Relevant and even prescient commentary on news, politics and the economy.

Is this Short Covering, or Are the Suckers Flooding the Market?

Via ElNuevoDia at LG&M, “Gamblers are now betting that Kavanaugh will not be confirmed.”

The market in question, at PredictIt, seems rather straightforward. Note, though, that the contract only opened five days ago (18 September) and traded consistently in the 60-70% range through yesterday (22 Sep), closing at 61% and only reaching as low as 55%.

In the past two hours, more than 20,000 transactions has occurred, which is greater than the volume on any previous day, with no trade higher than 60, and none in the past hour above 42. (It is 9:13 EDT as I write this.) The 24-hour graphic is impressive in its consistency:

until it’s not.

The open question is whether the buyers at the lower level are the same people who were selling in the 60s and 70s (the ratio of Trades to Shares is roughly 2:1; some of the previous activity was clearly coverage) locking in a profit against new, relatively low-information buyers, or if the route is on.

It appears the opportunity for buying at the bottom has passed; it remains to be seen if the market will stabilize at low levels or recover as time passes without new information and/or the termination of the contract.

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Catch 22.4

As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society must bear a certain proportion to the whole capital of that society, and never can exceed that proportion. — Adam Smith, The Wealth of Nations

An”invisible hand” reaches up out of the subterranean depths of that “whole capital” periodically to re-establish the “certain proportion,” which lies somewhere between 20 and 25 percent. The average from 1948 to the end of 2017 was 22.43434%. It looks rather like this:

Household and non-profit net worth and GDP track each other quite nicely from 1948 to 1973 until “something happens” in 1973. (What could that “B”?!) After 1973, net worth underperforms GDP until sometime in the late 1990s when a series of wild gyrations commences. As you can see from the chart, though, the authorities have the situation well in hand and nothing could possibly go wrong.

Henry Hoyt in 1886 and Leo Amery in 1908 chided Smith’s “fallacy” of “terminological inexactitude” and the consequence of ignoring the fact that the capital of a nation, “grows by the exercise of the qualities and energies of which it consists.” Well, yes, but to some extent those qualities and energies are bound up in the possession of assets whose market values at any particular time can be aggregated. The amount of work to be done is not fixed but it is bounded. Hoyt and Amery had a point — but so did Smith.

It seems to me that my little chart above tells a story of how those bounds might even be stretched a bit — presumably by the expedients of easy credit, fiscal deficits and financial deregulation. But there seems to be inevitable leakage from stimulation to speculation and from speculation to Ponzi finance, as Minsky warned. From 1948 to 2016, the CPI-adjusted net worth of households and non-profits never exceeded five times real GDP (or GDP never less than 20% of Net Worth). At the end of the second quarter of 2018, GDP was 18.7% of Net Worth.

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In the News – Sunday Morning

Senator Grassley tweeting: “Five times now we hv granted extension for Dr Ford to decide if she wants to proceed w her desire stated one wk ago that she wants to tell senate her story Dr Ford if u changed ur mind say so so we can move on I want to hear ur testimony. Come to us or we to u,”

I like how tweeting brings out the intellect in people and especially our politicians. And Chuckie the tweeting senator does this on a public forum with Ford and Kavanaugh so everyone can read along with him.

In New Jersey’s 2019 ACA marketplace, fruits of reinsurance, individual mandate, and silver loading.

New Jersey’s Dept. of Banking and Insurance has posted individual market health plan prices for 2019. Thanks to the state’s new reinsurance program, state-based individual mandate, and silver loading (actively encouraged by DOBI), unsubsidized enrollees will see price drops from 2018. For the subsidized, it looks pretty much like status quo ante — although network changes and plan design changes could alter that picture.

As was the case last year, AmeriHealth has sewn up all the lowest price points. AmeriHealth and Oscar are offering discounted silver plans off-exchange — presumably because of silver loading (Cost Sharing Reduction, available only with silver plans and only on-exchange, is not priced into off-exchange silver). Horizon is not offering any off-exchange discounts, but it has dropped prices about 7% from last year. A few salient year-to-year comparisons below. Quoted premiums are for a 46 year-old — where they’re a clean 1.5 times the base rate posted by DOBI. Andrew Sprung at xpostfactoid

More states should follow New Jersey’s lead.

