Archive for April 4th, 2010
Rick Bookstaber: Want To Know Where The Next Crisis Is Brewing? Check Out The Muni Market
The financial/hedge fund/banking crisis is over!
So sayeth Rick Bookstaber, a critic of financial complexity-turned-fed (he works for the SEC now).
On his personal blog he lays out where to look next for a serious crisis, and his answer is the municipal debt market.
But first, he lays out six preconditions for a serious crisis:
- Problems occur where leverage and opacity occurs.
- Things get serious when the market is big.
- Investors hold a false-belief in diversity.
- Portfolios that are apparently hedged often aren’t.
- Ratings can’t be relied upon.
- Defaults are not easy to manage.
Does the muni debt market meet the conditions?
You bet.
On leverage and opacity, he writes:
Leverage and Opacity. Leverage in the municipal market comes from making future obligations to employees in order to pay them less now. This is borrowing in the form of high pension benefits and post-retirement health care, but borrowing nonetheless. Put another way, in taking lower pay today, the employees have lent money to the municipality, with that money to be repaid via their retirement benefits. The opaqueness comes from the methods of reporting. For example, municipalities are not held to the same standards as corporations in their disclosure.
The next five are just as clear.
Of course this doesn’t tell you when there’s going to be a problem, so that part’s up to you. Good luck.
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Robert Reich: The Economy Is Still Wildly Out Of Whack, And Experts Like Larry Summers And Alan Greenspan Have No Clue
(This guest post is reprinted with permission from the author’s blog)
I’m in the “green room” at ABC News, waiting to join a roundtable panel discussion on ABC’s weekly Sunday news program, This Week.
Alan Greenspan is now being interviewed. He says he bore no responsibility for the housing bubble that catapulted the nation into a financial crisis in 2008 because no one could have known about the bubble when he chaired the Fed in the years before it burst. Larry Summers was interviewed just before Greenspan. He said the economy is expanding, that the Administration is doing everything it can to bring jobs back, and that the regulatory reform bills moving on the Hill will prevent another financial crisis.
What?
If any single person is most responsible for the financial crisis, it’s Alan Greenspan. He presided over a Fed that lowered interest rates to zero (adjusted for inflation) but failed to prevent banks from using essentially free money to speculate wildly. You do not have to be a brain surgeon to understand that if money is free, banks will take it and lend it out. And if oversight is inadequate, the banks will lend the money to anyone who can stand up straight and to many who cannot. The result will be a giant subprime lending bubble that will burst.
If any three people are most responsible for the failure of financial regulation, they are Greenspan, Larry Summers, and my former colleague, Bob Rubin. In 1999 they advised Congress to repeal the Glass-Steagall Act, which since 1933 had separated commercial from investment banking. By 1999, Wall Street was salivating over such a repeal because it wanted to create financial supermarkets that could use commercial deposits to place bets in the financial casino. That would yield the Street trillions.
At the same time, Greenspan, Summers, and Rubin also quashed the efforts of the Commodity Futures Trading Corporation to regulate derivatives, when its director began to worry that derivative trading already was getting out of control.
Yet Greenspan continues to take no responsibility for what occurred. In the interview he just completed he avoiding saying anything about the failure of the Fed under his watch to adequately oversee the banks, and the absence of sufficient financial regulation to begin with.
I dislike singling out individuals for blame or praise in a political system as complex as that of the United States but I worry the nation is not on the right economic road, and that these individuals — one of whom advises the President directly and the others who continue to exert substantial influence among policy makers — still don’t get it.
The direction financial reform is taking is not encouraging. Both the bill that emerged from the House and the one emerging from the Senate are filled with loopholes that continue to allow reckless trading of derivatives. Neither bill adequately prevents banks from becoming insolvent because of their reckless trades. Neither limits the size of banks or busts up the big ones. Neither resurrects the Glass-Steagall Act. Neither adequately regulates hedge funds.
