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Anglo Disease - the end of the "Bubbles" Greenspan illusion

by Jerome a Paris Fri Oct 17th, 2008 at 07:10:54 AM EST

Fed Rethinks Stance on Popping Bubbles

"[O]bviously, the last decade has shown that bursting bubbles can be an extraordinarily dangerous and costly phenomenon for the economy, and there is no doubt that as we emerge from the financial crisis, we will all be looking at that issue and what can be done about it," Fed Chairman Ben Bernanke said this week.

(NYT) Since mid-2007, when the credit crisis erupted, the country’s nine largest banks have written down the value of their troubled assets by a combined $323 billion. With a recession looming, the pain is unlikely to end there.


In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion.

The Greenspan Bubble was a time of great economic "growth", on the back of huge "profits" for the financial sector (which reachd 40% of total corporate profits). The profits proved to be imaginary. Can we also acknowledge that the growth was also imaginary, and thus that "reforms" (deregulation, labor market flexibility, tax cuts) DO NOT WORK, except to channel massive sums towards a happy few!?

See the updated list of diaries on the financial crisis and the Anglo Disease


In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Oct 17th, 2008 at 07:12:54 AM EST

And credit-card defaults have yet to peak.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Fri Oct 17th, 2008 at 08:51:52 AM EST
[ Parent ]
Just wait til all the debt backing the Private Equity Boom starts to go sour as these debt-loaded Companies call in the Receivers....

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Fri Oct 17th, 2008 at 09:08:20 AM EST
[ Parent ]
[insert W(H)EEEE tag here]

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt ät gmail dotcom) on Fri Oct 17th, 2008 at 09:33:34 AM EST
[ Parent ]
Op-Ed Columnist - Let's Get Fiscal - NYTimes.com

But the truth is that we were looking Japanese for quite a while: the Fed had a hard time getting traction. Despite repeated interest rate cuts, which eventually brought the federal funds rate down to just 1 percent, the unemployment rate just kept on rising; it was more than two years before the job picture started to improve. And when a convincing recovery finally did come, it was only because Alan Greenspan had managed to replace the technology bubble with a housing bubble.

Now the housing bubble has burst in turn, leaving the financial landscape strewn with wreckage. Even if the ongoing efforts to rescue the banking system and unfreeze the credit markets work -- and while it's early days yet, the initial results have been disappointing -- it's hard to see housing making a comeback any time soon. And if there's another bubble waiting to happen, it's not obvious. So the Fed will find it even harder to get traction this time.

We all bleed the same color.
by budr on Fri Oct 17th, 2008 at 09:38:59 AM EST
Can we also acknowledge that the growth was also imaginary, and thus that "reforms" (deregulation, labor market flexibility, tax cuts) DO NOT WORK, except to channel massive sums towards a happy few!?

You seem too suggest that, as far as the serious people are concerned, channelling massive sums towards the happy few should be considered a bad thing. I have not noticed any senior political sentiment in the europe or america that agrees with that, indeed many would consider that the entire point of the policy.

Oh sure, Darling the UK Chancellor of the Exchequer has made noises about reducing bonuses and dividends, but noises made for quietening the public do not imply action will be taekn.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Fri Oct 17th, 2008 at 10:44:41 AM EST
Oh happy news! /snark

Deutsche Bank's Ackermann to Forgo 2008 Bonus Payout

Oct. 17 (Bloomberg) -- Deutsche Bank AG Chief Executive Officer Josef Ackermann, the highest-paid executive of Germany's top 30 companies, will forgo his 2008 bonus as banks grapple with the worst financial crisis since the Great Depression.

Investment banking chiefs Anshu Jain and Michael Cohrs will also go without their bonuses, along with members of the bank's management and supervisory boards, Deutsche Bank spokesman Christian Streckert said today. Ackermann received a bonus and shares worth about 12.7 million euros ($17 million) last year, according to the Frankfurt-based firm's annual report.

They´ll just have to try and survive on their "meager" basic salaries. :)
And why that PR move?

German Finance Minister Peer Steinbrueck said Oct. 13 that bank executives tapping the government's emergency package shouldn't earn ``more than 500,000 euros a year -- no bonuses, no severance pay during this time, and no dividends.''

Cruel and unusual punishment! :)

by Detlef (Detlef1961_at_yahoo_dot_de) on Fri Oct 17th, 2008 at 03:15:49 PM EST
[ Parent ]
Unfortunately he's not required to forego his other bonuses retroactively :(

$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Fri Oct 17th, 2008 at 09:00:05 PM EST
[ Parent ]
Speaking of Greenspan: could it have been that he was beyond short-sighted - more in a bubble fixation mode? I mean, how does one explain this little news item from March 2004:
Of all the peculiar things Alan Greenspan said last week, none was more mystifying than his suggestion that consumers should seriously consider taking out an adjustable-rate instead of a fixed-rate mortgage at a time when interest rates are near record lows...

...His comments on mortgages, however, left many financial advisers dumbstruck.

"It was possibly the strangest bit of advice ever to be proffered by an American central banker," says Jim Grant, publisher of Grant's Interest Rate Observer.

The article gives two possible reasons for the unprecedented advice from a Central Banker, neither of which looks nice today:

...Greenspan is really trying "to help keep the housing bubble, and by extension the U.S. economy, expanding. Greenspan knows that the only way most home buyers can afford these ridiculously high prices is with ARMs. Without them, housing prices would collapse. He also knows how important (refinance) money is to the U.S. consumer. Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM."

