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You say you want a Resolution ?

Robert Waldmann

I just read the pdf of Geithner’s new regulatory proposal.

Generally pretty mild I’d say.

Geithner is firmly of the view that firms should not be able to pick their regulators. He proposes a new regulator for “systemically important firms (rough definition like Lehman and AIG) which would decide which firms (including potentially even hedge funds if they are huge and leveraged) are systemically important. He likes procyclical capital controls which will be tighter than current except in crises and fall back to current in a crisis. He wants a central clearing system for OTC derivatives like CDS so regulators can know who owes what to whom. He wants more regulation of money market funds.

He doesn’t propose a ban on cash settlement CDSs. He doesn’t say that money market funds are clearly banks (they are FDIC insured at the moment for God’s sake) and should be regulated as such. Compensation reform is briefly mentioned but vanishes when he gets to general regulatory proposals (there are no specific proposals).

However, his last proposal isn’t so mild. He says we need a resolution authority for systemically important non depository institutions. Note he wants resolution not revolution. The resolution would be triggered by unanimous agreement of the Fed, the FDIC and the President. It could involve appointing a conservator (alternate title for this post conservatives against conservators) who would have pretty much absolute power including the power to abrogate contracts and who would not be subject to the creditors.

Wow. My guess is he’s establishing a bargaining position. Still you have to appreciate the rhetoric. “Resolution authority” conservator no hint of nationalization or socializing the means of production or seizing the commanding heights of the economy except for the bit about how that is exactly what he has in mind.

Longer notes (but really just read the pdf it is longer but better written)

My reading of

1. New regulator of all Systemically important firms. Definition roughly is Lehman and AIG were systemically important firms.
No cherry picking. (how ?). Capital controls tighter in non crisis loosen to like now in crisis so don’t amplify crisis. (I’d go for 2 lines with milder punishment for crossing more demanding line).

2. overnight loans (???) and OTC derivativs e.g. CDS must have central clearing so can keep track of who owes what to whom.

(note no ban on cash settlement CDS). Really pretty mild I tihink.

3. Hedge (& etc) funds with more than x under management must register with SEC and report. If leveraged and C systemic regulator may decide to regulate them.
(I don’t get it. I think this is for Europeans, who were talking about regulating hedge funds. Most are registered. Authority of systemically important firm regulator already there depending on leverage and well importance and not legal form).

4. Regulate money market funds more (I would declare them to be banks — they are FDIC insured now so why not ?)

5) we need a resolution. Conservatorship not socialism. Total power if FED, FDIC and POTUS agree. break contracts, ignore complaints of creditors. Take over, alll the way over. Give me powerrrrrrrr.

1. We can’t allow firms to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.

2. global

3. Review Firms (incl investment banks, AIG Fannie and Freddie) acted like banks, but weren’t regulated as “depository insitutions” rather under weak prudential regulation and without access to the Fed discount window.

4. Lack authority to deal with failures of systemically important non bank financial institutions (I want power to nationalize)

5 systemic risk,

consumer and investor protection, regulation of dealing with regular people.

eliminating gaps, no cherry picking

international coord. FSF with G-20, IBRD and IMF. deal with tax havens.

6. Systemic risk

1) one regulator (but which ?) must prevent turf wars and concern for organizational charts to block this (how ?). Key is “systemically important” not “depostitory institution.” Hints at a definition.

2) Build up capital during good economic times. Look ahead and account for losses during downturns (cyclical capital requirements ? YES for “stystemic” firms) in any case stronger capital requirements.

c) regulate compensation to make sure it encourages focus on the long term. (odd mentioned in abstract but not on list)

3) (regulation of hedge funds, private equity funds, venture capital funds) register with SEC if have over threshold assets under management *and* if leveraged.

4) better trade on markets than OTC (so ? a wish is not a plan).

5) something on money market funds (how about declaring them to be banks ?)

6) give me power to nationalize.

7) for systemic firms aouthority to force “protective actions” before hit the line.

8) regulate settlement systems for key funding and risk transfer markets (overnight lending and CDS). Regulate key OTC markets as exchanges are regulated.