More fundamentally, neither bill begins to rectify the basic distortion in the national economy whose rewards and incentives are grotesquely tipped toward Wall Street and financial entrepreneurialism, and away from Main Street and real entrepreneurialism. It was just reported, for example, that America’s top 25 hedge fund managers last year earned an average of $3 billion each. They continue to pay a federal income tax of 15 percent on most of that, by the way, because their lobbying efforts have been so successful.
Meanwhile, the so-called jobs bills emerging from Congress and the White House are puny relative to the challenge of restoring jobs in America. Last Friday’s jobs report, read most positively, showed 112,000 jobs added to the economy in March. But that’s below the number needed simply to keep up with an expanding population. In other words, we’re actually worse off now than we were a month ago. At the same time, the median wage of Americans with jobs keep dropping.
The American economy is seriously out of whack. The two people interviewed this morning don’t seem to understand how far.
Read more economic commentary at RobertReich.org >
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Earthquake Rocks California And Mexico
It’s violent on the Pacific this evening.
There are report of at least one strong earthquake on the Baja Peninsula being felt in LA.
The link to the USGS info is here.
So far no reports of major damage.
More to come if warranted…
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Former Harvard Investor Marc Seidner Embarrassed At PIMCO Roundtable Debate
Did you think PIMCO was successful because shakes-hands sleeps with Uncle Sam?
Pshaw.
Well, okay, sure the Newport Beach firm lead by bond god Bill Gross benefited from the bailouts and also helped arrange them… but that’s not really how it makes it’s money, it wants you to know.
As this piece from Walter Hamilton at the LA Times favorably explains, PIMCO thrives because it’s a home of open-minded debate, where a young rookie investor can stand toe to toe and debate “The new normal” with luminaries like Mohammad El-Erian.
Or they can tear apart the ideas of fellow Harvard Management Company alum Marc Seidner, as conveyed here:
Veteran portfolio manager Marc Seidner went through the gantlet on a recent morning as he pitched an idea to 15 colleagues seated around a rectangular table in a conference room off Pimco’s vast trading floor.
The debate was mannerly and threaded with the technical jargon inherent to Wall Street. But the upshot was clear: Seidner’s co-workers gutted his arguments with surgical precision.
El-Erian ended the discussion after 20 minutes, saying he didn’t want to embarrass Seidner, whose head slumped in resignation.
What else do we learn about PIMCO frim the piece?
- Bond investing is harder than stock investing, supposedly, because you have to be on top of the whole economy (bear in mind that conveniently for PIMCO we’ve been in a multi-decade bond bull market).
- PIMCO has a brutal GE like ranking system for its employees.
- Mohammad El-Erian conducts his meetings like a professor, treating younger analysts like students.
So, there you have it. If PIMCO does hold secret calls with Ben Bernanke and Tim Geithner, they do it after reports like Hamilton leave the building.
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Remember That Real-Time Indicator That Was Rolling Over? It’s Not Anymore, It’s Coming Back
Remember the Aruoba-Diebold-Scotti real-time business conditions indicator maintained by the Philly Fed?
(Probably not; it’s never talked about.)
Here’s how the Philly Fed describes it (via EconBrowser):
The Aruoba-Diebold-Scotti business conditions index is designed to track real business conditions at high frequency. Its underlying economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow data. Both the ADS index and this web page are updated as data on the index’s underlying components are released.
The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions. The ADS index may be used to compare business conditions at different times. A value of -3.0, for example, would indicate business conditions significantly worse than at any time in either the 1990-91 or the 2001 recession, during which the ADS index never dropped below -2.0.
Anyway, last time we saw it it appeared to be rolling over… but as of March 31, that’s going away, and it’s almost back to even, providing another arrow in the optimist’s quiver.
This isn’t the end of the story, obviously, and no, it’s not quite even to 0 yet, but that dip early in the year is vanishing. The bleeding has been stopped.
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