Under this scenario he is utterly blind, displaying the foresight and the wishful thinking of a 4-year-old.

The other scenario is, equally disturbing in hindsight:

The "real agenda," Sandler says, is reining in Fannie Mae and Freddie Mac, the government-chartered but publicly held companies that buy fixed-rate mortgages from lenders.

The day after his credit union speech, Greenspan warned that Fannie Mae and Freddie Mac could pose a threat to the financial system if their growth was not restrained.

Fannie Mae and Freddie Mac enjoy certain government-granted benefits that have allowed them to amass a commanding share of the market for home loans.
Greenspan has become "increasingly aggressive about the fact that Fannie and Freddie do not really improve the situation of the homeowner. The subsidy they get from the government is disproportionate to the value they give the homeowner," Sandler says, without condoning or opposing this viewpoint."

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Fri Oct 17th, 2008 at 01:53:32 PM EST
I´d say two things.

  1. At the time of his speech the Fed Funds Rate was 1%. In the second half of that year the Fed started raising rates. He was either criminal or stupid. He must have known that the rate would go up.

  2. He was certainly successful in "the other scenario". I wonder what the private banks are thinking now of him?
Between 2004 and 2006, when subprime lending was exploding, Fannie and Freddie went from holding a high of 48 percent of the subprime loans that were sold into the secondary market to holding about 24 percent, according to data from Inside Mortgage Finance, a specialty publication. One reason is that Fannie and Freddie were subject to tougher standards than many of the unregulated players in the private sector who weakened lending standards, most of whom have gone bankrupt or are now in deep trouble.

During those same explosive three years, private investment banks -- not Fannie and Freddie -- dominated the mortgage loans that were packaged and sold into the secondary mortgage market. In 2005 and 2006, the private sector securitized almost two thirds of all U.S. mortgages, supplanting Fannie and Freddie, according to a number of specialty publications that track this data.

by Detlef (Detlef1961_at_yahoo_dot_de) on Fri Oct 17th, 2008 at 03:30:02 PM EST
[ Parent ]
Re 1: He didn't just know that the rate would go up. He was in a position to influence it. In fact, when you hear from the guy that "sets" the rate "choose ARMs" you're probably thinking, "well, he should know".

There must be a law against this...?

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Fri Oct 17th, 2008 at 07:01:55 PM EST
[ Parent ]
Jerome, I don't want to cramp your literary efforts, but pointing out (again) the folly or lies of the free-marketeers seems mostly an act of schadenfreude at this point.

Perhaps there are a few at DailyKos who are still ignorant of the 30 year Ponzi scheme now collapsing and even more among those who only read the daily newspaper. So for those audiences continuing to explain what went wrong and why may provide a useful service.

The audience at Eurotrib, however, seems to have been on top of this since the founding of the site. So, what might be more useful is to assume that we all understand the causes and that we also understand that the "bailouts" are designed to protect the interests of the monied classes.

Thus the issues to discuss are what is to be done next, after the decline and the bailouts have run their course.

I see three things remaining after the dust settles.

  1. A further consolidation into fewer big firms, especially those "too big to fail". Not only will there be only a few banks in each market, but a limited number of ratings agencies, brokerage firms and accounting companies.
  2. An explicit acknowledgment that the government has a duty to protect these favored firms from failing and to ensure that they make generous profits. Before this crash these guarantees were mostly implicit with only oil and defense firms.
  3. A permanent "big brother" spy and tracking system. This is being set up under the cover of fighting "terrorism", but as with all secret police efforts, is really being directed against political dissidents within countries.

When you add these three components together you get something that looks like Mussolini style Fascism. The only thing lacking is the brown shirts and the government-sanctioned attacks on the left.

To my mind, this is the real issue: is there a way to head off total neo-Fascism?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Fri Oct 17th, 2008 at 03:13:42 PM EST
And also, I don't know what to make of this:
Global Research: Behind the Panic: Financial Warfare and the Future of Global Bank Power - F. William Engdahl
There is serious ground to believe that US Goldman Sachs ex CEO Henry Paulson, as Treasury Secretary, is not stupid. There is also serious ground to believe that he is actually moving according to a well-thought-out long-term strategy. Events as they are now unfolding in the EU tend to confirm that. As one senior European banker put it to me in private discussion, `There is an all-out war going on between the United States and the EU to define the future face of European banking.'
The Paulson plan is now clearly part of a project to create three colossal global financial giants--Citigroup, JP MorganChase and, of course, Paulson's own Goldman Sachs, now conveniently enough a bank. Having successfully used fear and panic to wrestle a $700 billion bailout from the US taxpayers, now the big three will try to use their unprecedented muscle to ravage European banks in the years ahead. So long as the world's largest financial credit rating agencies--Moody's and Standard & Poors--are untouched by the scandals and Congressional hearings, the reorganized US financial power of Goldman Sachs, Citigroup and JP Morgan Chase could potentially regroup and advance their global agenda over the coming several years, walking over the ashes of a bankrupt American economy made bankrupt by their follies.
by Bernard (bernard) on Fri Oct 17th, 2008 at 04:51:20 PM EST
[ Parent ]

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