ett sista desperat försök att rädda Gota-gruppen undan konkurs, sålde moderbolaget Gota AB 1991 ut företagscertifikat för över en miljard kronor till utvalda placerare. Men denna "konstgjorda andning" räckte inte för att rädda Gota AB. Redan den 30 september 1992 försattes Gota AB i konkurs och mer än 150 placerare fick se sina "säkra" placeringar i Gotacertifikat gå upp i rök!

Unfortunately this is the pre-webb era so this claim from a one-sided 90's style webbpage is all I can find.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue May 24th, 2011 at 04:59:05 PM EST
[ Parent ]
Well, for purposes of this discussion, what Krugman believed happened is probably more important than what actually happened - and his description like most others I have seen including the NYT involves a blanket guarantee.

Such a move by the US government would have been foolhardy in the extreme - given the much larger scale and much murkier finances of US banks than the Swedish ones. It would have been nearly as stupid as the Irish move - not quite, because the US like Sweden had the ability to print money.

What amuses me is that the world-wide "progressive" left is so wedded to a narrative in which the "centrist" US government caved in to banking interests, that we can find people even now defending such a foolish approach and insisting that it had some hidden escape clause.


Sweden's first major step to alleviate its crisis was a blanket guarantee of all bank liabilities. This immediately restored depositor and creditor confidence, preventing runs which would have made it impossible for banks to restructure. Under emergency legislation passed by the parliament, the financial authorities could then take over and nationalise any bank on the verge of failing. In the end, Sweden only nationalised two banks--Nordbanken (which had been majority government-owned anyway and was in the process of privatisation) and Gota Bank, which was on the verge of failure with some 37% of its loans non-performing. It also provided substantial aid to the leading savings bank.

http://gregip.wordpress.com/2009/01/28/lessons-from-swedens-bad-bank/

And here was Krugman


As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there's a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That's what Sweden did in the early 1990s. It's also what we ourselves did after the savings and loan debacle of the Reagan years. And there's no reason we can't do the same thing now.

But the Obama administration, like the Bush administration, apparently wants an easier way out.


http://www.nytimes.com/2009/03/23/opinion/23krugman.html
Note the bogus "many but not all" - there's a way to stop a bank panic - "We're guaranteeing most bank debt". Jesus.

And note the "savings and loan" reference to the Reagan era Resolution Trust Company - a massively expensive transfer of public funds to wall street that Krugman and other "progressive" heroes like Bill Black have tirelessly flogged as a shining moment of public policy.

by rootless2 on Tue May 24th, 2011 at 05:47:11 PM EST
[ Parent ]
Note the bogus "many but not all" - there's a way to stop a bank panic - "We're guaranteeing most bank debt".

No, that's not how you stop the panic.

You stop the panic by taking the bank off the exchange (that's the point of having the SEC), until you have figured out which liabilities you want to guarantee. That should not be difficult or take long (mainly because any liability that is difficult to understand should not be guaranteed).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 05:56:19 PM EST
[ Parent ]
but I will note that taking the bank off the exchange does nothing at all about debt crisis and that for all his faults, even Paulson didn't try to protect the shareholders of AIG or Fannie/Freddie or Lehman or BS - or, for that matter, Citi or BOA. Bank equity holders in 2007 lost most of their investment.
by rootless2 on Tue May 24th, 2011 at 06:40:05 PM EST
[ Parent ]
The government rescued the banking system by different measures such
as that it provided an unlimited guarantee of bank deposits and liabilities. The crisis
management was quite successful, so that the total costs for the taxpayer were only 2.1
per cent of the GDP in 1997.

http://www.uni-konstanz.de/FuF/wiwi/franke/frankehome/09%20ifmmfoe%20seminar/The%20Swedish%20banking %20crisis%20Anja%20Kohlbacher.pdf

It looks as if your source is confusing equity and debt and I note that stockholders in US banks did see a major drop in equity.

by rootless2 on Tue May 24th, 2011 at 05:54:50 PM EST
[ Parent ]
rootless2:
It looks as if your source is confusing equity and debt and I note that stockholders in US banks did see a major drop in equity.

You mean the source I quoted?

I do not see how that follows, Gota issued bonds and the holders of those bonds got nothing (and later sued).

In tandem to that, Gota stockholders also got nothing because the government evaluated the company as having more liabilities then assets.

Nordbanken stockholders got some for their shares as Nordbanken needed more capital to function as a bank, but was not broke as a company. Thus the company never went broke and debts were honored.

What you should have quoted from your pdf was this:

Nevertheless on 9 September 1992, Gota AB, the parent company of Gota Bank, went bankrupt. The government became full owner of Gota Bank for one Krona, as pointed out in Drees et al. (1998). So the help for Gota Bank came from the government by an announcement, which guaranteed Gota's Bank obligation, except equity, with the setting to save the bank and not the owner of the bank.

Two weeks later the guarantee was extended to all other banks. This was the first formal deposit insurance at that time which included all forms of bank debt and not only deposits.

Which means we have differing statements from secondary sources and brings us back to trying to find primary sources. Like the text of the actual decisions in parliament or Volvo's credit losses.

Or figure that it might not really matter, annoying as it is not being able to find out.

I think a more important part was the swift evaluation of the banks on a mark-to-market basis and the good bank/bad bank split of troubled banks. After all governments can (unless they are in monetary union with a hostile central bank that threathens to kill their banking sector) later change its mind and not pay debts that it has decided should not have been shouldered.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue May 24th, 2011 at 06:25:48 PM EST
[ Parent ]
is not all that reliable.
by rootless2 on Tue May 24th, 2011 at 06:36:06 PM EST
[ Parent ]
And thanks for the advice, that was way easier then finding the actual regulations.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Tue May 24th, 2011 at 05:19:25 PM EST
[ Parent ]
I have spent some time hunting the exact terms of bankstödsgarantin without luck. The decision was taken by the parliament in 1992 but I do not appear to get closer than that.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!
by A swedish kind of death on Tue May 24th, 2011 at 04:12:19 PM EST
[ Parent ]
Should have mentioned that if I undestand the comments in the proposition for budget that apparently has been mangled through a picture to text editor, the guarantee was in practical terms limited because they demanded new decisions. At least that is my interpretation of this:

Proposition 1992/93:100 med förslag till statsbudget för budgetåret 1993/94

5.7 Finanskrisen och statsbudgeten

Budgetkonsekvenser av tidigare beslutade åtgärder

Rikscfegen beslutede hösten 1991 att steten skulle garantera en nyemission av aktier i Nordbanken på ca 5,2 miljarder kronor och teckna sin andel av emissionen. Som en följd av beslutet har 4 191 milj kronor betelats ut över stetsbudgeten under 1991/92 för nyteckning av aktier i Nordbank­en.

Riksdagens beslut i juni 1992 om rekonstraktion av Nordbanken (prop. 1991/92:153, bet. 1991/92:NU36, rskr. 1991/92:352) innebär att regeringen har bemyndigats att bilda Förvaltningsaktiebolaget Venantius med uppgift att inneha aktier i Nordbanken och svara för finansieringen av uppköp av utestående aktier i Nordbanken intill ett belopp om 2 050 miljoner kronor. Dette belopp belaster stetsbudgeten under budgetåret 1992/93.

I nämnda beslut bemyndigades regeringen att inom en ram om 20 miljarder kronor beslute om garantier, lån och kapiteltillskott eller vidte andra åtgärder i syfte att förstärka den fmansiella basen i Nord­banken och Securam. Den 29 oktober 1992 beslutede regeringen att tillskjute sammanlagt 10 miljarder kronor fill Nordbanken, viUcet har belastet innevarande års stetsbudget. Dessutom har en garanti på 9,85 miljarder kronor, syftande till att stärka den fmansiella basen i Securam, utfärdats. Vid denna garantis infriande kommer de principer som riksdagen beslutet på förslag av regeringen i prop. 1992/93:135 om åtgärder för att stärka det finansiella systemet att tillämpas.

Dessutom kommer stetsbudgeten att belästes av räntekostnader i samband med lån till den stiftelse som äger Sparbanken Förste.

Budgetbelastningen av nämncfe åtgärder uppgår under innevarande budgetår till 22,6 miljarder kronor. Däratöver uppkommer en svårbedöm­bar ytterligare budgetbelastning i den mån det generella bankstödet utnyttjas.

But that is a matter of interpretation and the actual decision would help.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Tue May 24th, 2011 at 04:37:50 PM EST
[ Parent ]
When it comes to the blanket guarantee (if applied for) I think one should note that the banking of 1990 was probably simpler and better understood by the central bank then todays. Swedens banks had lsot on real estate speculation within the country and the central bank would have known that. Meaning that in the worst case the government ended up with a lot of real estate.

As with the US savings and loan crisis. Which is why the Swedish model was a dubious model for resolving e.g. 2009 Citigroup - an enterprise whose assets included Japanese brokerages, unknown quantities of complex financial instruments with ugly counterparty agreements, and God knows what else. Krugman's proposal was (a) overly simplistic and (b) involved a massive government assumption of debts that were unknown at the time - exactly the sort of reckless stupidity that the Irish government exhibited.

by rootless2 on Tue May 24th, 2011 at 09:47:05 AM EST
[ Parent ]
  "With socialism either discredited or absorbed into the mixed systems"...

   You continue to repeat this as though it's actually a fact; that reminds me very much of the typical bludgeoning-techniques used over and over by proponents of causes which have no demonstrable empirical grounds to support their claims.