I So new systemically important firm regulator. No cherry picking. Procyclical Capital requirements

II) hedge funds (the word leverage has disappeared) . Systemic risk regulator could regulate them (seems idea would if huge and leveraged). All vague and scary and I don’t see why needed if don’t borrow.

III) CDS and other OTC All dealers regulated by systemic regulator. Will keep track of who owes what to whom by mandating a central clearling system.
Cash settlement CDS still allowed.

IV) Regulate MMFs more.

V) A resolution regime (nationalization is resolution not revolution).

(oh you say you want a resolution he he cause we’ve waited long enough).

Need OK by Fed, FDIC, SecTreas and Potus. If go to “conservator” (not socialism conservatorism) can repudiate contracts and not subject to OK of creditors. Won’t use FDIC funds.

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WTO procurement and US spending stimulus


Run 75441 comments on the WTO and US stimulus spending (lifted from comments):

Lori Wallach, Director of Public Citizens Global Trade Watch did a recent (March 12, 2009) report to the subcommittee on Terrorism, Nonproliferation, and Trade, “US Foreign Economic Policy in the Global Crisis.” Briefly this is what she is saying about banking and trade globally and how we may have signed away our rights.

Obama and company are on a collison course with the WTO and its Financial Service Agreement as signed by 39 countries including the US. By signing such, we have to treat foreign financial institutes as if they were the same as Amerrican banks, etc. Last year’s November Doha meeting was meant to develop a coordinated reponse to the current crisis. I suspect there will be much gnashing of teeth as the Obama reverses the trend of supporting the WTO expansion into domestic banking regulations and limitations. Other countries have excluded certain aspects of the WTO limiting its reach into such areas as well as production. In our push for greater deregulation globally, we instead achieved the control of the global banking and financial system by a few.

I guess we were the naive bunch on the global neighborhood block?

More under the fold from rdan…

The WTO’s procurement agreement and those of the FTAs into which the United States has entered limit how Congress may expend our tax dollars. Given the recent brouhaha attacking Buy American rules in the stimulus package as ‘protectionist,’ it is worth noting that the terms in question had nothing to do with tariffs or trade or the functioning of private markets. Rather at issue was Congress’ right to decide how to best spend U.S. tax dollars in a manner that could stimulate our economy. Yet, “trade” pacts such as WTO and the FTAs set limits on Congress’ decisions regarding use of our tax dollars in a manner that provides preferences for U.S.-made goods or U.S. firms.

Thus Congress’ stimulus spending of our tax dollars will not fully cycle through the U.S. economy, even though studies show that doing so provides important economic gains. For instance, the $20 billion in funding for electronic medical record keeping in the 2009 Economic Recovery Plan is probably more likely to be spent offshore rather than to employ Americans. Meanwhile, despite the hysteria regarding the Buy American rules relating to infrastructure projects, in reality even though the stimulus package included the much broader Senate version of Buy America rules, only a small share of that money can be directed into the U.S. economy thanks to the limits set in trade
agreement procurement rules. For instance, firms operating in 39 countries, including all of Europe, that signed the highly controversial WTO procurement agreement and firms in the additional 13 countries who are signatories to U.S FTAs must be treated as if they were U.S. firms for certain aspects of even the covered spending. While there are some important exceptions listed in the U.S. schedule of commitments in these agreements that safeguard the right to use domestic preferences for some categories of goods, the United States altogether gave up its rights to provide preferences to U.S. firms regarding the construction and other service procurement contracts.

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Why Is "Buy America" Okay for Banks, but Not Steel?


Dean says:

Why Is “Buy America” Okay for Banks, but Not Steel?

Those damn protectionists in the Obama administration obviously don’t know anything about economics. How else can we explain the decision to require that the fund managers in their bank bailout plan must be headquartered in the United States.

I can’t wait to see the outraged and condescending editorials in the Washington Post and elsewhere explaining how protectionism is not the way to promote jobs and growth.

(Credit for the protectionism detection goes to my former colleague Heather Boushey, who can now be found at the Center for American Progress.)

