Archive for the ‘Financial crisis’ Category
In 1914, Europe had arrived at a point in which every country except Germany was afraid of the present, and Germany was afraid of the future.
Sir Edward Grey
That from a Ben Hunt piece drawing parallels between today’s Greek debt crisis and the lead-up to WWI.
Since the 2008 financial crisis, I have held that the US parallel to that event was not 1929-32 but the financial panic of 1907. Subsequent events seem to at least loosely confirm this thesis. My biggest fear was, and remains, that in the inevitable game of global musical chairs (who ends up holding the bad debts), the risk was that one party or more was going to be a sore loser. And that war, not financial collapse, was the bigger concern.
Ben is not predicting a war in Europe over who should pay whom what. But his is a cautionary perspective and reminds us that we take the status quo for granted at our own peril.
In spite of all the apparent turmoil in the world and the terror events in our country and abroad, the seven decades since WWII have been among the most pacific in modern history. A great part of this is due to the establishment of international trade and the maintenance of a global order by the US. The Euro experiment was created in part as an add-on attempt to further preclude another catastrophe such as befell Europe twice in the 20th century. But the antecedent attempt to bridge European borders with a common currency (Austria Hungary in the 1880s) did nothing to prevent WWI. And I suspect when push comes to shove, neither the Euro, nor all the trade agreements in the world, can prevent a desperate country from doing what desperate countries do.
We shall see whether, hopefully, calmer heads prevail, or whether the US will be called upon (and is still willing) to play the global order enforcer should events take a more hostile turn.
If this were a marriage, the lawyers would be circling.
The Economist, My Big Fat Greek Divorce (pointer, John Mauldin)
Probably the last thing anyone wants to read is yet another book that attempts to explain why the financial crisis happened. Most of the territory, from the plausible to the incomprehensible, has been covered and recovered ad nauseam. That said, there is a strong case that Atif Mian and Amir Sufi have actually contributed a new and worthwhile line of thinking in their House of Debt.
The most interesting thing I took away from my reading of their book was that the mortgage crisis hit lower wealth households the hardest, by a substantial margin. In most cases, the wealth of lower income groups is mostly tied up in their homes and their equity was completely wiped out as home prices fell. As these lower income groups have a “higher propensity to spend” income, this severe negative wealth effect had – and continues to have – a dramatic dampening effect on economic growth. As a byproduct, this consequence of the financial crisis also exacerbated the already growing wealth disparities in the country.
If Mian and Sufi are correct, then many of the public policies to shore up the financial system in response to the crisis – decried by both conservatives and liberals – were off target. Most notably in their view, the greatest error of both the Bush and Obama Administrations was failing to enact true mortgage relief for underwater homeowners. Failing to do this created a self-reinforcing cycle of default, falling home prices, lower consumer spending, slower growth and job loss that continues to depress the economy to this day.
“Where, Oh Where, Is Ferdinand Pecora?” – my Op Ed on the fifth anniversary of the financial crisis – is published in Advisor Perspectives, a leading interactive publisher for Registered Investment Advisors, wealth managers, and financial advisors.
It is the 5th anniversary of the onset of the greatest banking and financial crisis of our lifetimes. During September 2008, vast chasms opened in the global financial system, exposing imbalances so large they threatened to bring down the world’s economies. For a few months during which time seemed to stand still, we came perilously close to just such a collapse as markets seized up and cash was hoarded by banks and households worldwide.
Five years later, one would like to think that the fundamental conditions that led us to the precipice in 2008 had been corrected. One might presume that the many individuals and companies who knowingly or carelessly gamed a largely unsupervised bazaar of counter-party debt and derivatives for their own benefit had been charged and convicted. One would be wrong on both counts.
As I wrote here one year ago, the world was rescued from the brink. And in the intervening years, some progress has been made towards reducing the dangerously excessive leverage in our financial systems, at a cost to tax-payers and savers worldwide (see financial repression).
But as I wrote in 2012, the financial crisis did much to damage the credibility of the once-vaunted American financial marketplace. Were I the “brand manager” for Team Financial Markets USA, I would have made restoring that trust my number one priority, once the immediate crisis had passed. Congressional inquiry, criminal and civil prosecutions would have played a prominent role, if only (as the tough-on-crime advocates are fond of saying) as an example to others and as a means of discouraging similar behavior in the future.
Yet none of these responses have occurred. Even modest attempts to re-regulate a recklessly deregulated banking and finance industry have been met with ferocious, and abundantly funded, opposition by lobbyists and other industry flacks.
The Great Depression had its Pecora Commission, deemed at the time a “witch hunt” in the same tones used to decry today’s Volcker Rule. Yet Pecora’s theatrical trial lawyer tactics succeeded in unleashing a groundswell of public support for substantive Congressional action. And this led to historic consumer and investor protection laws such as Glass Steagall, which mandated the separation of commercial and investment banking; and the Securities and Exchange Act of 1934, which created the Securities and Exchange Commission.
In 1999 Glass Steagall was overturned, and today’s SEC is an understaffed, understaffed remnant of its former self, both due to the deregulatory zeal that reigned throughout the 1990s and 2000s. Market efficiency was, and remains, the rallying cry, all else be damned. I am still waiting for some definitive indication that the finance industry, and Washington alike, are committed to restoring the qualities of fairness, transparency and rule of law that made our capital marketplace the greatest in the world.
So writes the always insightful Bill Black, lawyer, academic and former banking regulator best known for his role in the Savings and Loan Crisis of the 1980s.
Glass-Steagall prevented a classic conflict of interest that we know frequently arises in the real world. Commercial banks are subsidized through federal deposit insurance. Most economists support providing deposit insurance to commercial banks for relatively smaller depositors. I am not aware of any economists who support federal “deposit” insurance for the customers of investment banks or the creditors of non-financial businesses.
It violates core principles of conservatism and libertarianism to extend the federal subsidy provided to commercial banks via deposit insurance to allow that subsidy to extend to non-banking operations.
The NY Times reports that Elizabeth Warren, who came to Washington to reform the banking industry, has teamed up with John McCain to introduce legislation to restore a modernized version of the Depression-era Glass-Steagall Act, repealed in 1999. Says Barry Ritholz of The Big Picture who is quoted in the Times piece.:
For about 70 years, Glass-Steagall managed to keep the riskier, more damaging part of Wall Street away from what should be the boring, straightforward side of finance. It was the height of stupidity repealing Glass-Steagall.
This should be interesting.
Total US debt – both public and private as a percentage of GDP – peaked in 2010 after a 30-year climb. As seen in the chart, this critical ratio is now steadily declining. I have long argued that it was this number – total debt as a percentage of GDP – that was the crucial figure to watch, as opposed to all the attention being focused on the level of Federal debt only.
As a society, we became way over-leveraged, thanks to the below-market costs of our borrowings, courtesy of our “friends” the Chinese and other factors. The debt ratio levels we reached were unsustainable and when the financial crisis hit, this veritable house of cards started to collapse around us.
But thirty years of excess borrowing and spending will not be reversed in such a short time. We have a long road ahead before this ratio declines back into a more “normal” zone. Fortunately this can be accomplished by GDP (economic) growth in addition to an actual decline in indebtedness.
Chart from Ned Davis Research
The great mystery story in American politics these days is why, over the course of two presidential administrations (one from each party), there’s been no serious federal criminal investigation of Wall Street during a period of what appears to be epic corruption.
So writes Matt Taibbi in a Rolling Stone article “Why The Government Won’t Fight Wall Street.” Taibbi is best known for coining the phrase “vampire squid” to describe Goldman Sachs.
h/t The Big Picture