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What was it about 1995 and the US Federal Reserve?

Brenda Rosser at Econospeak has a great post here:

What was it about 1995 and the US Federal Reserve?

1990 – 1992 era. The changes began then that led to the elimination of the reserve requirement.

1992 The Fed Reserve ratios were lowered.

1995 – The US Federal Reserve effectively eliminated the fractional reserve ratio. Banks were no longer required to back assets that largely corresponded with “broad money” (M3) with cash reserves. The consequence was that banks could effectively create money without limitation. From early 1994 to late 1996, most of the remaining reserve deposits disappeared. “This transformation of banking practices seems to have started small, but really picked up steam by 1996 and 1997, likely due to competitive pressures among banks; those banks that used these methods could easily out-compete those that did not.”[1]

1995 – US Fed and other central banks printing money like confetti….It is reasonable to suppose that such a gigantic increase in money supply would produce price rises in assets, housing and commodities BUT consumer price inflation remained under control. Why? Rapid growth of India and China (source of cheap labour)? Internet and telecommunications revolution rapidly improved the cost structures of existing products? Labour-free productivity of manufacturing. The stepping up of the rate of environmental rape (mining of raw materials and forests) associated with industrial production? The WTO established.

1995 Dow First close above 5000. Stock Market Keynesianism. Never before had a US economic expansion become so dependent on the ascent of the stockmarket.

Mid 1990s – the collapse of the First Italian Republic. It involved large-scale criminal influence in government and originated as an American parapolitical operation.

1995 – 1999 – The vice president of the Bank of New York sets up illegal accounts to facilitate the movement of funds into and out of Russia. Her crimes of money laundering did not result in a sentencing for her.

1995 – 2001 – the dot com speculative bubble.

1990 – 2005 – doubling of the global workforce

1995 – 2005 – about 3.2 million US homeowners bought houses on the basis of subprime mortgages or similar credit terms

1995 – 2005 Global ‘Savings’?? Glut. “..a remarkable reversal in the flows of credit to developing and emerging-market economies, a shift that has transformed those economies from borrowers on international capital markets to large net lenders…” (Ben Bernanke in 2005)

[1] What (Really) Happened in 1995? How the Greenspan Fed Screwed Up in the Mid-90s and set the stage for the Greatest Financial Bubble in the History of the World. By Aaron Krowne

Also see: ‘Made in U.S.A. 1995’ by Eric Janszen. March 22, 2006

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Cactus asks the good question

by cactus

Voting Your Bedfellows

In a few months it will be time to go to the polls. Remember, there are people who told you eight years ago, and then four years ago, about the wonderful things GW’s policies were going to do for the economy. Most of them also told you how bad things were going to be if Clinton was elected in 1992, or re-elected in 1996. Do you really want to trust their advice? On anything?

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What Is to be done ?

Robert Waldmann

OK what now ? Unless someone has just submitted a post, AngryBear doesn’t have a post on what to do now that the House Republicans (and some Democrats) have voted down the Paulson-Dodd-Frank bailout bill.

The contingent consensus of the Left Blogosphere seems to have been to go for the Swedish solution if the Paulson solution is rejected — that is nationalize banks with inadequate capital. I think this is still politically impossible. Even if the Democrats go alone and Bush is afraid to veto, the blue dogs will be blue dogs.

I think 2 complementary and more moderate proposals might pass over Republican objections and save the financial system. They are, of course, exactly what I have already proposed here and here.

First preferred shares. Economists of all ideologies agree that what the banks need to do now is increase their equity by selling shares. No one much wants to buy so if they sold a lot the shares would be very cheap. I think a bill which allows banks to sell a lot of preferred shares to the Treasury and makes sure that the Treasury will lose money only if the bank goes bankrupt might make enough sense to people who aren’t even me, that it would be a political winner. See the old post for details.

I add one clause — a contingent surtax on the rich. Withold an extra 10% of income over $1,000,000 and, each year, return the part that wasn’t needed to cover losses in the Buffet X 100 plan (plus the chained 3 month t-bill interest rate). This is very much in the interests of the rich as they will get their money back and the financial system will be saved. The under a million crowd will be protected.

Also squabbling over exactly what to do with the profits that the Treasury will make might convince people that there will be profits (I think there will be if the purchase is at share prices as of today September 30).

The other is Toxic Sludge Inc. This is a mandatory program in which the Treasury contributes 0 dollars (sky divers holding hands and thinking they are pulling each other up in Drum’s words but it might help). The proposal would be to require all owners of mortgage based assets to contribute those assets to the new entity in exchange for shares proportional to the current market value of the assets.