–Dean Baker

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Lady Liberty Douses Her Torch: Social Security and Immigration Policy

by Bruce Webb

Barkley Rosser and I among others have long claimed that Social Security’s economic models are too pessimistic in light of performance both over the whole post-war period and particularly over the last dozen years. And the numbers looking back are pretty clear, Social Security income/cost ratios have come in better than Intermediate Cost projections and were right up to around August of 2008 (when things went into decline).

These claims have drawn some pushback from the ‘Crisis’ folk including Andrew Biggs. In his most recent post he calls on Doug Elmendorf of CBO to give the explanation. CBO Explains Why Future GDP Growth Will be Slower than in the Past. But first Andrew explains why GDP in and of itself is not the key metric.

This difference comes down to the fact that the Trustees don’t think about “GDP growth” as a single thing, but break it down into its components and project how those components will change over time. In fact, despite Langer’s claim that “The Gross Domestic Product (GDP) is the key economic assumption in estimating costs,” it actually plays no direct part in estimating Social Security’s finances: Social Security doesn’t collect taxes based on GDP, nor does it pay benefits based on GDP.

To some degree this is a straw man argument, critics of the current Intermediate Cost economic model use Real GDP because it is a widely reported and pretty well understood metric that within limits reflects the factors which really determine Social Security solvency, which is to say more people working at higher wages with lower inflation. In any event whatever the source of increased GDP the larger it is the easier it is to supply a basket of goods to a more or less fixed cohort of future retirees, (being that almost everyone who will be collecting Social Security over the 75 year actuarial window being already alive). So granting the point that GDP is not a perfect proxy for Social Security solvency why is it going to be smaller going forward? Elmendorf explains (and Biggs follows up)

Projected growth from 2015 to 2019 is also below historical average growth rates, a difference that is more than accounted for by slower growth in the labor force because of the retirement of the baby boom generation. Over the postwar period, the labor force grew at an average annual rate of 1.6 percent; by contrast, we project it to grow only 0.4 percent per year in the period from 2015 through 2019. As a result, potential GDP grew 3.4 percent per year on average in the postwar period, but CBO expects that it will grow by only 2.4 percent annually (allowing for a tad more productivity growth) in the 2015-2019 period.

In other words, the economy will grow more slowly in the future because the labor force will grow more slowly in the future. No conspiracy needed.

Excuse me for leaving my tin foil hat on. My response to Biggs is under the fold.

A slower growing labor force in the future implies more demand for the labor hours that remain which if the rules of supply and demand work in the way that most economists insist they do should translate into real wage gains (which are directly captured by FICA taxes). Instead we are told that real wage increases will decline permanently to an annual 1.0 to 1.1% rate.
Table V.B1.—Principal Economic Assumptions

Similarly if the economy is sputtering going forward due to a slowing in labor force growth (and so a slip in covered worker ratio) you would think you could counteract that via an increase in legal immigration. Instead we are told that by 2010 legal immigration will stabilize at a rate 21% below that of 2006 and remain at 750,000/year forever.
Table V.A1.—Principal Demographic Assumptions, Calendar Years 1940-2085
Which means that as the population increases from 308 million in 2007 to 481 million in 2085 the proportion of foreign born Americans is projected to steadily drop. This flies in the face of American historical experience, when we needed farmers to open up the frontier we got them from the Scots-Irish and the Germans (that’s when my ancestors checked into America). When we needed laborers to build the railroads we got them from Ireland and China. If we have a growing yet ageing population and a dire need for more night nurses and geriatric care doctors we have a ready supply going forward in Mexico and the Philippines.

Perhaps someone can provide a reasoned explanation why in the face of an economy handicapped by a stagnant labor supply our policy response will be to clamp down on both legal and illegal immigration in the way implied by the data tables. But until that contradiction gets satisfactorily explained I will be keeping that hat firmly down around my ears.

Because it all still looks like a model chasing a desired conclusion. Particularly when Low Cost itself sees immigration settling out an an absolute rate lower than the 2006 peak. This really doesn’t make any real world sense at all.

