Blog on the Run: Reloaded

Monday, September 6, 2010 6:05 pm

Crime wave

If you read/listen to the mainstream financial press, you probably presume that the primary responsibility of the Federal Reserve is to control interest rates.

That’s true, but it also is required by law to do something else:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

So, in addition to interest rates, the Fed also is required to seek maximum employment.

Has it done so? Obviously not. For one thing, it (or, for that matter, Congress) could have required banks and other firms that got bailed out to increase hiring, or to increase lending in ways that reasonably could be expected to lead to increased hiring. Instead, the money mostly went to bonuses and other nonproductive uses.

As Ryan Grim noted last December:

The Fed is mandated by law to maximize employment, but focuses on inflation — and “expected inflation” — at the expense of job creation. At its most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.

Board members expressed concern “that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation.” That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting. The bank keeps secret the actual transcript. Likewise, because of Fed secrecy, it’s unknown which or how many members voiced such concerns.

Suffering high unemployment in order to keep inflation low cuts against the Fed’s legal mandate. Or, to put it more bluntly, it is illegal.

But, as is true of every other illegal thing banksters do, there will be no consequences. Remember, right after Grim wrote this, Fed Chairman Ben Bernanke was reconfirmed. And things have only gotten worse since, and neither Obama nor Congressional Democrats nor Congressional Republicans nor business is doing one damn thing about it.

Relatedly, and unfortunately, Crimes Against the Economy is not a capital offense, which is a lucky thing for former Fed chairman Alan Greenspan because Gonzalo Lira is standing by for the prosecution with a blindfold, a cigarette and one heck of a case.

UPDATE: Oh, and here’s a best-case projection of how long it’s going to take us to get back where we were, jobs-wise, in December 2007. And by best-case, I mean this chart outright ignores growth in the labor force, currently in the vicinity of 90,000 people per month.

Seven years. Best case. Reality: given that growth in the labor force since the Great Recession began in December 2007 means that instead of 7.6 million jobs lost in the past 32 months, we’ve actually lost 11.2 million jobs, it’ll be a lot longer than that.


Monday, June 21, 2010 11:04 am

Layin’ the smackdown on Alan Greenspan

Why do so many people think Alan Greenspan is a genius? Barry Ritholtz just doesn’t get it, and after reading him for several months, neither do I:

Former Fed Chair Alan Greenspan discussed the Federal deficit in a WSJ OpEd yesterday. In it, he argued that the budding “urgency to rein in budget deficits” is occurring “none too soon.”

Like most of the former Fed Chair’s analyses, forecasts, and economic beliefs, this one is pure, unmitigated nonsense. A brief look at the Greenspan legacy, along with his track record of forecasts, leads to the obvious conclusion: Greenspan is an economist to blithely ignore, as his commentary contains almost nothing of value other than its status as a contrary indicator.

Before we get into the details of his deficit commentary, I must highlight this sentence: “The financial crisis, triggered by the unexpected default of Lehman Brothers in September 2008, created a collapse in global demand that engendered a high degree of deflationary slack in our economy.”

No, Alan, the financial crisis was not triggered by Lehman’s collapse. You are getting the causation exactly backwards: The crisis is what triggered LEH’s collapse. Further, the fall of Lehman was hardly “unexpected.” Whether you want to look at stock price before the collapse, spreads on its debt, David Einhorn’s forensic accounting (he was short LEH) or our own quantitative analysis (we were short LEH), there were plenty of warnings about Lehman’s collapse. It was only unexpected by those whose ideological beliefs blinded them to reality. (Remind you of anyone?)

I am not particularly well-versed in economics — I’ve taken one course in my life — and yet I knew the economy in general and Lehman Bros. in particular were overextended even before Lehman failed. So how did this escape the notice of the Master of the Universe?

And this is not an isolated instance. Ritholtz actually makes a decent case that Greenspan is “the most incompetent economist of his generation” … which is saying something.

Thing is, there are still plenty of politicians in positions of power out there who will believe every word Alan Greenspan says because he tells them what they want to hear.

Sunday, January 24, 2010 12:08 am

Odds and ends for 1/23

Insider trading at the Fed?: Or tied to the Fed, anyway. Yet one more reason to audit the thing, and I don’t mean just routine annual audits, either.

Meanwhile, over at the New York Stock Exchange, one can also find hinky goings-on.

Prop-trading ban will hit Goldman Sachs a lot harder than Goldman says, according to an independent credit analyst. In the immortal words of Al Capone, I’ll send flowers. If you own Goldman stock, you should consider the strong probability that you’re being lied to.

Roundup of stories on the prop-trading ban and related issues, here.

Whose Kiss of Death is deadlier, Fred Mishkin’s or Alan Greenspan’s? I don’t care as long as at least one of the two works as advertised and Ben Bernanke slithers back off to the private sector.