   "absorbed into mixed systems" is a euphemism for what looks to me like ersatz "socialism"---the sort of "democracy" we have, too, by the way.

  So, I'd point for "socialism" out what an astute observer in a different forum once opined about democracy:

    Before you can blame democracy for failing, you have to have had a democracy in the first place.

    Basta!!!!!!!!!!!!!!!!

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 08:15:57 AM EST
[ Parent ]
I hear that same line of reasoning from religious zealots often e.g. "Before you can blame Christianity for failing, you have to have had real Christianity in the first place". I cannot evaluate "real" systems that have never existed in this world, only ones that are subject to empirical test.
by rootless2 on Tue May 24th, 2011 at 09:35:07 AM EST
[ Parent ]
  Gee, what can, what should, I say?  Hail, Caesar?

  You get to determine what qualifies as socialism, and then declare it discredited.  And so on, I guess for any other "isms".  

   How convenient!--and intellectually dishonest.  

What you claim is nothing short of a open pass to construct your own straw-man view of anything and everything you decide has to be dispensed with, then, calling your straw-man the or as "real" a version of "___ism" as any other, it's tried and convicted in your court, where you enjoy the roles of prosecutor, judge and jury.

   No, thank you.  I'll pass on such trumped-up stuff.
  There are actually ranges of views within which fair people choose to find one or another abstraction is reasonably described.  In what I can only guess --as I've yet to see you present any clear idea of what you're calling discredited socialism---is your notion of socialism, it's discredited.  For my part, nothing that I see as fairly essential to that term has been discredited.  Though lots and lots of what I call Bullshit-called-socialism, that, yes, has been discredited.

   

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 12:30:29 PM EST
[ Parent ]
The sad fact that the "left" in the US has to champion bog standard economists like Krugman or people like Stiglitz who proudly announce that the "law" of diminishing returns is somewhat limited by his discoveries, indicates that socialism is not even in the discussion anymore.
by rootless2 on Tue May 24th, 2011 at 01:06:27 PM EST
[ Parent ]
  "...indicates that socialism is not even in the discussion anymore."

   Really?, now!   So, "socialism," (taking some view of it as you concoct for the purposes of discusion (only) ) currently being not discussed, i.e.: apparently since "in the US has to champion bog standard economists like Krugman or people like Stiglitz who proudly announce that the "law" of diminishing returns is somewhat limited by his discoveries,"  it is therefore "not even in the discussion anymore"--and, extrapolating from this, you give us, socialism has been discredited.

  That's it?   You are really "something"!, mister.

   Please remind us of this view of yours when you're as old as "socialism", the poor, discredited thing.  Until then, whatever your age may be, you are a child, just-born-yesterday, compared to socialism.

   "Got 'humility'?" (much?)

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 01:37:33 PM EST
[ Parent ]
actually my larger point is that the supposed left-center debate in the US is characterized by a complete absence of "left". If you want to see a left critique of the US government, you have to go to obscure figures like Angela Davis. The people who are supposedly representing the left,such as krugman, stiglitz, dean baker, etc. do not push anything resembling socialism, don't seem to care about unions, buy into stupid "free trade" mantras, and essentially critique the administration from a viewpoint that is "left" only in a stylistic manner. Ron Bloom, who is the White house manufacturing "czar" and who works for Geithner has produced far more unsparing and realistic left wing critiques of finance than Stiglitz ever dreamed.
by rootless2 on Tue May 24th, 2011 at 02:16:13 PM EST
[ Parent ]
  It didn't (until just now) occur to me that you might have meant "in the U.S." when you wrote that socialism is discredited.

  After reading your posts, what strikes me is that you often state things which, upon your being pressed (and frequently corrected on factual errors), you then restate in a way that gives a different and anything but the the same impression as seemed clear from the earlier posts.

 You also seem to take virtually no notice of when someone, as, JakeS does throughout this thread, simply demolishes your points in a thorough and systematic way; at this point, you either ignore the cogent analysis which leaves your claims in tatters or you sort of, kind of re-state things as though what you meant to say all along was in line with your critic's views, takes those views into account and leaves your new, revised point untouched, untroubled.

   In other words, your arguing style and techniques leave your credibility undermined.  

   In my view, socialism's prospects don't and quite fortunately never did depend on how well it fared in the United States.  I expect that socialism will outlast the United States themselves as a nation.  So, to speak of its discredit, and in the process to only get around to the emphasis of its general lack of importance among key contemporary politico-economic pundits is both irrelevant and the clearest example of how and why your approach to this issue (to say nothing of others) is shot through and through with faults and problems.

    It's as though your posts are the product of a committee--the members of which never meet, never confer and don't consult and read their fellow members' posted-contributions.

   

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 05:11:57 PM EST
[ Parent ]
Jake is simply wrong. How you got the theory that he demolished my points is baffling. His only factual win is that the World Bank, not the IMF was Stiglitz previous home. His theory that Krugman and Stiglitz offered practical solutions rather than empty variants on the Irish panic lacks factual basis. If at the very least he could confront the issue that the head of the FDIC noted that packing up Citigroup would have been nearly impossible, we'd have a basis for discussion other than me rolling my eyes at his handwaving explanations of how simple everything is if you ignore law and politics.

As for socialism - the Socialist Party in Spain and Greece are the parties of austerity. The Socialist Party in France appears to be the party of troussage domestique and leaves to Ms. LaPen the job of opposing banks. The Germans seem to have simply fallen asleep. I see no more a vigorous advocacy of socialism from any of the European socialist parties than I do here in the USA. The European Communist parties are museum relics without any platform at all.  The greens have some vitality, but they don't propose socialism either.

by rootless2 on Tue May 24th, 2011 at 05:30:44 PM EST
[ Parent ]
we'd have a basis for discussion other than me rolling my eyes at his handwaving explanations of how simple everything is if you ignore law and politics.

There are laws against letting creditors to an insolvent institution lose their shirts? That's news to me.

Treating every AIG creditor the same was a policy decision by the NYFRB, not a legal obligation. Bailing out AIG instead of bailing out the pension funds was a policy decision, not a legal requirement. Refusing to prosecute the mountain of clear-cut fraud on Wall Street is a policy decision, not a legal requirement.

You were the one who framed it in terms of There Is No Alternative. If you had framed the question in terms of this being a compromise between doing what was best for the American economy (burning the bondholders to the ground) versus doing what was politically expedient, given the fact that you needed to have fifty-one Senators, then you could make the case that this is a policy decision that has to be lobbed into the big bin with all the other policy decisions (some good, like killing the pre-existing conditions clauses on health insurance; some bad, like not fighting the Florida foreclosure mills), and that we should then evaluate the big bin as a whole (on the theory that the administration has limited political capital).

But as long as you frame the question as "what was done was the optimal policy" rather than "what was done was the most cost-effective policy in terms of political capital," you simply don't have a case.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 06:16:47 PM EST
[ Parent ]
Partly correct. Paulson, remember him? The former GS CEO who was Treasury Secretary under Bush? Ring a bell? Paulson decided with Bernanke to give AIG an $85B line of credit because their policy decision was that AIG could not be permitted to fail. Then Geithner, who was not Czar of All Americas but merely President of the NY regional bank under Bernanke later committed more money at in the emergency- however, contrary to narrative, that did not lose money for US taxpayers - in fact, taxpayers made money from the 2cd and 3rd Maiden Lane interventions.

But the period in which Krugman and Stiglitz were issuing their pronouncements was later, when Geithner was at Treasury implementing Obama's policy. At that point Stiglitz and Krugman were demanding a panicked bank nationalization.

Obviously, optimal policy without any constraints would have been for Obama to use the opportunity to break Wall Street banks altogether and set up some sort of national public bank that could have invested in something more useful than mall and oil speculation. But of course not only was that not a practical possibility, but it was way outside the range of the debate between Stiglitz/Krugman and the administration. What bothers me most about that debate was that instead of having an actual left that would have proposed e.g. a national bank and democratization of capital allocation, we got a prissy pseudo-"left" alternative that was in actuality further to the right than the policies that the Obama administration actually adopted.

by rootless2 on Tue May 24th, 2011 at 06:34:18 PM EST
[ Parent ]
however, contrary to narrative, that did not lose money for US taxpayers

Are you including the loss of tax revenue from the resulting wave of unemployment and foreclosure in that statement?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 24th, 2011 at 08:48:56 PM EST
[ Parent ]
there was no resulting wave from that transaction. Of course there was job loss when the bubble collapsed, but that transaction did not cause the bubble to pop.
by rootless2 on Tue May 24th, 2011 at 09:08:08 PM EST
[ Parent ]
At the risk of repeating myself, I am not defending Krugman's policy recommendations. But you keep referring to Krugman and Stiglitz as if they were one person. In case it escaped your notice, they are not, and you have not substantiated your claims about Stiglitz' recommendations. Since they contradict prior public statements by Stiglitz, I think you owe him and your readers that courtesy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 25th, 2011 at 03:16:27 PM EST
[ Parent ]
Stiglitz' predictive powers stand (actually fall) on their own.

http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html?pagewanted=1&_r=1

The main problem is not a lack of liquidity. If it were, then a far simpler program would work: just provide the funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.

WRONG.

by rootless2 on Wed May 25th, 2011 at 03:33:16 PM EST
[ Parent ]
No, Stiglitz' reasoning is absolutely correct there: IF the banks were adequately capitalised but the markets were being irrational, THEN the Fed could have solved the problem by extending rediscount facilities to the relevant asset classes (the Fed has broad discretionary powers at the discount window). The fact that the Fed did not simply extend rediscount facilities to these asset classes is strong circumstantial evidence that the banks were, in fact, believed by policymakers to be undercapitalised.