I want to highlight that last point. Per the 2008 Report legal immigration for 2006 was estimated to be 950,000 with illegal immigration adding another 380,000 for a total of 1,330,000 adding to a total population equalling 306 million. Under Intermediate Cost assumptions those numbers are projected to settle out at 750,000 and 380,000 by 2020 (1,130,000 out of 345 million people) and to an ultimate 750,000 and 275,000 or 1,025,000 new immigrants out of a 2085 population estimated at 481 million. Now these numbers do imply that we ultimately get reasonable control of the borders, which is not a bad thing in and of itself. But it also implies a specific policy decision to limit legal immigration 17% lower in absolute numbers than the 2006 peak. While this maybe would come as good news to the no-growth zealots currently controlling the Sierra Club, it would be an odd response to an systematic economic slowdown caused by low labor supply growth.

And this remains true when we turn to Low Cost. It also suggests we will get better control over the borders with illegal immigration dropping through the 75 year window, although slower than IC. But it also implicitly argues that we will by 2010 set a hard, permanent cap on legal immigration at 960,000. Which date is exactly when Boomer retirement picks up and so the need for cheap labor to care for us in our old age. The notion that we will be beating our heads against the wall wondering where we will get landscapers and nursing home aides come 2020 is pretty odd. Because unless Mexico and the Philippines drop off the face of the planet this shouldn’t really be a problem.

The conspiracy I see is not in Intermediate Cost projections, that could be explained away as the natural caution of actuaries. But in data category after data category it is Low Cost that seems artificially capped both on the economic and demographic fronts. The argument boils down to saying that the near future (say the next twenty years) cannot even on your most optimistic assumptions be as good as the recent past. We probably will not hit every component of Low Cost, that is a function of a model that assumes every factor favorable to solvency tracks together (Low Cost) or alternatively that every factor moves negatively (High Cost). (We indeed would be served better with an expanded matrix of alternatives, something suggested by the SSAB). That is no reason to simply accept that demography has us in a helpless trap that dooms us to no better than 1.1% Real Wage, 1.7% Productivity, and 2.1% Real GDP.

Come on we can do better than that! We are not passive victims here, we can if necessary craft policy in a way that targets economic growth. That is if we want Low Cost outcomes we can implement Low Cost policy, and if that requires relighting the torch on the Statute of Liberty sobeit.

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Going to the Source

Robert Waldmann

Ask Mr Obama.

Criticisms of the Geithner plan (including mine) focus on the no recourse loans from the FDIC which give private partners of the Treasury an incentive to over pay for toxic legacy assets.

In the plan as briefly described in a press release and interpreted here, there are two different programs. One an FDIC program to provide no recourse loans to encourage purchases of “pools of mortgages” (or is that of, for example, “pools of mortgages” but also more toxic derivatives of derivatives) and a separate program of private public partnership to buy any legacy asset in which “Treasury will make co-investment/leverage available “

Huh ? Is that co-investment or leverage ? If it is leverage is it of the form of a full faith and credit loan or a no-recourse loan or what ?

Damned if I can tell. Who to ask ? Where does the buck stop ?

I ask “What does “leverage” mean in “Partnering Side-by-Side with Private Investors in Legacy Securities Investment Funds: Treasury will make co-investment/leverage available.” Could this be a no recourse loan ? “

here at this absolutely awesome site where you can propose questions *and* vote on already proposed questions and Obama will answer some of the questions (I hope the most popular ones and I don’t expect mine to get answered). The site does have a twitty limit on characters which delights me when I am reading others questions and irritated me when I was trying to write mine.

my favorite so far “What I want to know is what are u doing for those that used to be middle income families but because they have lost their job are about to lose everything?? I say u should issue checks to all americans under a certain income.”
sassee, illinois ” I don’t like the “used to be middle income” but I do like the proposal (Bring back AFDC and for married parents in all 50 states too).

I also like the proposal for a national registry of vacant jobs. Selfishly, I want some measure of the US vacancy rate. The good old conference board index of help wanted advertising must be useless now that classified ads have been interentised.

update: New favorite question “What are we going to do to eliminate homelessness.”