Further evidence that the tax cuts have not led to widespread bonuses, wage or compensation growth. Economics Policy Institute.

Newly released Bureau of Labor Statistics’ Employer Costs for Employee Compensation data allow us to examine nonproduction bonuses in the first two quarters of 2018 to assess the trends in bonuses in absolute dollars and as a share of compensation. The bottom line is that there has been very little increase in private sector compensation or W-2 wages since the end of 2017. The $0.03 per hour (inflation-adjusted) bump in bonuses between the fourth quarter of 2018 and the second quarter of 2018 is very small and not necessarily attributable to the tax cuts rather than employer efforts to recruit workers in a continued low unemployment environment.

Saving the Planet Doesn’t Mean Killing Economic Growth”

Noah Smith: Hickel cites analyses by the United Nations Environment Program and others showing that even big improvements in resource efficiency, encouraged by very high carbon taxes, will be unable to halt overall resource use or global carbon emissions. But this evidence doesn’t support Hickel’s conclusions, which rely on several misconceptions about the nature and the importance of growth.

Hickel doesn’t seem to grasp the fact of most economic growth happening in countries that are relatively poor. From 2010 to 2015 as determined by estimates by the IMF emerging markets, developing countries were responsible for about 70 percent of global output and consumption growth and advanced economies were responsible for the rest. World Bank’s forecasts for 2017-2019 are similar.

China’s contribution to global growth will be double the U.S. growth and India’s will be larger than the whole of the entire euro zone. The same is true of greenhouse gas emissions. Since about 1990, emissions from the U.S. and EU have fallen, while emissions from developing countries such as (and especially) China and India have exploded.

In 2017, the International Energy Agency estimated that the growth in energy-related carbon emissions in China and the rest of developing Asia was more than five times the growth in the European Union while U.S. emissions declined.

If Hickel and others succeed in stopping economic growth in developing countries, it will not be rich countries bearing the brunt of the change. It will be poor and middle-income countries such as India and China. The desperately poor African countries will not a chance at increased prosperity.

$600,000 in Debt and the Crisis is Worsening “The student loan default rate more than doubled between 2003 and 2011, and 40 percent of borrowers are expected to fall behind on their loans by 2023.”

There is a long history of Congress favoring financial institutions with laws and regulation blocking students from debt relief. Yet, our president can bankruptcy relief multiple times without any court or law blocking him. For him it is business as usual, getting a new loan to buy property and increase profits, pay the old loan with then new loan, and declaring bankruptcy when costs exceed cash inflow. Students do not have the luxury of gaming the system.

With the cost of an education in this country is only rising, borrowing is unlikely to slow. State funding for public colleges fell by $9 billion between 2008 and 2017, and the gap has been filled with tuition hikes. For the first time, half of all states relied more heavily on tuition last year than on government appropriations to fund higher public education. Americans now spend an approximate $30,000 per student a year to gain a college education or twice as much as the average developed country.

The IBR and Repaye programs put in place by well-meaning advocates has been a failure due to a lack of understanding in how to manage it yearly and with some servicers such as Naviente deliberating misleading students into multiple postponements of loans instead of into the income-driven repayment plans. The plans cap monthly payments at a percentage of the borrower’s income. It is not the first-time commercial interests have lied to students and taken a predatory approach on student loans. Naviente is being sued by five states and the CFPB.

Indian sailor Abhilash Tomyinjured on disabled yacht.

A multinational rescue effort is underway to try to reach an injured sailor whose yacht is disabled in the South Indian Ocean.

Abhilash Tomy, a 39-year-old Indian naval commander, was competing in the 2018 Golden Globe Race. The race is a nonstop, 30,000-mile solo yachting competition that bars the use of modern technology. To me, this sounds like a lot of fun and a lot of work. I always like to sail as the quiet of the water is soothing.