The point is that it is easier to price the whole pool of toxic waste than each droplet so the shares of toxic waste Inc will be traded and, I hope, for a reasonable price. Also Toxic Sludge Inc will be able to reassemble whole mortgages and authorize mortgage initiators to re-negotiate if it is more profitable than foreclosure.

I think these ideas might be popular enough (both have guarantees that they cost most people nothing and don’t add to the deficit long term) that the Democrats can afford politically to pass them over Republican objections.

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Class Warfare? Are We There Yet?

By Stormy

As Wall Street plunged, everyone argued. Some said Bailout Plan was the end of the Reagan era. Others said it would snuff out the free market system. Others said it would bail out the culprits. Conservatives and outraged populists joined forces to defeat the bill. As a Washington Post article points out, it is no accident that most of the Nays were up for election.

There is no question that it is the end of the Regan era. There is less of a question that freewheeling financial markets are kaput, fini. Lou Dobbs could barely contain his outrage over the present political leadership. Such outrage, while commendable, may be misplaced. As I pointed out in a prior piece, if credit dries up, then all of us will be like small fish caught in the ice.

On the other hand, to limit debate to ten hours…and to claim that we could push through a salvation bill in two or three days…was idiotic. More damage may have been done through the failure of its passage than would have been done if it had been passed. We should have given two, three, or four times as much debate. Take some time, please. I try to imagine myself as a representative, struggle through those three hundred odd pages, trying to sort out all the questions I have, while at the same time the phone is ringing, arms are being twisted….ouch.

The last thing we need is panic.

Meanwhile, rage moves through streets. While Paulson tries to loosen the proposed shackles on CEO compensation for fear companies will be less willing to cooperate, the masses outside want blood.

They have been told to worship at the golden feet of CEO’s such as Merrill’s O’Neal, to hope one day their son or daughter would climb such heights, revel in such riches. They thought they were wise, not arrogant, careless, and greedy.

Now…surprise! They are careless and greedy. And more surprise, even those who should have known better, who were in charge, are now surprised. Things are about to fall apart…and now they tell us. And falling apart so fast that we have, it seems, seconds in which to act.

Not even the most devious demon could not have conjure up a scenario such this to cause such panic: One month ago–everything fine. Today and seconds away–Unimaginable disaster. Outrage? You betcha.

Class warfare? Seconds away.

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The Coming Harvest

by Ken Houghton

Claudia asks the question of the day of the previous post:

When you say “the coming harvest” are you speaking from a purely literal standpoint, or are you also speaking metaphorically?

I was starting from the literal. When you get to the consequences, then you get to think Buffy the Vampire Slayer.

2slugbaits laid out exactly the scenario that makes early November too late:

The coming harvest may just rot in the fields. No liquidity, no market for the grain. And no loans to rent equipment to bring in the harvest.

I hope the Republican farmers in the red states are happy. Well, at least they’ll still have their shotguns…they may need them.

I pointed this out to someone today, who started ranting about farm subsidies and how the farmers won’t suffer, so we’ll do this slowly, just in case:

  1. Farm subsidies are an atrocious waste of money, and badly allocated.
  2. However, farm subsidies are either (a) payments made to farmers not to grow (keeping prices higher, and theoretically also ensuring the land isn’t depleted) or (b) additional payments for crops that are harvested and delivered to market.
  3. Therefore, by and large, farm subsidies are irrelevant to the harvesting of crops. And that is the subject of the day.

What often happens in farm country is that farmers plant, tend, and fertilize out of last year’s earnings. By the time you get to the harvest, though, they tend to be tapped out.

Fortunately, they have several thousand dollars worth of crops in the fields. So they go to the bank and say, “Lend me enough money to get through the harvest”—so I can pay workers and/or rent equipment, sort and allocate grain from chaff, get the crops to the market, and get paid for them—”and I’ll pay you back in November/December.”

Banks, knowing this is as close to a risk-free short-term loan as there is in commercial lending, generally loan the money.

But they won’t do it at any reasonable rate if they’re going to get hammered over the short-term. Which means there will be farmers who can’t harvest, crops left in the fields, and higher food prices.

Anyone have any further questions about how Wall Street affects Main Street?

Come to think of it:

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Republicano Delenda est *

by Ken Houghton

Brad DeLong lays out the breakdown.

When 2/3 of your party believes that taking the Dow down 600 750+ points is a Good Idea, claims such as “the party of fiscal responsibility”—or even the “party of Wall Street”—fail the free market test Big Time.

If I weren’t worried about the coming harvest, I would fully endorse the DeLong proposal.

UPDATE: John Boehner lies with impunity though Julie Hirschfield Davis of the AP wakes up later:

Republican leader John Boehner, R-Ohio, said he and other Republicans were pained to vote for such measure, but he agreed that in light of the potential consequences for the economy and all Americans, “I think that we need to renew our efforts to find a solution that Congress can support.”