Those policymakers may have been wrong. Or they may have known that the relevant companies were adequately capitalised, but implemented an overly complicated solution anyway. But given their actions, Stiglitz' inference is not absurd in the least.

Regarding Stiglitz' policy suggestions, and how they differ from Krugman's, you could have read but a little further to find that Stiglitz recommended FDIC resolution, along the lines of Washington Mutual. And while I can certainly find several impolite things to say about the resolution of WaMu, it did not involve Uncle Sam guaranteeing a single red cent beyond the FDIC-insured deposits.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 25th, 2011 at 04:29:22 PM EST
[ Parent ]
But in fact the Fed did resolve the problem by a combination of PPIP, agency bond purchases, and other actions - even though Stiglitz predicted that their actions would fail. You can claim he was wrong for the right reasons if you want, but that seems like a strange line of argument.

Not only did he say it would fail, but he joined Krugman in that absurd expected value theory of how bond investors would game the system to - break even at Fed expense.That is, not only was he wrong, but he publicized an absurd theory which demonized the reform government and fed into stupid winger conspiracy theories.

Because he's overly focused on banks, Stiglitz did not realize the importance of the PE firms in the market - something that Bloom and Geithner understood - which is why the goal was to get PE firms to create a liquid market in the assets, not just to bail the banks.

As for the FDIC resolution: I'm going to remind you one more time that the head of the FDIC said that she did not have the authority to properly wind down Citibank.

by rootless2 on Wed May 25th, 2011 at 05:01:10 PM EST
[ Parent ]
But in fact the Fed did resolve the problem by a combination of PPIP, agency bond purchases, and other actions

So you're against loan guarantees when the Fianna Fail does them, but OK with them when Timmy Geithner does them? Because, well, that's what a PPIP is: The government guaranteeing private debts.

And don't give me any bullshit about "creating a liquid market for the securities." You do not need a liquid market in bank assets when you have a central bank. That is one of the key points of having a central bank in the first place: The discount window can provide all the liquidity anybody needs. So "creating a liquid market" is not a valid excuse for granting subsidies to the financial sector.

As for the FDIC resolution: I'm going to remind you one more time that the head of the FDIC said that she did not have the authority to properly wind down Citibank.

And I'll remind you that Citi was hardly the only bank thus subsidised.

If you want to make the argument that the US had a compelling foreign policy interest in not letting an American bank default on foreign creditors, then you need to make that case. And hand-waving about "Lehman Brothers in German" will not suffice, unless you can demonstrate that there was actually something wrong with the way Lehman was resolved, aside from the fact that it spooked the Villagers.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 25th, 2011 at 07:49:53 PM EST
[ Parent ]

So you're against loan guarantees when the Fianna Fail does them, but OK with them when Timmy Geithner does them? Because, well, that's what a PPIP is: The government guaranteeing private debts.

The US government has made a profit on PPIP.  The Krugman/Stiglitz analysis was, to put it kindly, confused. There was no guarantee of private debts.  All that "option" stuff that Krugman and Stiglitz whined about was bullshit. The government just stood in for a banking sector that works badly. In fact, I think that's excellent policy and should be expanded. The failure of the banks to allocate capital rationally or productively is a serious social problem.


And don't give me any bullshit about "creating a liquid market for the securities." You do not need a liquid market in bank assets when you have a central bank.

The market in those securities far exceeded bank holdings. The finance world has changed since 1930.


 That is one of the key points of having a central bank in the first place: The discount window can provide all the liquidity anybody needs. So "creating a liquid market" is not a valid excuse for granting subsidies to the financial sector.

The purchasers of those assets were NOT BANKS.

You should at least do what Krugman and Stiglitz were not willing to do and find out something about the details of the program. The purpose of the program - which has worked well - was to push through the panic and get investors to separate good and bad MBSs.

http://www.housingwire.com/2011/04/25/treasury-earns-1-2-billion-through-legacy-mbs-purchase-program

by rootless2 on Wed May 25th, 2011 at 09:42:02 PM EST
[ Parent ]
There was no guarantee of private debts.

Clicky.

Money quote (my boldface):

The Legacy Loans Program will facilitate the creation of individual Public-Private Investment Funds which will purchase asset pools on a discrete basis. The program will boost private demand for distressed assets that are currently held by banks and facilitate market-priced sales of troubled assets.

The FDIC will provide oversight for the formation, funding, and operation of these new funds that will purchase assets from banks. Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases. The Treasury will manage its investment on behalf of taxpayers to ensure the public interest is protected. The Treasury intends to provide 50 percent of the equity capital for each fund, but private managers will retain control of asset management subject to oversight from the FDIC.

But perhaps the FDIC stopped being part of the US federal government at some point while I wasn't paying attention?

The purchasers of those assets were NOT BANKS.

Yes, I know that. That's part of the problem, not part of the solution.

The sellers were banks. Which is why the operation was unnecessary.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 25th, 2011 at 09:53:30 PM EST
[ Parent ]
You keep trying to avoid the bottom line: Krugman/Stiglitz said (a) the programs would fail and (b) the public would lose money. Both of those have turned out to be false. It may be that your theory of how it should have been done is preferable to you, but it seems absurd to me.The discount window is not meant for moving assets from private to public accounts. In fact PPIP was specifically designed to avoid the possibility of the government being saddled with bad assets.

As for the loan guarantee this is not a guarantee of bank debt which is what we discussed. Let's look at the difference
a) The Irish government said Ireland would guarantee all debts owed by Irish banks without reference to any assets or any attempt to evaluate or any haircut or ...
b) The US government lent a limited amount of money to be used with private money to buy assets with the the private investors taking the first risk and with a guarantee depending on analysis of the credit worthiness of the specific assets. That is, they said: if you put up risk capital, we'll back you in a purchase. You lose money if you buy crappy assets and we get a long look at anything first before we provide financing.

This is the difference between acting as a smart bank for saavy investors and acting as a chump.

by rootless2 on Wed May 25th, 2011 at 11:06:28 PM EST
[ Parent ]
And you keep not reading what Krugman said.

It's not difficult to look up his actual words.

The money (hah!) quote is this:

3. Even if it works, the system will remain badly undercapitalized. Realistic estimates say that there will be $800 billion or more of real, medium-term -- not fire-sale -- losses on home mortgages. Only around $480 billion have been acknowledged by financial institutions so far. So even if the fire-sale discount is removed, we'll still have a crippled system.

That's actually not a bad estimate.

Now, three years on, around 10% of mortgage holders are on month behind on payments, and foreclosures are estimated to run at around 3 million a year. Banks have taken to stealing homes to book them as "assets", but many of those assets are worthless, decaying, and impossible to sell.

The claimed returns are simply a lie. Because in fact most of the Treasury "assets" of $176 bn are based on the same collateral.

How is the Treasury supposed to realise the claimed return?

The triumphalist rhetoric is nonsense. The book values of the "assets" are simply being inflated for political reasons.

Meanwhile the housing market continues to deteriorate in most states. And while TARP-equivalent money could have been spent in a bottom-up way to underpin the market, guarantee owner security and maintain the value of housing stock, the true cost of top-down spending has been mass destruction of housing value far beyond the deflation required to balance the bubble, and a sizeable drop in tax revenues.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 26th, 2011 at 02:33:51 AM EST
[ Parent ]
Now, three years on, around 10% of mortgage holders are on month behind on payments

And that's not even the real problem.

If Uncle Sam had been buying mortgages, then he would have been doing some actual good while he was saving the banks from their own stupidity and incompetence.

The problem is that on top of these mortgages, the banks made a huge number of side bets. Which is why bailing out the banks is so ridiculously much more expensive than bailing out the mortgage holders (you could have bought around 70 % of all subprime mortgages at face value for the original $ 700 bn Paulson threw at the banksters).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 26th, 2011 at 05:08:49 AM EST
[ Parent ]
I just want to note that many people do not appear to understand how MBS assets work, but for an investor like the government, there is never a need to sell the asset to realize a profit.
by rootless2 on Thu May 26th, 2011 at 08:45:03 AM EST
[ Parent ]
There is never a need to sell the estimate to book a profit.

But that's the issue - the point of the exercise is a rhetorical transaction of abstractions, not a realistic valuation of tangible assets. It's just another level in the shell game.

That doesn't change the fact that somewhere down the line tangible real estate has been destroyed.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 26th, 2011 at 02:52:57 PM EST
[ Parent ]
You keep trying to avoid the bottom line: Krugman/Stiglitz said (a) the programs would fail and (b) the public would lose money.

And given that the program was designed in a way that can only possibly make sense if the purpose was to make the public lose money, that was not in any way an unreasonable conclusion.

You then claim that the regulators who constructed this program were (and had reason to be) reasonably confident that it would not lose money. That is possible. But if they did believe that, they had a variety of simpler and easier ways to solve the problem at their disposal, so one must ask why they did things the complicated way.

The discount window is not meant for moving assets from private to public accounts.

Huh?

The discount window is precisely the place where you provide liquidity to illiquid assets when the interbank market freezes over. That's what the discount window does.

In fact PPIP was specifically designed to avoid the possibility of the government being saddled with bad assets.

Uh, no.