Abhilash Tomy boat the “Thuriya,” hit a storm in the South Indian Ocean. The 36-foot boat was one of several hit by 80 mph winds and 46-foot seas midway across the South Indian Ocean on Friday, day 82 days of the race. Thuriya’s mast was broken about 1,900 miles southwest of Perth, Australia and “at the extreme limit of immediate rescue range,” according to media statements.

Organizers became concerned after Tomy sent a text message reading: “ROLLED. DISMASTED. SEVERE BACK INJURY. CANNOT GET UP,” and then was unheard from for nearly 15 hours. In a later satellite text message, the sailor gave his location and wrote: “ACTIVATED EPIRB (Emergency Position Indicating Radio Beacon). CANT WALK. MIGHT NEED STRETCHER.”

What is the White House Deflecting from Now?

It is no secret one of the strategies used by the White House is to deflect attacks on their agenda by creating another emer . . . spectacle . . . gency when the news and the opposition gets close to defeating their plans. The attack on Rosenstein as led by the NYT is just too easy, convenient, and laughable (almost). The deflections have happened too many times already. Trump holds Fire

Continuing on this path; “Kavanaugh Accuser Agrees to Testify” I am sure Grassley and other members of the Senate, Hatch, Cornyn, Cruz, Hannity, and the tier two Senators such as Flake, etc. will make this debacle into another shameful attack on Ford, women, and the truth. What, no women on the Repub side? I am sure the 4 women on the Dem side can support Ford and strike back.

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“What Keynes Ignored”

“What Keynes Ignored”

Ruth Sutherland wrote in The Daily Mail a couple of days ago:

Here is how Keynes “ignored” those “workaholic tendencies”:

Yet there is no country and no people, I think, who can look forward to the age of leisure and of abundance without a dread. For we have been trained too long to strive and not to enjoy. It is a fearful problem for the ordinary person, with no special talents, to occupy himself, especially if he no longer has roots in the soil or in custom or in the beloved conventions of a traditional society. …

For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented.

To be fair to Sutherland, Keynes didn’t use the exact words “workaholic tendencies” so if she actually read the Keynes essay, she might have not comprehended the passages dealing with the training of “old Adam”… “too long to strive and not to enjoy.” On the other hand, it is entirely possible Sutherland didn’t read the essay but just assumed Keynes ignored the point she wanted to raise.

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A hypothesis for Prof. Krugman: the transmission method was FEAR

A hypothesis for Prof. Krugman: the transmission method was FEAR

In his recent column disagreeing with Ben Bernanke, Paul Krugman asks for an explanation as to how a financial panic could lead to years thereafter of a slow recovery. Specifically, Krugman says that he “really really wants to hear about the transmission mechanism.”

After all, the financial panic eased in 2009. And yet, outside of the very noteworthy exceptions of corporate profits generally and Wall Street bank profits specifically, the economic recovery was lethargic.

Now, to a great extent, the debate between “credit event” and “housing event” is somewhat a semantic one.  You simply don’t get a housing bubble unless there is a credit bubble to enable it. Similarly, absent a credit bubble in consumer lending for either housing (the 2000s) or appliances and furniture (the 1920s), you don’t get a big consumer downturn (see, e.g., 2001, in which consumers sailed right through a brief and shallow recession brought on in large part by a stock market bubble. See also the quick late 1980s recovery from the 1987 stock market crash).

But if you are looking for a transmission mechanism that lasted after 2009, as usual you have to look beyond narrow-minded neoclassical economy orthodoxy. Because from a behavioral point of view, the answer looks pretty simple: FEAR.

Behavioral economists have shown that people in general react twice as strongly to the fear of a loss vs. the anticipation of an equivalent gain. A good example in the everyday economy is that consumers cut back spending twice as sharply in the face of an oil price spike, as they loosen their spending in the face of a steep decline in gas prices.

It is crystal clear that the financial panic of September 2008 instilled fear in the vast mass of households. I believe that there is very good evidence that it persisted for most of this decade.