Why is this a lie? As a correspondent who would probably prefer me not to link to his blog said, “Pelosi delivered about 60% of her caucus for the bill; Boehner
delivered about 30%. Is the House [Republican leadership] incompetent[?]”

Davis returns to reporting a moment later, identifying the party that deflected first:

In the House, “no” votes came from both the Democratic and Republican sides of the aisle. More than two-thirds of Republicans and 40 percent of Democrats opposed the bill. Several Democrats in close election fights waited until the last moment, then went against the bill as it became clear the vast majority of Republicans were opposing it.

So instead of maybe overpaying about $700 billion for assets over the next year, in the hope that banks will loan again now, the Republicans in the House—with John “we need to renew our efforts to find a solution” Boehner pretending to be the Voice of Reason—decided to knock $1,200,000,000,000 out of the stock market in a single day.

Talk about your multiplier effect.

Davis continues by quoting the Minority Leader and the Minority Whip both whining about how evil Nancy Pelosi is—and reporting the truth of the matter:

Republicans blamed Pelosi’s scathing speech near the close of the debate…for the defeat. It was not much different from her usual tough words against the president and his party.

“We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House,” Boehner said.

Rep. Roy Blunt, R-Mo., the whip, estimated that Pelosi’s speech changed the minds of a dozen Republicans who might otherwise have supported the plan.

So the Minority Whip might have been able to deliver almost 40% (78-120) of his party for this bipartisan effort—assuming we believe him—if not for the fact that Nancy Pelosi has a sense of history. Gosh, I’m really impressed now. As is Barney Frank, who notes that “country first” does not appear to be the motto of the Republican House members:

That amounted to an appalling accusation by Republicans against Republicans, said Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee: “Because somebody hurt their feelings, they decide to punish the country.”

Presumably, because that worked so well for Newt Gingrich in 1995.

*Title change hat tip mregan in comments. (I’ve seen it both ways, and guessed wrong.)

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Champaign Bottle corks are popping today

Joseph Stilgitz asks tough questions at The Nation:

The champagne bottle corks were popping as Treasury Secretary Henry Paulson announced his trillion-dollar bailout for the banks, buying up their toxic mortgages. To a skeptic, Paulson’s proposal looks like another of those shell games that Wall Street has honed to a fine art. Wall Street has always made money by slicing, dicing and recombining risk. This “cure” is another one of these rearrangements: somehow, by stripping out the bad assets from the banks and paying fair market value for them, the value of the banks will soar.

There is, however, an alternative explanation for Wall Street’s celebration: the banks realized that they were about to get a free ride at taxpayers’ expense. No private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price; they finally had found a sucker who would take them off their hands–called the American taxpayer.

The administration attempts to assure us that they will protect the American people by insisting on buying the mortgages at the lowest price at auction. Evidently, Paulson didn’t learn the lessons of the information asymmetry that played such a large role in getting us into this mess. The banks will pass on their lousiest mortgages. Paulson may try to assure us that we will hire the best and brightest of Wall Street to make sure that this doesn’t happen. (Wall Street firms are already licking their lips at the prospect of a new source of revenues: fees from the US Treasury.) But even Wall Street’s best and brightest do not exactly have a credible record in asset valuation; if they had done better, we wouldn’t be where we are. And that assumes that they are really working for the American people, not their long-term employers in financial markets. Even if they do use some fancy mathematical model to value different mortgages, those in Wall Street have long made money by gaming against these models. We will then wind up not with the absolutely lousiest mortgages, but with those in which Treasury’s models most underpriced risk. Either way, we the taxpayers lose, and Wall Street gains.

And for what? In the S&L bailout, taxpayers were already on the hook, with their deposit guarantee. Part of the question then was how to minimize taxpayers’ exposure. But not so this time. The objective of the bailout should not be to protect the banks’ shareholders, or even their creditors, who facilitated this bad lending. The objective should be to maintain the flow of credit, especially to mortgages. But wasn’t that what the Fannie Mae/Freddie Mac bailout was supposed to assure us?

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products–which they created–and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer–and for no return. The second problem is that there is a big and increasing hole in bank balance sheets–banks lent money to people beyond their ability to repay–and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market–and letting it deteriorate at taxpayers’ expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February–one that would have included increased unemployment benefits and aid to states and localities–and they still say we don’t need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn’t they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, to aid the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle-down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

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A Look at an Incredibly Silly Story

by cactus

Rent Control and the Current Financial Mess – A Look at an Incredibly Silly Story

There’s a trope going around among libertarians and many Republicans– I’ve seen it in a few places – that the mess on Wall Street is due to excessive regulation.

This tripe by Richard Epstein in is a good example, as it contains both elements of the trope.