A PPIP works like this:

  1. Uncle Sam sets up an SIV, and puts ten dollars into it.

  2. A crack ferret speculator in the money markets puts ten dollars into the SIV.

  3. Uncle Sam lends the SIV one hundred dollars.

  4. The SIV buys an asset for $ 120 dollars.

How does this not get 92 % of the asset on Uncle Sam's books?

b) The US government lent a limited amount of money to be used with private money to buy assets with the the private investors taking the first risk and with a guarantee depending on analysis of the credit worthiness of the specific assets. That is, they said: if you put up risk capital, we'll back you in a purchase. You lose money if you buy crappy assets and we get a long look at anything first before we provide financing.

So private investors are unable to evaluate the fair value of the assets because of a panic, which is why you can't mark-to-market. That sounds reasonable - everyone knows "the market" behaves like a bunch of attention deficit ferrets on crack.

But to check this panic, you then construct a scheme that relies on private investors evaluating the fair value of the same assets. And the fact that you limit their liability to 16 % of the purchase price of the asset is supposed to do what, precisely, for their ability to value the asset correctly? I can see why it would increase their valuation. I can't see any reason why it would make their new valuation more correct than the old one.

Oh, but Uncle Sam gets to go over the assets and decide what is good and what is toxic. Well, yes, but if Uncle Sam is able to value the assets correctly, what, precisely, does he need a crack ferret private equity partner for?

If for some reason that I do not quite understand you do not want to Lehman Brothers the (potentially) insolvent institution, here is an alternative scheme:

a) Uncle Sam lends 84 % of Uncle Sam's valuation of the suspicious assets to the original holder at the discount window.

b) This being insufficient to place the original holder on a sound financial footing, Uncle Sam decides to extraordinarily recapitalise the potentially insolvent original holder to the tune of 16 % of Uncle Sam's valuation of the dubious assets.

c) The recapitalisation takes the form of senior preferred shares. That is, shares which behave as the most junior bonds when the price or dividend of the firm's common stock goes below some agreed upon point, and as common stock when they are above.

This process involves less upside for Uncle Sam, but it also involves considerably less downside. Because Uncle Sam in this scenario can recoup any losses from dubious assets out of the equity and revenue from the non-dubious part of the bank (which must exist - otherwise there'd be no reason not to Lehman it, right?), whereas the PPIP model saddles Uncle Sam with what amounts to a no-recourse loan against the dubious assets.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 26th, 2011 at 04:54:14 AM EST
[ Parent ]
And given that the program was designed in a way that can only possibly make sense if the purpose was to make the public lose money, that was not in any way an unreasonable conclusion.

E pur si muove..

To me if your analysis is that X only makes sense if it does Y and it turns out that X does not do Y, then the problem is your analysis. But I'm not an economist so I am less than comfortable with the theory that the world is wrong when it conflicts with the data.

So private investors are unable to evaluate the fair value of the assets because of a panic, which is why you can't mark-to-market. That sounds reasonable - everyone knows "the market" behaves like a bunch of attention deficit ferrets on crack.

Yes

But to check this panic, you then construct a scheme that relies on private investors evaluating the fair value of the same assets. And the fact that you limit their liability to 16 % of the purchase price of the asset is supposed to do what, precisely, for their ability to value the asset correctly? I can see why it would increase their valuation. I can't see any reason why it would make their new valuation more correct than the old one.

Actually not 16%, more like 25%, but yes, you provide leverage because you have a dysfunctional banking system and, no, it won't increase valuation because nobody actually wants to lose money and Krugman/Stglitz seemed unable to understand the concept of risk pooling which Treasury used to focus investor intelligence. The ridiculous theory that K/S propose (a) makes no sense and (b) would be defeated by the pool structure of the investments anyways - as I and others noted at the time.  Their "reasoning" if one can call it that, depends on the theory that post bubble one can find investors who are willing to throw away billions of dollars into hopeless bets and, more important, that the US treasury was run by criminally stupid and complicit people.

Oh, but Uncle Sam gets to go over the assets and decide what is good and what is toxic. Well, yes, but if Uncle Sam is able to value the assets correctly, what, precisely, does he need a crack ferret private equity partner for?

Just prudence. I pick a house, my mortgage banker requires an appraisers report. This kind of thing is absolutely standard.


f for some reason that I do not quite understand you do not want to Lehman Brothers the (potentially) insolvent institution, here is an alternative scheme:

a) Uncle Sam lends 84 % of Uncle Sam's valuation of the suspicious assets to the original holder at the discount window.

And this is exactly what Geithner attempted to avoid - banks coming to the government with their absolute trash and foisting it off on some hapless bureaucrat. Note that through the crisis, the Fed and Treasury have mostly limited themselves to purchase of (a) treasury bonds, (b) agency bonds (which people like Nomi Prins do not seem to be able to comprehend) and (c) haircut assets where a private partner takes a significant first loss if the asset fails. That is, they have purchased only assets where either the government was already at risk or where a private partner would act as a rationality check and share risk. Contrast to the Irish Government's willingness to swallow whatever garbage the banks had in the vaults.

The Obama administration has, consistently, acted as if it were a competent social democratic government with a thin majority. It has not instigated social revolution nor Bush style corruption/incompetence nor Clinton era "washington consensus". Unfortunately, instead of facing an actual left critique that would have e.g. demanded that the Fed/Treasury extend PPIP to the purchase of energy and transportation bonds, the pseudo-left has engaged in factually incorrect conspiracy mongering that has only assisted the far right.

by rootless2 on Thu May 26th, 2011 at 08:40:41 AM EST
[ Parent ]
"conflict with prediction" not "conflicts with data"
by rootless2 on Thu May 26th, 2011 at 08:46:26 AM EST
[ Parent ]
You are trying to have it both ways here.

Either the private sector is capable of valuing the assets in a reasonable manner, or it is not.

If it is not capable of valuing the assets, then what is the purpose of asking its opinion?

If it is capable of valuing the assets, then what is the purpose of not marking to market?

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 26th, 2011 at 11:42:38 AM EST
[ Parent ]
"private sector" is not unitary. There were investors who would want to invest, but clearly banks that were overloaded with mbss during a market freeze are not going to provide them with leverage for buying these things.

Despite the fantasies of free market propagandists and nostalgic leftists, the banking system fails at rational capital allocation and so when the state steps in one has to evaluate the details of the state action to decide whether its good (e.g. refloat auto companies and provide partial financing for private mbs market) or bad (e.g. pour Irish treasury into UK property and German bond markets).

by rootless2 on Thu May 26th, 2011 at 12:07:21 PM EST
[ Parent ]
I think we have arrived at the fundamental difference of opinion: You view securitisation as part of the solution, I view it as part of the problem. I do not want a liquid market in MBS, because I do not want a market in MBS - I want mortgages to stay on the banks' books.

Because, ceteris paribus, banks are easier to regulate and police than private equity funds.

And if that causes the banks to go tits-up, then I want to burn the banks' bondholders. If those bondholders include DeutcheBank and Societe Generel, then so much the better - the continued existence of those particular institutions is not a net benefit to European society.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 26th, 2011 at 08:21:03 PM EST
[ Parent ]
So you castigate the administration for not adopting a radical policy that they don't support and that their voters don't support. That is, in a nutshell, why progressive politics is such a fail.
by rootless2 on Fri May 27th, 2011 at 07:31:27 AM EST
[ Parent ]
You lament the lack of a leftish criticism of the administration's policies, yet you don't accept policy proposals hat the administration doesn't want to do. What's up with that?

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Fri May 27th, 2011 at 10:32:02 AM EST
[ Parent ]
Jake's proposal is not the proposal that Krugman/Stiglitz made. My original point was what they proposed would have worked less well for the general population than what the Obama administration did.

But I don't think that "blow off securitization" is either a program with potential popular support or one that actually does anything useful.  "Let's make home ownership more expensive by implementing a financial change that most people can't understand"!

A moderate leftist proposal would be "Banks won't finance high paying jobs because they want to gamble, so government should" or "Change tax laws to make gambling with other people's money more expensive and investing in green energy more profitable".  

But "Obama sucks because he won't listen to the radical proposals that have no popular support and his "left" critics have not even proposed" is kind of hard to get behind.

by rootless2 on Fri May 27th, 2011 at 10:41:59 AM EST
[ Parent ]
Potential popular support? Everything can have popular support if the PR budget is big enough. I grant you however that there are no well funded interests pushing for an end to securitization. I won't argue the case here, but it seems the best result that can be expected of the administration's plan is  return to just before the financial system exploded. Only with more people being unemployed and or homeless. Extend and pretend has lead to the financials' grip on public policy being stronger than ever. Meanwhile the debate was shifted from bank reform to austerity and the cat food commission.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Fri May 27th, 2011 at 02:52:12 PM EST
[ Parent ]
Actually the debate is over extensions to the social welfare system and tax fairness - far better grounds than arcane financial issues.
by rootless2 on Fri May 27th, 2011 at 05:23:43 PM EST
[ Parent ]
Uh, no. Swing and a miss.

Lehman Brother'ing the fuckers is not a radical policy. It's applying the law as it was on Feb. 1st, 2009. So any policy proposal has to be able to beat FDIC seizure of FDIC-insured banks and Ch. 11 bankruptcy for the rest.

Yeah, that might result in Wall Street going tits-up. Not Uncle Sam's problem. As long as you have 50 Senators and the VP, you can ram any amount of stimulus down the Repug's throats, and tell them to fuck off and die if they complain [finance bills were filibuster-proof last time I checked].