To begin with, here is a graph of consumer confidence as measured by the University of Michigan:

I have zoomed in on 2007-2015, because i want to emphasize that consumer confidence did not rebound meaningfully at all once it crashed in 2008, until about 2014. Furthermore, any time there was a whiff of renewed crisis during that timeframe, confidence plummeted, in the case of the 2011 “debt ceiling debacle,” all the way back to its bottom, but also in response to the Deepwater Horizon massive oil spill (2010), the “fiscal cliff” (end of 2012) and the GOP’s government shutdown (2013).

That, ladies and gentlemen, is fear.

Meanwhile, households didn’t just deleverage out of debt during the 2008 financial panic, but they continued to deleverage and deleverage and deleverage all the way until late 2014 — well after housing prices had bottomed (red in the graph below):

and they haven’t meaningfully increased their exposure to debt since.

Further, there was a housing boom from 1986-88 without a credit bubble. Afterward house prices declined 10% into the early 1990s:

But the below graph of the personal savings rate shows that, unlike the 1990s, when the household savings rate went into a sustained decline, as household debt levels increased (see first graph above), following the great recession, the savings rate maintained its higher level, with the exception of 2012-13 when a one year 2% rebate of Social Security withholding taxes that resulted in higher spending, which resulted in a one year decline in saving when it expired:

So, I believe a good case can be made that the “transmission mechanism” that Krugman seeks is that the trauma of the 2008 financial crisis instilled a continuing sense of fear in consumers that there might be a repeat, leading to a shunning of debt and a resulting more subdued increase in the consumption that is 70% of the U.S. economy.

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Housing: a big miss in permits with important ramifications

Housing: a big miss in permits with important ramifications


NOTE: I’ll have a more comprehensive report up at Seeking Alpha later, and will link to it once it is posted.

Despite a smart month over month increase in starts, this morning’s report on housing permits and starts, taken as a whole, was a sharp negative.

It’s true that starts, both in total and for single family units only, were higher than their readings from the last two months. This is something that I forecast one month ago, because permits had had a couple of good months, and starts tend to follow permits with about a one month lag.  But they were below every other reading but one for this entire year.

Permits were another story entirely.  Last month I said that I expected them to stagnate, based on higher mortgage rates this year.  They did even worse than that. Total permits came in at a 12 month low, and are down -5.7% YoY, and down -12% from their March high.  This is recession watch territory. The less volatile single family permits came in at an 11 month low. While they are still up +2.1% YoY, they are down more than -7% from their February high. This is also enough to turn this important long leading indicator negative, as we have gone 6 months without a new high and are down over -5%.

The data isn’t up on FRED yet, so here is the Census Bureau’s graph:

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A detailed look at Industrial Production during this expansion

A detailed look at Industrial Production during this expansion

In the past week there’s been a little highbrow relitigation of the drivers of the “Great Recession” between Paul Krugman and Ben Bernanke. Bernanke plumps for it having been a “credit event” — and as to the crisis of 2008, he is clearly correct — while Krugman says it was primarily a “housing event,” although Krugman also acknowledges that he is mainly speaking of the aftermath from 2009 onward.

Since neither the 10% decline in housing prices between 1989 and 1992, nor the NASDAQ internet bubble of 1999-2000 managed to cause the worst downturn in 75 years, my own view is that it was precisely because there was a credit bubble in the biggest asset that is owned by a majority of Americans — for which there was no financial help forthcoming to the middle class — that the effects were so longstanding. Had the government — as it did for the 1930s Dust Bowl — bought up or crammed down existing mortgages, and took repayment of the loans out of housing appreciation whenever the owners eventually sold, it is likely that the consumer rebound from the recession bottom would have been much more “V”-ish.

But neither Krugman nor Bernanke, so far as I can tell, mentions a third important reason for the slowness of the recovery: the second installment of the China shock.  Because it is crystal clear that businesses decided, once demand picked up beginning in late 2009, to move plants and hiring overseas.

This is plain when we look at how employment recovered. Services employment recovered in relatively “V”-ish fashion: two years down and three years up. Even goods employment ex-manufacturing came back in more delayed fashion, and is at 97% of peak 2007 levels. But manufacturing employment only began to turn very late and, at 92.5% of peak 2007 levels, is still far behind:

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The Messenger Wore A Skirt

I had written this in 2009 and it also appeared in “the new agenda.” It is a decent piece about people who saw the coming crisis pre-2007/8 and those who opposed them.