The first part of the trope (though the order appears interchangeable) is an inexplicable need to mention rent control in NYC. Now, we’re told that “ruined New York City real estate markets.” Those are Epstein’s words, but we’re heard it before. Rent control has been around in NYC since 1943, and libertarians and Republicans have been telling us its “ruined New York City real estate markets” literally for generations now.

Now, I haven’t been in NYC in decades, but I do know this. After a few decades, there’s time for a market to adjust. If it doesn’t pay to be a landlord, expect fewer people to want to be landlords – the supply of dwellings for rent relative to dwellings for sale will dwindle. If it doesn’t pay to be a renter, expect fewer people to want to be renters – the demand for dwellings for rent relative to dwellings for sale will dwindle. Either way, if rent control “ruined New York City real estate markets” and has been doing so since 1943, one thing we should expect is that the percent of occupied housing units that are owner-occupied (as opposed to renter occupied) in NYC is much higher than in places where the real estate markets were not ruined by rent control.

According to this fact sheet on the New York City statistical area, the NYC area had a total of 3,020,284 occupied dwellings in 2006, of which 1,040,037 were owner occupied. Put another way, 34% of occupied dwellings were owner occupied. Two-thirds were renter occupied.

This table from the Census shows us the percentage of occupied housing units that are owner-occupied for all states in the US plus the District of Columbia. The average for the US is: 67.2.

Put another way, in NYC, where generations of rent control has destroyed the rental market, two thirds of all occupied dwellings are rentals. In the rest of the US, two thirds of all occupied dwellings are not rentals. By the numbers, it seems the rental market is extremely healthy in NYC relative to the rest of the country. And BTW… the bottom three slots of the national ranking of states and the District of Columbia, the three locations with the lowest percentage of owner occupied housing as a percentage of total occupied housing, were taken up by the Washington DC, New York, and California. It just so happens that when I hear people talk about how rent control has destroyed a market, driving out landlords and renters alike, the story is usually about DC, NYC, or San Francisco. Funny, huh?

Two more points… fourth from the bottom of the list, right above California, is Hawaii, while at the other end (i.e., at the top of the list) we find we find Minnesota, West Virginia, Michigan and New Hampshire. Also, if you work your way through the data, you’ll find that big cities like Boston, LA and Houston all tend to have relatively low homeownership rates. I’m guessing anyone whose mouth isn’t automatically programmed to say “rent control” can noodle out for him/herself exactly what is going on here.

I could go on, but I’ve wasted enough time on what is only a secondary topic to the main story, namely that excessive regulation has destroyed the market. Back to Epstein:

Yet once regulators slow down foreclosures, other potential homeowners are denied opportunities to purchase housing they can afford. The housing stock cannot recirculate. Banks that acquired this mortgage paper see their portfolios nosedive. That dicey paper, as William Isaac noted in last week’s Wall Street Journal, drives the entire economy over the edge by strict government regulations that require all financial institutions to “mark-to-market” the various instruments in their portfolio.

Allow me to translate this from gibberish into English using an analogy. Say I own a ritzy apartment building in NYC, and one fine Thursday, the gubmint passes a new law requiring all apartment buildings to be booked at zero value. This is essentially mark-to-market on steroids, so any effect that mark-to-market would have would be exacerbated under this scenario. But does that change anything at all? Does it in any way change my income? Would it change the amount a bank is willing to lend me in order to renovate the lobby or to buy another building (whose value on paper would also be zero at this point)? Unless I was a complete moron, that new law wouldn’t change the amount which I would have to receive from a buyer in order to sell it. And if I was such a complete moron, there’d be a horde of eager buyers fighting to take advantage of that arbitrage opportunity. Anyone spot the horde of eager buyers fighting to take advantage of the arbitrage opportunity mark-to-market has created according to folks like Epstein? It looks to me that what little paper is selling is selling for significantly less, not more, than its book value, which is the opposite of what Epstein and company would have predicted if Epstein and company had bothered to think through their argument to its logical conclusion.

Come to think of it, there is one real world change that would result from the government forcing me to mark down the book value of a piece of property I own. Granted, I’m no accountant, so I may be wrong, but I would think the new law would provide me with one heck of a write-off (a supposed capital loss) on my taxes.

A bonus we find in Epstein’s piece is the little gem about how laws preventing foreclosures are making things worse. Does Epstein really think home prices, and hence the value of the paper backed by mortgages would rise if more houses hit the market right now? Snark fails me.

Which brings me back to a bugaboo of mine. There’s a huge group of people arguing things that don’t just part company with reality, they’re arguing things that literally contradict reality as completely and thoroughly as humanly possible. It can’t be a good thing for society when the criteria for being a writer at a major publication is essentially the same one for getting you admitted to an asylum and given a heavy dose of medication.
by cactus

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