Which is how you solve financial crises: Liquidate the banks, liquidate private equity, liquidate the bad debt, write off mortgages, write off industrial debt, and then put enough public spending into the real, productive economy to ensure full employment. All the while seizing the payment clearing system so the ATMs keep working. The law as it existed was perfectly adequate for that.

(This, incidentally, is pretty much exactly Stiglitz' position.)

Oh, I don't doubt that there have been improvements in the laws for handling large, transnational holding companies. Which is commendable. But not, strictly speaking, necessary.

The fundamental problem in a financial crisis is that the productive economy owes too much money to the casino economy. Any resolution that does not change this fact, does not solve the crisis. There are four basic ways to change this fact:

  1. Stimulus. The administration did this, it worked, and it has received far too little praise for that. The right went ballistic, of course, since they're ideologically opposed to having a functioning industrial society. But more disappointing was what you call the prissy left, who seemed to prefer to look at what could have been done rather than what was successfully done (having seen the German policy response, and noting that the Teabaggers are even more nuts than Merkel, I must in retrospect plead guilty here).

  2. Default and bankruptcy. This is normally something you want to avoid, because it eliminates businesses and their organisations and expertise. However, the US financial sector needs to downsize considerably to reach something that can reasonably be called sustainable, let alone efficient, so in this case it would be a net positive.

  3. Consumer price inflation. Messy, but it works because the debt overhang is in nominal dollars. Unfortunately it won't happen in the real world as long as there is a significant debt overhang (inflation chickenhawk screaming notwithstanding), unless you have an unscheduled currency collapse (which you really don't want).

  4. Asset price inflation without corresponding consumer price inflation. Better known as "blowing a new bubble."

- Jake

Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 27th, 2011 at 01:43:43 PM EST
[ Parent ]
Lehman Brother'ing the fuckers is not a radical policy. It's applying the law as it was on Feb. 1st, 2009. So any policy proposal has to be able to beat FDIC seizure of FDIC-insured banks and Ch. 11 bankruptcy for the rest.
Yeah, that might result in Wall Street going tits-up. Not Uncle Sam's problem.

Why not? Couple of hundred thousand immediate US layoffs and mass panic in world markets, shutdown of US industry - what could go wrong?


 As long as you have 50 Senators and the VP, you can ram any amount of stimulus down the Repug's throats,

One of the most mysterious aspects of the "progressive" critique of Obama has been this persistent delusion that the US legislature - and in particular the Democratic Caucus is under some sort of party discipline. "As long as you have 50 senators" makes as much sense as "As long as UK governments operate under the Eclesiatical Code". Especially after both Carter and Clinton were tossed overboard by Democratic majorities in the Senate, this delusion is absolutely remarkable. The party discipline of the Republican caucus is not 100% and it has been created by 30 years of serious work by Club for Growth, CofC, evangelical churches and so on - there is no analog on the Democratic side.


(This, incidentally, is pretty much exactly Stiglitz' position.)

Not really. I don't see any specific suggestion from Stiglitz past handwaving about "nationalization".


Oh, I don't doubt that there have been improvements in the laws for handling large, transnational holding companies. Which is commendable. But not, strictly speaking, necessary.

And you have your opinion which does not correspond to the law, to the opinion of the FDIC chair, or to the opinion of the US Congress which added specific rules in the Financial reform.

 But more disappointing was what you call the prissy left, who seemed to prefer to look at what could have been done rather than what was successfully done (having seen the German policy response, and noting that the Teabaggers are even more nuts than Merkel, I must in retrospect plead guilty here).

Indeed.
Default and bankruptcy. This is normally something you want to avoid, because it eliminates businesses and their organisations and expertise. However, the US financial sector needs to downsize considerably to reach something that can reasonably be called sustainable, let alone efficient, so in this case it would be a net positive.

It's certainly not too late for that - note that DB USA is being asked for an increasing amount of refund money and Citigroup is a mess. But why nobody wants to pay attention to the US effort to build up alternative financing centers is a mystery to me.

But, to me, the crisis is just a symptom and both left and right economists are way too finance sector focused.

by rootless2 on Fri May 27th, 2011 at 02:45:15 PM EST
[ Parent ]
Why not? Couple of hundred thousand immediate US layoffs and mass panic in world markets, shutdown of US industry - what could go wrong?

You are trying to claim that the US had no banks outside Wall Street that could (re)finance industrial operations?

One of the most mysterious aspects of the "progressive" critique of Obama has been this persistent delusion that the US legislature - and in particular the Democratic Caucus is under some sort of party discipline.

Well, if you keep pandering to shitheads like Lieberman, you won't have any party discipline.

Yeah, throwing the party machine behind an asshole who got primaried successfully from the left has consequences. But I'm sure nobody could have predicted that.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 27th, 2011 at 02:55:59 PM EST
[ Parent ]
The US system is designed to make senators independent of party discipline. The Republicans have obtained some discipline by leveraging highly oligarchic corporate power and media concentration in combination with a totally mobilized primary electoral base.  But Obama's 50 included Evan Bayh, Ben Nelson, Mary Landrieu, Blanche lincoln, Rockefeller, Dianne Feinstein and a number of other exceptionally unreliable votes. Liberman's method of winning election - where the Republicans were able to impose enough party discipline on their base voters to get them to vote for a former Democratic VP candidate exhibits a level of flexibility and control not available to Democratic party leaders.

That is how it is.

by rootless2 on Fri May 27th, 2011 at 03:13:32 PM EST
[ Parent ]
One could of course answer with the classic Greenwlad contention that the WH is very quick to bring down the wrath of heaven on leftish dissidents in the party while right wing dissidents get met halve way until they are happy.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Fri May 27th, 2011 at 03:48:45 PM EST
[ Parent ]
The example always used is its own refutation. kuchinich was confronted with the fact that if it had been his vote that killed health reform, his own voters would have abandoned him. On the other hand the WH has little credible threat to use against conservative senators. Nelson's funders and voters don't care what a black liberal in the WH says. And in spite of that the WH ran over nelson when it had the votes.

A lot of American "progressives" have a weird idea that things are supposed to be fair instead of being determined by power.

Of course, Greenwald is a right wing hack in disguise so his argument is probably not even sincere.

http://rootedcosmopolitan.wordpress.com/2011/04/20/glenn-greenwald-neither-a-liberal-nor-a-progressi ve/

by rootless2 on Fri May 27th, 2011 at 05:02:38 PM EST
[ Parent ]
Has he ever pretended to be a liberal? And I'd want to see some examples of outright dishonesty before consigning him to hack status.
As to the argument: The WH could endorse challengers instead of incumbents. Having the president of the US speaking in support of a candidate would at the very least raise visibility. Instead democratic bigwicks turned out in force to campaign for Lieberman who ran against their own party.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Fri May 27th, 2011 at 06:41:59 PM EST
[ Parent ]
Roosevelt - at the height of his popularity - tried it and failed.
http://www.ashbrook.org/publicat/oped/busch/06/1938.html

The Obama administration is interested in high probability outcomes, not high stakes gambling against the odds. What amazes me about US progressives is that, unable to win political control of a single US city, represented in the Senate by one not particularly radical "socialist" from an all white rural mini-state, and unable to bring people out into the streets, they are nevertheless aggrieved that a US administration that they didn't support does not repeatedly risk all to follow their political ideas. Actually the political impotence and the grandiose demands are clearly related.

As for Greenwald, he's a libertarian and his writing is full of dishonest rhetorical tricks. For example, today he's bitching about how the arrest of Karadzic  shows the killing of Bin Ladin to be unnecessary as if there had not been a significant military operation in Bosnia and Serbia that deprived Karazic of his ability to run a military force.

by rootless2 on Fri May 27th, 2011 at 07:11:16 PM EST
[ Parent ]
Frankly I can't follow your logic here. What difference does it make that at one point there was a war?

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Fri May 27th, 2011 at 08:05:15 PM EST
[ Parent ]
greenwald's implicit claim is that ordinary civil police procedures and courts and so on are effective so that the rationale of the bin ladin mission is suspect. However, the arrest of karadic follows and depends on an exceptionally violent intervention by NATO.

In general, Greenwald's ideas on courts and laws are typical libertarian process worship and violence whitewash.

by rootless2 on Sat May 28th, 2011 at 08:51:14 AM EST
[ Parent ]
I'll grant you the process worship, but disagree with the rest. The NATO campaign would be relevant if he were arguing for nonviolence in international relations or about the morality of starting a war. But he isn't so it's not.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter
by generic on Sat May 28th, 2011 at 11:08:01 AM EST
[ Parent ]
There were 56 or 57 people with a D after their names in the Senate at the time. And another two or three without an R after their names. You need 50 votes to make fiscal policy. While I understand that party discipline is tenuous, this is about as good a margin as you are going to get under any electoral system.

Also, perhaps I misremember, but I do not recall the Democratic Party precisely backing Lamont after he defeated the Lieberzombie in the primary. To put it kindly. Although that is something of a tangent, as it arguably precedes the present crisis.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 27th, 2011 at 04:52:50 PM EST
[ Parent ]
Your memory is incorrect. Lieberman won on Republican votes. Note the 10% Republican poll.
Note the turnout in the previous election. And Lamont ran a terrible campaign - symptomatic of his "netroots" support.

It's worth reading about how Clinton and Carter managed their (similar) majorities in the US Senate. Obama proved FAR more capable of getting results.