Recently, Stanford Magazine did an article on one of the University’s former law review presidents who graduated at the top of the 1964 class. The first female to hold either distinction of graduating first in her class and also as president of the school’s Law Review. Prophet and Loss. Stanford Magazine, April 2009.

“Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” Alan Greenspan

“I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way,” Rubin told the Washington Post. “My recollection was . . . this was done in a more strident way.”

“characterized as being abrasive.” Arthur Levitt

It would seem the three coupled with Larry Summers’s push back in Congress on the regulation of derivatives, had the problem and not Brooksley Born. Since then, all three men have suggested there should have been more regulation of the derivatives market Greenspan has called its recent collapse a “once in-a-century credit tsunami.” Called a modern-day Cassandra by Stanford Magazine, one could only wonder where we would be today if the economic and financial wizards had taken heed of Brooksley’s warning.

Short histories on CDO/CDS . . . Collateral Debt Obligations (CDO) were invented by Drexel Burnham Lambert (Milken) as a way to package asset-based securities. The CDO was tranched into similar asset backed securities of the same rating allowing investors to concentrate on the rating rather than the issuer of the bond. Ten years later, JP Morgan invented Credit Default Swaps (CDS) which was used as a mechanism to bet on a 3rd party default. In 2000, CDS were made legal with the passage of the Commodity Futures Modernization Act and any regulation of them was stymied with this bills passage. Later on, an investment firm decided to team CDS and CDO together, transferring the risk from the CDO to the issuer of the CDS, and creating a synthetic CDO. Few CDS if any and their counters naked CDS had the reserves set aside to payout a claim against a failed CDO.

It was 1994, Bankers Trust lost ~$800 million from various derivative investments. The chief losers were P&G and Gibson Greetings. Bankers Trust was formed by a consortium of banks, shedding the loan image for conducting trades. Bankers Trust was successfully sued by P&G for its losses by claiming racketeering and fraud. Bankers Trust also became known for its remarks about Gibson Greetings not knowing what Bankers Trust was doing. In 1998, Bankers Trust pled guilty to institutional fraud due to the failure of certain members of senior management to escheat abandoned property to the State of New York and other states.

In 1998, LCTM was struck by a downturn in the market when Russia defaulted on government bonds, a security LCTM was holding. To make a significant profit on small differences in value, the hedge fund took high-leveraged positions. At the start of 1998, the fund had assets of about $5 billion and had borrowed about $125 billion. When investors panicked and sold Japanese and European bonds and bought US treasuries, the spreads between LCTM holdings increased, resulting in a loss of ~$1.8 billion by August 1998. LCTM was saved by an orchestrated Fed bailout utilizing private investors.

In both cases, the history was there to call for more regulation.

It was in 1998, Brooksley Born testified to Congress about the dangers of the unregulated derivatives market referencing the LCTM losses as a recent example. It was then deputy Treasurer Larry Summers testified to Congress that Born’s desire to regulate is “casting a shadow of regulatory uncertainty over an otherwise thriving market.” Larry’s testimony set the stage for Congress to rein in the power of the Brooksley Born’s and the CFTC with the passage of Phil Gramm’s Financial Service Modernization Act of 1999 prohibiting the regulation of the derivatives market (In 2005, the revised bankruptcy laws would place derivatives outside of the laws making it the first in line to receive compensation). Wall Street and banks had clear unregulated sailing in the sea of laissez faire in 2000 with a closing of the door for debtors in 2005. It was little better than a roach motel, you could check in but you could never check out.

In 1999 in the Senate, opposition arose to the passage of the Financial Services Act in the form of North Dakota’s Senator Dorgan. An excerpt from the Senator’s speech the day before the bill was passed:

I, obviously, am in a minority here. We have people who dressed in their best suits and they just think this is the greatest piece of legislation that has ever been given to Congress. We have choruses of folks standing outside this Chamber who spent their lifetimes working to get this done, to say: Would you just forget all that nonsense back in the 1930s about bank failures and Glass-Steagall and the requirement to separate risk from banking enterprises; just forget all that. Time has moved on. Let’s understand that. Change with the times.