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Why is Obama asking for new power for the Treasury?

By Divorced one like Bush

This past weekend I wrote about the OCC, Office of the Comptroller of the Currency and 4 rulings that this office has made over the last two presidencies.
1. Preventing state AG’s and the state banking departments from investigating and regulating national banks. 2004.
2. Allowing Banks to become real estate developers and managers to including wind mill operations. 2006
3. Asserting that credit card insurance via telemarketing was not insurance and thus again immune from state AG’s and the state insurance departments. 2002 This particular ruling being the result of the Gramm-Leach-Bliley Act of 1999. The act that is now pegged as THE deregulating action of the current economic mess.
4. Allowing banks to sell insurance. 1996.

All four are clearly rulings that can have lines drawn directly to the what we are hearing today as to why the alphabet soup of “financial products” created by “to big to fail” entities have required a combination of delivering funds and pledging funds to the tune of around $9.5 trillion dollars. I googled the current number and could only find numbers dating from December 2008 such as this site suggesting then the total was $8.5 trillion.

We really need to start talking about the OCC. It is a player, if not the behind the scene player of a lot of what has become our financial system. Note, I did not say banking system. That is key.

Ok, yesterday it was proposed that as part of the solution, our Treasury head needs some new power. Already leadership is say “Yes”.

This call for power with an already announced “Yes” immediately sets off my suspicion meter. After 8 years of power being concentrated into the hands of the one (Homeland Security), unitary executive powers still being exercised by Obama, lobbyist run wild, departments turned from working for the people to working for the industry (see labor, FDA, military), no bid contracts and their results, $9 billion in bundled crisp new hundred dollar bills missing in Iraq, Paulson asking for $750 billion, not strings attached (add yours here)…

You want to give the power to say “yeh” or “nay” on a financial institution to one person? Have we not learned?

Then it dawned on me. Think about the 1996 OCC ruling and the 2002. Think about the praise for the FDIC and the job it has been doing. Here is an entire entity congress created to take care of failed banks. Ah, you say entities like AIG are not banks, so there is no jurisdiction. At least that is what we are being told. However, being that the OCC has in it’s rulings merged the banking, real estate and insurance industries (specifically ruling what was and was not insurance) I will not accept that all those smart lawyers in congress and the one that heads the White House would not be able to produce a winning argument that by the actions of the OCC rulings, the FDIC already has the authority to do to AIG what it has currently been doing.

That lead me to look at the FDIC web site. In particular, it’s “About” page:

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

It does not say “banks”. It says “financial systems” and “managing receiverships”.

Not enough for you. Consider there was an advisory committee created in 2002 by the then Chair Donald Powell.

Scope and Objectives: The Committee will provide advice and recommendations on a broad range of issues relating to the FDIC’s mission and activities, including, but not limited to: the delivery of services by the FDIC, its corporate infrastructure, and policy initiatives in the areas of deposit insurance, supervision of financial institutions, resolutions and management of failing and failed institutions, and other issues impacting the financial services industry.

It did not say “banking” or “banks” here either. And it specifically talks about exactly what we have here today: failed and failing institution. You can not get away from the all inclusive “financial services industry”.

Want more? Consider the bio of the current chair:

Before her appointment to the FDIC, Ms. Bair was the Dean’s Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst since 2002.

The FDIC is already the entity with the power that Obama is now requesting for his surrogate. On the plus side in my book, it is an agency created from the destruction of the last time we were here. It is a New Deal institution and that makes it clean in my mind (at least cleaner than more recently created entities). So, even if I’m wrong, and I don’t think I am because this nation for 13 years now has been blurring the line between banks, insurance and recently real estate to the point that it is one big industry and that counts when you go in front of a judge, the correct request that we should have been hearing from Obama is to expand the definition of banking to clarify all these new mongrel banking entities such that the entity this nation created specifically to do what the Treasury is asking for can do the job without question of jurisdiction. Simple, neat, maintains separation of power and not bureaucracy expanding.

So why didn’t he?

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