 

by rootless2 on Fri May 27th, 2011 at 05:22:24 PM EST
[ Parent ]
The Democratic Party backed Lieberman.  For example,  Obama and the Clintons spoke in favor of the Lieberkrank, tho' I don't have a link handy to prove it.

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Fri May 27th, 2011 at 05:28:41 PM EST
[ Parent ]
Before the primary. After the primary the Party supported Lamont - although they were clearly not convinced he had the chops to win - for good reason.
by rootless2 on Fri May 27th, 2011 at 07:12:22 PM EST
[ Parent ]
When the Swedish real estate bubble pops/deflates (real soon now), keep your eye out for the so called säkerställda bostadsoblisgationer, ie the shitty mortages Swedish banks turn into securites, get them rated investment grade, and then get them off of their balance sheets, by dumping them into their own money market funds! Good times!

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon May 30th, 2011 at 06:05:40 PM EST
[ Parent ]
See Timbro (Swedish Neo-Lib think tank) is advocating:

Think tank: cut wages to boost immigrant jobs

According to von Bahr the reasoning has its basis in elementary economic theory - cut the price of something then you increase demand.

Using this reasoning pattern: cut the wage rate to 1 krona per century and watch the Swedish economy soar!

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Mon May 30th, 2011 at 06:12:05 PM EST
[ Parent ]
JakeS:
So private investors are unable to evaluate the fair value of the assets because of a panic, which is why you can't mark-to-market. That sounds reasonable - everyone knows "the market" behaves like a bunch of attention deficit ferrets on crack.

The swedish method did evaluate on what I understand as a mark-to-market basis (while posting guarantees to avoid bank rushes). The owners of SE-banken and Sparbanken choose to re-capitalise in order to meet the demands.

While I can see the risk for a downwards spiral, that always exists in busts, so I fail to see while the owners of banks should be treated with more leniancy then anyone else. If the owners can not or will not put up their own capital, then it goes into recievership. And why should it not?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Thu May 26th, 2011 at 02:29:48 PM EST
[ Parent ]
Indeed! What ever is wrong with rights issues?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon May 30th, 2011 at 06:12:50 PM EST
[ Parent ]

  "How you got the theory that he [JakeS] demolished my points is baffling."

   Hint:     I read them.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 06:15:37 AM EST
[ Parent ]
I expect that socialism will outlast the United States themselves as a nation.

This wouldn't surprise me at all - although it's also true that "old" socialism is creaking a bit, and a refresh might not be a bad thing.

In the UK there a lot of bottom-up (well - middle up) socialist activity wasn't directly political, but made it possible for socialism to gain political power.

E.g. in the UK the early socialists created the Working Men's College which both educated and politicised workers. There were spin-off projects across the UK, and they had a huge missionary influence on socialism as a movement.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 24th, 2011 at 05:37:36 PM EST
[ Parent ]
  corrected, amended,

    " So, to speak of its discredit, and in the process to only get around at length to the emphasis of its [i.e. socialism's]  general lack of importance among key contemporary politico-economic pundits in the U.S. points up how in this light, the claimed "discredit" is both irrelevant and the clearest example of how and why your approach to this issue (to say nothing of others) is shot through and through with faults and problems.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 05:16:40 PM EST
[ Parent ]
Point me to a vigorous advocate of socialism who has contributed to the fiscal crisis debate in Europe.

And by socialism, I mean, some system in which the world economy was not dominated by huge private corporations, not a system where capitalism is adjoined to a social welfare system.

by rootless2 on Tue May 24th, 2011 at 05:33:17 PM EST
[ Parent ]
Define "contributed".

If you mean "has been allowed to set the narrative in the financial press" then - oddly enough - it's not easy to find someone like that.

If you include books and interviews elsewhere, there's been no lack of published critiques of the disaster - from Shock Doctrine downwards.

The fact that there are people in the streets of Madrid and London suggests that at least some of the books have been read, and they've had an influence on beliefs and behaviour.

For the rest - being excluded from the financial press isn't quite the same as being discredited.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed May 25th, 2011 at 06:26:19 AM EST
[ Parent ]

    "Define "contributed".

      Don't worry.  He needs no encouragement there.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 06:46:09 AM EST
[ Parent ]
   We're being baited-and-switched," "put on," "led downt the path," by an interlocutor who insists, as a prerequisite to discussion, that we adopt his fantasy visions, his definitions, his grounds, and then, having denied us all the usual tools and devices of ordinary common-sense reason, asks us to defend our claims on the barren ground he leaves to us.

  Or, in the rap vernacular, we're being "played" by a guy who has no respect for his interlocutors' rights to a standard of fair reason and evidence.  

  Of books--as evidence of the still-lively debate-- there are plenty to be cited.  And that is exactly why he demanded "a vigorous advocate of socialism who has contributed to the fiscal crisis debate in Europe" instead.

   

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 06:57:44 AM EST
[ Parent ]
Shock doctrine - Is Naomi Klein your candidate? She's no socialist.

I'm a believer in mixed economies and I'm a democratic socialist. I do believe it is possible to have far less violent versions of systems which contain elements of the market within them.

"Elements of the market"!

by rootless2 on Wed May 25th, 2011 at 07:44:15 AM EST
[ Parent ]
then we're finally getting somewhere! (with respect to understanding where you're coming from)

The market is where I exchange my surplus for things I need, or want. I often go there on Sunday mornings to buy fruit, vegetables, amusing cheeses and bits of cured pig. If this is an unsocialist institution, then I suspect you will find few socialists here.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed May 25th, 2011 at 10:09:58 AM EST
[ Parent ]
I am not arguing that all forms of market systems are inherently violent. It is eminently possible to have a market-based economy that requires no such brutality and demands no such ideological purity. A free market in consumer products can coexist with a free public health care, with public schools, with a large segment of the economy--like a national oil company--held in state hands. It's equally possible to require corporations to pay decent wages, to respect the right of workers to form unions, and for government to tax and redistribute wealth so that the sharp inequalities that mark the corporatist state are reduced. Markets need not be fundamentalist

She's a social democrat.

by rootless2 on Wed May 25th, 2011 at 10:47:54 AM EST
[ Parent ]
makes it pretty clear that it's an extinct species. It was all downhill since Lenin's NEP.

Hardly surprising we don't hear much from them.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Wed May 25th, 2011 at 01:09:37 PM EST
[ Parent ]
When "socialists" and Warren Buffet and Bill Gates, the Tory party in the UK, the US Democratic Party all say the same words, one has to ask.

We are committed to an NHS that is free at the point of use and available to everyone based on need, not the ability to pay. We want to free NHS staff from political micromanagement, increase democratic accountability and give patients the power to choose the treatments that are best for them.

UK Conservative Party Platform.

The socialist parties as organizations with mass blue collar worker/union membership and with social welfare as a distinctive program had a certain intellectual coherency. When "socialists" mostly consist of a small cadre of  middle class "activists" on the left or essentially indistinguishable technocrats on the socialist right (as in the French Socialist Party), that coherency is long gone.

by rootless2 on Wed May 25th, 2011 at 01:40:03 PM EST
[ Parent ]
Be interested in your thoughts on my comment here

Skepticism is the first step on the road to truth. -- Denis Diderot
by ATinNM on Wed May 25th, 2011 at 02:00:50 PM EST
[ Parent ]
We are committed to an NHS that is free at the point of use and available to everyone based on need, not the ability to pay. We want to free NHS staff from political micromanagement, increase democratic accountability and give patients the power to choose the treatments that are best for them.

- UK Conservative Party Platform.

Tories lie. Film at 11.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed May 25th, 2011 at 02:28:00 PM EST
[ Parent ]
  As you reserve the right to define "vigorous," and  "advocate," and "socialism," and "contributed," and "fiscal crisis," and  "debate in Europe," and, (not to mention)  "And by socialism, I mean, some system in which the world economy was not dominated by huge private corporations, not a system where capitalism is adjoined to a social welfare system," I may find it difficult to meet these requirements.

  On the other hand, I can and I do object to the validity of your presumption that this lack is indicative of and support for the claim that "socialism is discredited."

   The debate you demand I show evidence of is in suspension due to an unfortunate widespread ideological insanity that for some forty years has dominated the political scene--going under various names, it's known as "Reaganomics," "Thatcherism," "Supply-side economics," "Neo-liberal" (or "conservative", depending on which side of the Atlantic Ocean one resides).

   None of that insanity "discredits" socialism any more than the fact that fewer and fewer people read books "discredits" books or reading but that absurd reasoning, in effect, is the essence of your assertion, an assertion for which we have had zero supporting argument or evidence from you, merely your bald-faced unsupported assertion.  

    "The past is not dead. In fact, it's not even past."

     

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 06:43:41 AM EST
[ Parent ]

  "Point me to" ....

  I'd rather point you to a clownish trafficker in bad faith.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 06:59:40 AM EST
[ Parent ]
Socialism is alive and well, without a single prominent advocate participating in the debate.

Amazing. As with the US, my observation is that "the left" in Europe has become primarily a social club for people who want to feel morally superior without actually doing anything.

by rootless2 on Wed May 25th, 2011 at 07:36:30 AM EST
[ Parent ]
   "Socialism is alive and well, without a single prominent advocate participating in the debate.
Amazing."

  more obfuscatory twaddle: conflating "socialism" as being, by necessity, either "discredited" or then, if not, "alive and well".  The theoretical bases of socialism are, though currently out of sight and out of mind, still as valid as ever and, in that sense, "alive and well".  Being ignored and being discredited aren't necessarily the same things.