We have folks outside who have worked on this very hard and who very much want this to happen. We have a lot of folks in here who are very compliant to say: Absolutely, let me be the lead singer. And here we are. We have this bill, which I will bet, in 5, 10, 15 years from now, we will be back thinking of this bill like we thought of the bill passed in the late 1970s and early 1980s, in which this Congress unhitched the savings and loans so some sleepy little Texas institution could gather brokered deposits from all around America and, like a giant rocket, become a huge enterprise. And guess what. With all the speculation in the S&Ls and brokered deposits and all the things that went with it that this Congress allowed, what did it cost the American taxpayer to bail out that bunch of failures? What did it cost? Hundreds of billions of dollars. I will bet one day somebody is going to look back at this and they are going to say: How on Earth could we have thought it made sense to allow the banking industry to concentrate, through merger and acquisition, to become bigger and bigger and bigger; far more firms in the category of too big to fail?

Daily KOS, Senator Dorgan’s Speech, November 4, 1999 on “Gramm-Leach – Bliley Act” also known as the Financial Services Modernization Act (you can hear the 16-minute speech here or read it)

Larry Summers has been present throughout much of this change, supporting it, denigrating the opposition, and claiming his experience at D. E Shaw gave him an insider’ knowledge as to how the derivatives market works. While President of Harvard University; Larry received a letter (May 12, 2002) from Iris Mack, a new employee of the Harvard Management Company managing Harvard’s endowment funds. A Doctorate in Mathematics from Harvard and a former employee of Enron who dealt in derivative trades, she expressed concern about the trades (swaps and other complex financial instruments) being made by the funds and the lack of understanding of the trades by the traders. On July 1, Iris was called into the office of Jack Meyer, the chief manager of Harvard Management. On July 2, Iris was fired for making what Harvard Management termed as: ‘baseless allegations against HMC to individuals outside of HMC.”Ex-Employee Says She Warned Harvard of Risky Moves” Boston Globe, April 3, 2009. While Harvard Management Company claims above normal returns on its endowment funds, it has spent much of last year selling off private equity and investments to raise cash to pay for losses.

The attitude expressed by the head of the Economic Council was one of “trust me now” as I have all of the experience necessary to fix the current economic and financial problems. Instead he has promulgated the issues of the collapse by denigrating Brooksley Born’s request to Congress for regulatory power, ignoring the advice of Iris Mack at Harvard University, by consulting to D.E. Shaw (hedge fund) making ~$5.2 million as the financial engineer’s engineer following a model Buffet called Financial Weapons of Destruction, and he has been repeatedly wrong in his direction and advice to Congress and Industry.

In the game of deregulation and global efficiency, Larry Summers was its cheer leader signing off on a letter encouraging the dumping of toxic wastes in Asia at the World Bank. He helped to shepherd China into the WTO claiming:

The agreement with China is a one-way street. China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies.
‘It is difficult to discern any disadvantage to the United States in passing this legislation.
Larry Summers and Senator Dorgan, Angry Bear blog.

Personality, ego, and a blind belief in the ability of the market place to dictate the proper path and the correction has gotten in front of common sense. Maybe it was time to sideline Greenspan, Summers and his protégé Geithner beliefs in favor of Born, Mack, and Dorgan’s?. The latter has shown more foresight into how today’s problems and issues were created and how to resolve them. SEC head Arthur Levitt later recanted his decision to support the Commodity Futures and Modernization Act calling it one of the worst decision he ever made.