So if Bernanke doesn’t stay as Fed chair, who should get the job? Zero Hedge nominates John Taylor, whose thoughts on the roots of the current crisis can be found here. I do not agree with everything Taylor believes, but I believe that on balance he would be a substantial improvement on Bernanke. I’d like to know whether someone else might be even better.

Paul Volcker’s rise from exile to the president’s right hand helpfully resurrects a short (well, compared with Barney Frank’s 1,100-page bill) paper on restoring security and stability to the U.S. financial system.

Rx from Ezra Klein: “If Democrats abandon health-care reform in the aftermath of Brown’s victory, the lesson will be that they can’t govern. … A plumber and I both agree that my toilet should work. But if he can’t make it work, I’m not going to pay him any money or invite him into my home. Governance isn’t just about ideology. It’s also about competence and will. That’s where Democrats are flagging.”

Another Rx: The California Supreme Court ruled this week that people with prescriptions for medical marijuana can have/grow all they need, not subject to arbitrary state limits. Yeah, that increases the likelihood of abuse, but there was no medical basis for the old limits. Let doctors make that call.

My BS meter just pegged: The same Lord Hutton who certified, despite questionable evidence, that British weapons inspector David Kelly committed suicide has ordered all records in the case sealed for 70 years.

My BS meter just pegged again: Walter Isaacson reviews the new book by John Yoo in today’s NY Times without ever using the word “torture.”

S.C. Lt. Gov. Andre Bauer says we need to stop feeding poor people because they breed: I am not making this up: “You’re facilitating the problem if you give an animal or a person ample food supply. They will reproduce, especially ones that don’t think too much further than that. And so what you’ve got to do is you’ve got to curtail that type of behavior.” He also called for drug testing for the parents of the 58 percent of S.C. schoolkids who receive free or reduced-price lunch. I think I know who needs the drug test.

Obama adopts another trick from the Bush bag: This time, it’s having the Justice Department’s Office of Legal Counsel retroactively legalize illegal surveillance. So that’s why the Senate never took up Dawn Johnsen‘s confirmation as head of OLC: There’s no way she’d have signed off on this crap.

The pope says priests should blog. I think that’s a great idea, but I think they’ve got other things to do first.

And finally, DJ Earworm’s annual remix of the Billboard magazine Top 25 pop songs of the year, for 2009. This year’s is called “Blame it on the Pop”:

Saturday, February 14, 2009 6:15 pm

Because we were running out of bad news

Filed under: I want my money back. — Lex @ 6:15 pm
Tags: , ,

Paul Krugman guesstimates that the four biggest commercial banks have a combined market cap of $200B — and that’s including shareholder belief in the likelihood of a bailout — and problems totaling about $450B. He adds:

Given these numbers, it’s extremely hard to rescue these banks without either (a) giving a HUGE handout to current stockholders or (b) effectively taking ownership on the part of we, the people. Of these, (a) would be politically unacceptable as well as bad policy — but the Obama administration isn’t ready to go for (b), because it’s not in our “culture”.

I say our culture needs to get over it because the nationalization train left the station at least as far back as AIG, if not sooner.

UPDATE: Now even Alan Greenspan is saying that nationalizing some of the banks may be the “least bad option.” So if Bush used Greenspan for political cover for the 2001 tax cut, I see no reason why Obama shouldn’t do the same if — or when — it becomes necessary to nationalize some banks.

Thursday, October 23, 2008 8:44 pm

And he was supposed to be the bright guy

Filed under: Sad — Lex @ 8:44 pm
Tags: ,

I suspect I’m even more surprised than Alan Greenspan was:

WASHINGTON (AP) — Alan Greenspan, the former Federal Reserve chairman, said Thursday that the current financial crisis had uncovered a flaw in how the free market system works that had shocked him.

Mr. Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong.

Mr. Greenspan said he had made a “mistake” in believing that banks operating in their self-interest would be enough to protect their shareholders and the equity in their institutions.

Mr. Greenspan said that he had found “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

Mr. Greenspan, who headed the nation’s central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a “state of shocked disbelief.”

He said that the current crisis had “turned out to be much broader than anything that I could have imagined.”

Of course, I’m not going to sit here and tell you I could have imagined things would get this bad, either. But then, it’s not my job to know these things. It was Greenspan’s job.

However, knowing that “free-market” trading in securities in fact needs some kind of regulation and oversight to keep the players informed and relatively honest with one another — which is exactly why we have an SEC — I *did* figure that banks having a lot of unregulated trading in complex securities was probably going to lead to problems someday. I figured the problems would be fairly limited in the greater scheme of things, though.

I guess that’s why I’m not the one who spent 18.5 years as chairman of the Federal Reserve.

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