   I posed an analogy to explode such a nonsense notion as that when I pointed out that the dramatic fall off in reading books in contemporary life hasn't "discredited"
 books or reading; instead, it has simply given evidence of a society which is lost and confused.

    "people who want to feel morally superior without actually doing anything"  describes your attitude when you peddle the view that socialism is a discredited world-view merely because it isn't at the center of current or recent media debate and attention--and that those who reject that are insisting that it's alive and well in actual contemporary practice--- a view that no one in this thread has asserted.  
   

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Wed May 25th, 2011 at 08:01:44 AM EST
[ Parent ]
Thanks for the discussion - although you probably won't agree, to me the salient peculiarity of this argument is that in taking the position widely seen on progressive blogs as "more left" you are arguing that the structure of finance and banking corporate law is fundamentally fair and adequate while I argue it's a sham disguising exercise of power. You argue that if the administrators of the system had only exhibited the moral fiber needed to apply the law, the crisis would have purged the system of dysfunctional financial companies, rewarded the competitive and punished the inefficient/reckless, while I argue that the whole system was a precarious, morally absurd, mess.
by rootless2 on Sun May 29th, 2011 at 06:45:17 AM EST
[ Parent ]
I actually agree with the salient points of that summary: The law as exists is quite adequate to deal with the cleanup of a financial mess - it can be improved, yes, but it does not have to be improved in a way that implies a revolutionary overthrow of the existing social order. It was, after all, substantially written to clean up the last serious financial mess, and it is mostly the prevention side that has been attacked.

When it was enforced, it worked as well as can be expected. When it is systematically not enforced over a period of 30 to 40 years, well then it stops working. This does not discredit the law, nor those who call for prosecuting violations, any more than the systematic violations of the Geneva Conventions discredit prosecution of war criminals.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 29th, 2011 at 07:49:50 AM EST
[ Parent ]
  ..."while I argue that the whole system was a precarious, morally absurd, mess."

     The difference in your critique and Jake's is all-important; numerous contributors here recognize that  "the whole system was [is] a precarious, morally absurd, mess."  But they don't, for all that, simply dismiss out of hand everything in it without distinction.

    My favorite example of your myopia is how you take Paul Krugman to task (and you don't hesitate to restate his positions in a flagrantly unfair way.)

  Whatever Krugman's faults, he's not only done more to redress the incredible general ignorance of basic economic concepts than practically any other U.S. figure, he's done it with extremely few fellow-writer/journalists to help him.  There should be hundreds like him--since, after all, he presents what are generally the standard accepted views among respectable economists on basic issues; but there aren't, at least in the pages of the daily mainstream press.  Joseph Stiglitz, who also writes columns and books, is the most notable example of "help" in this effort.  But before Krugman began a patient effort to correct what amounts to monumental public ignorance in economics--he did Noble-worthy work just raising the level of attention to economic issues at all--the situation resembled a general public which existed in a vast darkness, having simply no idea beyond simple fairy-tales they'd been fed in junior high and high school.

    You denigrate all of that effort by Krugman without the slightest distinction.  Despite the fact that today, because of Krugman's decade of columns, many more Americans have a deal more than sheer ignorance or simplistic fairy-tales on which to reason in economic issues.

     Krugman does absolutely essential work in offering the non-specialist public a comprehensible interpretation of contemporary economic controversies and you give him zero credit, zero credit.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Sun May 29th, 2011 at 10:21:49 AM EST
[ Parent ]

the "toxic assets" purchased by government have turned out to be a great  investment, and the economy is recovering slowly, not smoldering in  ruins.

  1. the toxic assets are not on the government's books only because their are on the Fed's balance sheet.

  2. the unemployment rate has been at 9-10% (or, you can argue, using the more relevant U6 measure, above 15%) for more than 2 years now - in a country with a very limited safety net; the housing market is under water in any definition of the term, with millions of people dragged down by mortgages bigger than their home value, and incomes are still down - and even more unequal. The only things that have recovered are corporate profits and financial asset prices.


Wind power
by Jerome a Paris (etg@eurotrib.com) on Tue May 24th, 2011 at 05:21:59 AM EST
The "toxic assets" are on both Fed and Treasury books. Their valuation has increased. You can look up the maiden lane valuations and status easily on the Fed web pages. Do you want a link?

The economy is not in good shape. However, even in the best of times, recoveries from such big shocks are slow and there a long term problems in the US economy that are very difficult to solve. These include the evaporation of millions of manufacturing jobs - a phenomenon that was obscured during the housing bubble by a bubble in construction work. But certainly, we don't see any solution to any of those problems in Krugman's critique of Geithner's bank rescue.

There are many long term problems in the US economy, some of which may be intrinsic to capitalism, but none of that means Stiglitz and Krugman knew what the fuck they were talking about.

by rootless2 on Tue May 24th, 2011 at 08:58:23 AM EST
[ Parent ]

Citi would have dragged down BOA and WellsFargo with it (and God  only knows what would have happened in Europe). Instead of working on  the auto rescue and the Green energy investment programs and starting  the health care reform, the Administration would have been sinking in an  effort to manage $3trillion of assets and "clean up the their books".  GE capital would have followed - undoubtedly dragging down manufacturing  output - instead of investing in green automobiles and locomotive factories GE would have been battling creditors. The US government would have taken responsibility for the debts  of those banks and it would have cost hundreds of billions of dollars.

This is the "too big to fail" argument. If one admits that it had to be done, in the circumstances, what has been done since to ensure that we never have to do that again? Unless you think it's a good think for these large institutions to have a permanent public guarantee that they will be bailed out, no matter how stupidly they behave?

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue May 24th, 2011 at 05:24:25 AM EST
A number of good steps have been taken notably: the Treasury now has authority to wind down non-banks like Citigroup in an orderly fashion including provisions permitting "clawback" of bonus money.

Longer term, the use of direct investment of billions in manufacturing industries - a policy that the Obama administration has taken without much notice by anyone, cuts in bank subsidies such as the student loan program, and a major reform of Ex-Im bank etc. have all acted to reduce wall street. The longer term effect of health reform will be to squeeze money out of the insurance companies.

Obviously (a) much more could be done and (b) the return of an administration like the Bush one will defeat any system.  But my point was the for immediate crisis management, the "left critique" was neither correct not "left".

I wish that we'd had some actual left policies like union management of the auto companies at least suggested instead of having this crabby market worship passed off as "left".

by rootless2 on Tue May 24th, 2011 at 09:06:06 AM EST
[ Parent ]
  Jake,

    thank you for your counter-points in this issue. I also followed your suggestion and viewed the video presentation of Richard Koo; brilliant.

    I wonder if (or where) the TINA crowd refutes Koo's arguments.  So far, I haven't seen them do other than assume that, in the midst of a smoking wreckage, they don't have to refute anything.  Apparently, capitalism is fine; it's just that irresponsibles abused and misused it, leading to world-wide financial chaos and hardship---though in no way fairly distributed or borne.  No, the genius of this variant of capitalism, and its intimate connection to the concomitant rampant political corruption which characterizes our times, is that profits are privatized and won among a tiny elite at a pyramid's peak, while harms and losses are shunted off on those who had least to do with causing them and who politically have the least capacity to defend themselves from the same elite which is profiting at their expense.

   Is it significant that nowhere in the piece above by rootless2 do the words "structured finance products" figure--- nor Asset-backed securities, nor Mortgage-backed securities, nor Collateralized debt obligations?

   I wonder: did Geithner ever seriously or consistently inveigh against these in his time as chairman of the N.Y. Federal Reserve Bank?  Not that I ever read, anyway.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 08:34:01 AM EST
It would have been peculiar indeed for a civil servant working in a central bank to have "inveighed" against structured finance products given that the market in such products was deliberately created and built by by legislature and executive actions. Fannie & Freddie did not fall from the heavens, they emerged from a political system in which an ongoing subsidy of the FIRE sector and the white middle class was a core part of the political economy of the state.

If you are going to argue that capitalism is itself unfixable and unredeemable then why are you involved in an argument over the relative correctness of two policy recommendations, both of which are completely within capitalism? Do you mistakenly believe that Krugman and Stiglitz were proposing radical changes in the world system? They were not.

by rootless2 on Tue May 24th, 2011 at 09:58:49 AM EST
[ Parent ]
It would have been peculiar indeed for a civil servant working in a central bank to have "inveighed" against structured finance products given that the market in such products was deliberately created and built by by legislature and executive actions.

We appear to have radically different notions of the professional obligations of civil servants in general and financial regulators in particular.

Of course it is the central bank's job to point out - loudly - when the financial system is trending towards systemic insolvency. In fact, they should point it out by withdrawing rediscount facilities from banks suspected of abusing the discount window to fund speculative or otherwise irresponsible lending.

This is Central Banking 101 (pre-Friedman edition).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 11:10:12 AM EST
[ Parent ]
Don't be ridiculous. It was not the place of unelected central bankers to decide economic policy. The policy of the United States was to promote the securitization of mortgages as a means of subsidizing the real-estate market. This policy was carried out since the 1960s. The central bankers certainly should have recognized and warned against the dangers of the system, but the dangers of central bankers setting economic policy are being demonstrated right now in Europe.

If you want to see a particularly deluded apologia for securitization, you should consult the Stiglitz/Orzag article.

http://online.wsj.com/article/SB10001424052748704204304574543503520372002.html

(there's a pointer to the actual text in the linked article)

by rootless2 on Tue May 24th, 2011 at 11:37:33 AM EST
[ Parent ]
It was not the place of unelected central bankers to decide economic policy.