I certainly am not pleased with the results. I think the market grew so enormously, with so little oversight and regulation, that it made the financial crisis much deeper and more pervasive than it otherwise would have been.” Brooksley Born, Stanford Magazine, April 2009

*’The messenger wore a skirt,’ says Marna Tucker, a Washington lawyer and a longtime friend of Born. ‘Could Alan Greenspan take that?’”

run75441@ Angry Bear Blog
revised Sept. 20, 2018

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The Minsky Moment Ten Years After

The Minsky Moment Ten Years After

These days are the tenth anniversary of the biggest Minsky Moment since the Great Depression. While when it happened, most commentators mentioned Minsky and many even called it a “Minsky Moment,” most of the commentary now does not use that term and much does not even mention Minsky, much less Charles Kindleberger or Keynes. Rather much of the discussion has focused now on the failure of Lehman Brothers on September 15, 2017. A new book by Lawrence Ball has argued that the Fed could have bailed LB out as they did with Bear Stearns in February of that year, with Ball at least, and some others, suggesting that would have resolved everything, no big crash, no Great Recession, no angry populist movement more recently, heck, all hunky dory if only the Fed had been more responsible, although Ball especially points his finger at Bush’s Treasury Secretary, Hank Paulson, for especially pressuring Bernanke and Geithner at the Fed not to repeat Bear Stearns. And indeed, when they decided not to support Lehman, the Fed received widespread praise in much of the media initially, before its fall blew out AIG and brought down most of the pyramid of highly leveraged derivatives of derivatives coming out of the US mortgage market, which had been declining for over two years.

Indeed, I agree with Dean Baker as I have on so many times regarding all this that while Lehman may have been the straw that broke the camel’s back, it was the camel’s back breaking that was the problem, and it was almost certainly going to blow big time reasonably soon then. It was not Lehman, it was going to be something else. Indeed, on July 12, 2008, I posted here on Econospeak a forecast of this, declaring “It looks like we might be finally reaching the big crash in the US mortgage market after a period of distress that started last August (if not earlier).”

I drew on Minsky’s argument (backed by Kindleberger in his Manias, Panics, and Crashes) that the vast majority of major speculative bubbles experience periods of gradual decline after their peaks prior to really seriously crashing during what Minsky labeled the “period of financial distress,” a term he adopted from the corporate finance literature. The US housing market had been falling since July, 2006. The bond markets had been declining since August, 2007, the stock market had been declining since October, 2007, and about the time I posted that, the oil market reached an all-time nominal peak of $147 per barrel and began a straight plunge that reached about $30 per barrel in November, 2008. This was a massively accelerating period of distress with the real economy also dropping, led by falling residential investment. In mid-September the Minsky Moment arrived, and the floor dropped out of not just these US markets, but pretty much all markets around the world, with the world economy then falling into the Great Recession.

Let me note something I have seen nobody commenting on in all this outpouring on this anniversary. This is how the immediate Minsky Moment ended. Many might say it was the TARP or the stress tests or the fiscal stimulus. All of these helped to turn around the broader slide that followed by the Minsky Moment. But there was a more immediate crisis that went on for several days following the Lehman collapse, peaking on Sept. 17 and 18, but with obscure reporting about what went down then. This was when nobody at the Board of Governors went home; cots made an appearance. This was the point when those at the Fed scrambled to keep the whole thing from turning into 1931 and largely succeeded. The immediate problem was that the collapse of AIG following the collapse of Lehman was putting massive pressure on top European banks, especially Deutsches Bank and BNP Paribas. Supposedly the European Central Bank (ECB) should have been able to handle this but along with all this the ECB was facing a massive run on the euro as money fled to the “safe haven” of the US dollar, so ironic given that the US markets generated this mess.

Anyway, as Neil Irwini The Alchemists (especially Chap. 11) documented, the crucial move that halted the collapse of the euro and the threat of a full out global collapse was a set of swaps the Fed pulled off that led to it taking about $600 billion of Eurojunk from the distressed European banks through the ECB onto the Fed balance sheet. These troubled assets were gradually and very quietly rolled off the Fed balance sheet over the next six months to be replaced by mortgage backed securities. This was the save the Fed pulled off at the worst moment of the Minsky Moment. The Fed policymakers can be criticized for not seeing what was coming (although several people there had spotted it earlier and issued warnings, including Janet Yellen in 2005 and Geithner in a prescient speech in Hong Kong in September, 2006, in which he recognized that the housing related financial markets were highly opaque and fragile). But this particular move was an absolute save, even though it remains today very little known, even to well-informed observers.

Barkley Rosser
Revised; 9/19/2018

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