How lucky Greenspan could never be accused of that.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 24th, 2011 at 11:47:37 AM EST
[ Parent ]
Indeed he did not. Greenspan implemented policies that were endorsed by the political branches of government.
by rootless2 on Tue May 24th, 2011 at 11:55:28 AM EST
[ Parent ]
He was a cheerleader for casino mortgages.

For fuck's sake, the man stood up on a podium at a time where nominal interest rates could not possibly go any lower without introducing a Wörgl-type currency and argued for adjustable-rate mortgages. On the basis that they had a lower monthly payment.

That's well beyond any implied (let alone official) obligations he might have had to support Congressional bubble policy (something he in any case never did when Congress wanted to ensure full employment, or on other such trivial matters).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 12:00:45 PM EST
[ Parent ]
exactly - he was propping up Bush's administration. The guy was appointed by the President and confirmed by congress and treated as a figure of religious veneration by generations of political hacks.

The idea that there is some shadowy banker who by force of personality is responsible for the political power of the oligarchy strikes me as fundamentally right wing.

by rootless2 on Tue May 24th, 2011 at 12:27:11 PM EST
[ Parent ]
exactly - he was propping up Bush's administration.

Funny how selective he was about that. Seeing as he never did prop up Clinton's more responsible policies, though he was central bankster then as well. And that was not just down to personal animosity either - he enthusiastically supported the right-wing bits of Clinton's agenda...

He was a political hack. Good riddance.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 12:39:58 PM EST
[ Parent ]

  Gee, no reply from rootless2 to this response of yours.

   Why is that?, I wonder.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 12:47:02 PM EST
[ Parent ]
Greenspan was a scumball, a rightwing hack, and a fool. These are all clear. But the proposition that Greenspan was able to pursue economic policies in defiance of Congress/President does not follow from those.

I am fascinated by the possibility that you will attempt to argue that Greenspan battled Robert Rubin, however - because  I'd be curious to see how you could paint them as deeply opposed while keeping them both as comic book bad guys.

by rootless2 on Tue May 24th, 2011 at 12:58:55 PM EST
[ Parent ]
Greenspan was a scumball, a rightwing hack, and a fool. These are all clear. But the proposition that Greenspan was able to pursue economic policies in defiance of Congress/President does not follow from those.

There is a number of positions between full support and successfully implementing your own policy. The fact that he could not do the latter does not imply that he had not way to pervert policy.

I am fascinated by the possibility that you will attempt to argue that Greenspan battled Robert Rubin,

I won't. I was talking about Greenspan's opposition to responsible macroeconomic policy.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 01:08:50 PM EST
[ Parent ]
  "But the proposition that Greenspan was able to pursue economic policies in defiance of Congress/President does not follow from those."

   Supposing the Fed chairman was to flatly defy the president on any given matter, what, exactly, according to you, could the president do about it? --beyond fussing and fuming, I mean.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge

by proximity1 on Tue May 24th, 2011 at 01:54:20 PM EST
[ Parent ]
In theory the President can remove any member of the board "for cause". Also in case of conflict of powers between Treasury and frb, Treasury wins.

In practice, strong presidents lead, weak ones do not.
Certainly it is not practice for chairs of the regional banks to make policy although as Jake points out there is room for more or less zeal and competence.

by rootless2 on Tue May 24th, 2011 at 02:10:32 PM EST
[ Parent ]
And who exactly in Congress or the Senate was giving Greenspan orders, either during Bush's time or Clinton's?

Is there some memo or record trail you can point us at which proves conclusively that the pony was leading the dog, not vice versa?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 24th, 2011 at 06:06:46 PM EST
[ Parent ]
what exactly in Bush or even Clinton's financial policy do you see as conflicting with Greenspan's policies?
by rootless2 on Tue May 24th, 2011 at 09:23:10 PM EST
[ Parent ]
Your claim was that Greenspan was the employee of Congress etc, rather than vice versa.

I'd like to see some evidence of regular policy direction from Congress etc to Greenspan to support that.

Or should we assume that Greenspan was the perfect employee who never needed direction of any kind?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 24th, 2011 at 10:00:05 PM EST
[ Parent ]
That was not my claim. I said that the Fed implemented policies set by the political branches.

That doesn't mean that Fed officials are memo driven puppets.

by rootless2 on Tue May 24th, 2011 at 10:15:13 PM EST
[ Parent ]
If you want to see a particularly deluded apologia for securitization, you should consult the Stiglitz/Orzag article.

Oh, dear me. A 2002 paper concluding that, based on 2000 data, concluded that Fannie and Freddie were solid at the time. Apologia indeed.

I don't know if you noticed, but the Wall Street Journal was busy spinning that story as an "it's all Fannie and Freddie's fault" (when did that become a left-wing narrative... but I digress).

Now, that is not to say that Orzag and Stiglitz' use of historical data was appropriate, or that Fannie and Freddie make sense. It very probably isn't, they very probably don't, and very probably never was or did. But pretending that you can use a bubble and subsequent crash to discredit the author of a paper written at least one year before the bubble started (and using data from at least three years before the start of the bubble) is... well, the quality of analysis I'd expect from the Wall Street Urinal.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 12:13:37 PM EST
[ Parent ]
I'm merely pointing out that the securitization policies of the US government were widely endorsed by both political and economic savants and that it would have taken a particularly heroic central bank civil servant to take a loud position of dissent.

The theory that structured bonds were an evil invention of some Goldman-Sachs executive doesn't stand up to the evidence.  All the post crash shocked hand-wringing that there was securitization going on in the casino is absurd.

by rootless2 on Tue May 24th, 2011 at 12:31:59 PM EST
[ Parent ]
I'm merely pointing out that the securitization policies of the US government were widely endorsed by both political and economic savants and that it would have taken a particularly heroic central bank civil servant to take a loud position of dissent.

That would have been a lot more exonerating if those same people hadn't been actively involved in purging dissenters within the civil service. It is one thing to go along with insanity because your boss demands it. It is quite another thing to enthusiastically pressure skeptical colleagues to support it.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 12:51:58 PM EST
[ Parent ]
The US government invented securitisation to make it easier and cheaper to offer loans to those on low incomes.

No issue there. But the original 1970 version included solid due diligence, which led to reliable asset quality.

Now, as a side note it's interesting that this was a fine example of government innovation - something that isn't supposed to be possible.

Anyway - the private sector decided it like the idea, and ran with it. But it "innovated" the use of fraudulent, optimistic, or just plain wrong ratings, backed up with fake pseudo-insurance to create a tool for selling low-quality investments as high quality ones.

While the process is superficially similar, the motivation and the implementation are very different. In the original scheme the government rather carefully selected the mortgages it would support, both for financial and social reasons. The result was a safe return.

In the privatised version, the motivation was making a quick buck from anyone, anywhere, for any reason, and the process became an excuse to knowingly hide poor risks from investors, to allow banks to charge investors administration and portfolio fees, and generally to fuck people around.

This was not part of the original specification.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue May 24th, 2011 at 06:24:24 PM EST
[ Parent ]
You have a more generous view of US government securitization policy than I do. The poor got some crumbs, but it was mostly a subsidy of the politically important middle class, the banks, real-estate, and investors - all of whom benefited from the engine of suburb subsidy. Think about Fannie/Freddie which were private companies that arbitraged the credit rating of the federal government to speed up the mortgage/loan process - and agency bonds were a fucking wonderful investment for people who could afford them. But of course bloating the real-estate and financial sectors has both economic and political effects and so the gate had to keep widening ...

The original specification carried the seeds for the later developments.

by rootless2 on Tue May 24th, 2011 at 09:16:31 PM EST
[ Parent ]
It was not the place of unelected central bankers to decide economic policy.

Hilarious, as seen from a country with an independent central bank.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon May 30th, 2011 at 06:20:14 PM EST
[ Parent ]
there is no such thing as an independent central bank. They either respond to political pressure or are completely captured by finance.
by rootless2 on Mon May 30th, 2011 at 06:27:38 PM EST
[ Parent ]
See Willem Buiter's What's left of central bank independence? (May 5, 2009)

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Mon May 30th, 2011 at 06:41:48 PM EST
[ Parent ]
A third option is that they're captured by the civil service. Which is arguably the more desirable outcome, although I will grant that it seems to happen less often than getting captured by the banksters.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 30th, 2011 at 07:06:18 PM EST
[ Parent ]
civil servants have ideologies too.
by rootless2 on Mon May 30th, 2011 at 07:21:36 PM EST
[ Parent ]
Of course they do.

But they also have sufficiently different institutional incentives and patronage systems from politicians and banksters to warrant mentioning them as a separate power bloc.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 30th, 2011 at 07:39:48 PM EST
[ Parent ]

  There are an as-yet-unspecified number of variants of this thing called capitalism. (See: Pierre-Noël Giraud, Le commerce des promesses : Petit traité sur la finance moderne passim.)

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge
by proximity1 on Tue May 24th, 2011 at 12:45:17 PM EST
[ Parent ]
I wonder if (or where) the TINA crowd refutes Koo's arguments.

They do not. They assert their silly liturgy in a louder voice.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 24th, 2011 at 11:10:33 AM EST
[ Parent ]
 This thread's "Best before __" date has passed.

"In such an environment it is not surprising that the ills of technology should seem curable only through the application of more technology..." John W Aldridge
by proximity1 on Wed May 25th, 2011 at 08:07:06 AM EST


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