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No Depression
October 9, 2008
Here is a brave and very interesting piece by Larry Kotlikoff and Perry Mehrling. I wonder if it is correct.
Global markets have not been reassured by the coordinated interest rate cuts of several central banks or by recent congressional action, but they should be. Our bet is that financial markets will return to normal in short order and that the U.S. economy will squeak by with a moderate recession. Recapitalizing the banks and working out mortgages will take time, but the financial system will not collapse — the government won’t let it.
The markets, of course, seem to be factoring in some probability of collapse. Why is this wrong?
For starters, the biggest subprime mortgage gamblers have already failed, been nationalized or been married off, shotgun-style, to banks run by grown-ups. Yes, lots of small shoes may still drop, but the Paulson “buy-up” bill, and, ultimately, the Fed’s ability to print money, provides the Treasury and Federal Reserve all the tools they need. The media don’t seem to have noticed, but Section 113 of the bill authorizes government capital infusions into the banking system as necessary — something the British government is now doing and the Swedish government successfully did in the recent past. That means any bank with a viable business will not be allowed to fail simply because it is temporarily undercapitalized.
Second, Uncle Sam (a.k.a. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke) is doing precisely what’s needed to avoid the mistakes of the 1930s. With credit markets drying up, he’s turning on the faucet by recycling our panic dollars back into the financial market.
The government is taking in our money (in exchange for Treasury bills) and using it to make mortgages and buy up the assets we’re too scared to hold. It’s doing this via the Treasury, the Fed, the Federal Deposit Insurance Corp., the Federal Housing Administration, the Federal Home Loan Bank, Fannie Mae, Freddie Mac and other appendages. It’s starting to lend directly to large and small businesses whose usual sources of credit have become unavailable.
In short, Uncle Sam is becoming our new bank.
Read the whole thing.
If “Uncle Sam is becoming our new bank” then how can the article assert that “financial markets will return to normal in short order”?
Posted by: ozajh | October 9th, 2008 at 1:54 pm | Report this commentIf we are to have socialism, why don’t we at least adopt a socialism that benefits everyone, instead of just those at the top? The latter, if I am not mistaken, was once called the Corporate State, which might not be a bad description of what we have been leading up to during the Bush/Cheney years.
The Corporate State, of course, was related to something known as National Socialism, which a few of us older folks who occasionally dip into our history books may remember having heard of.
Another aspect of National Socialism, as is true of all totalitarian societies, was the use of hate and violence as a political tool. This is why we should be more than a little concerned at the reports of a recent Palin rally in Florida, where members of the crowd were allegedly shouting “kill the terrorist” and similar anti-Obama epithets with strong racist overtones.
There have already been barely more sophisticated attempts to blame Mexican immigrants for the financial meltdown, based on the half-baked argument that they have been among the subprime borrowers who are unable to pay their mortgages (as if all English-speaking US citizens were paying on time), by Michelle Malkin and other anti-immigrant bigots.
If the financial crisis gets any worse, and the McPalin campaign any more desperate, things could get very ugly indeed. Since both of the above are very likely possibilities, they probably will.
Posted by: algasema | October 9th, 2008 at 2:38 pm | Report this commentWell, I think the model is electricity and water utilities.
Posted by: fxtrader | October 10th, 2008 at 2:37 pm | Report this commentA big part of the banking system, around payments, commercial banking etc.. is a pretty dull and boring paper shuffling business where scale matters (costs of servicing 10m or 100m clients are essentially the same: strong IT infrastructure etc..)
So why dont we just do like we did for other essentials (water, electricity etc..) and make that part of the banking system a tightly regulated entity (with caps on returns etc… )?
That would free the risk-taking parts of the banks - would could still be allowed to be within the wider bank. But should risk appetite vanish like now, that would mean the “utility” part of the banks keeps going while the other freezes - the adv is clearly that routine refinancing for corporates would not be halted like it is now.
In practise and over time, I’d expect the “mega bank” model to be slowly broken down - and have large dedicated parts doing financial plumbing (utility) and spinned off divisions probably akin to today’s larger regulated hedge funds.
“larger regulated hedge funds”
fxtrader: I thought hedge funds by definition are “unregulated” mutual funds. Please elaborate.
Posted by: Wendell Murray | October 10th, 2008 at 3:01 pm | Report this comment“Another aspect of National Socialism, as is true of all totalitarian societies, was the use of hate and violence as a political tool.”
I agree fully with algasema on this. If one reads the many excellent books on the National Socialist (aka Nazi) period in Germany or on the Fascist period in Italy the parallels to the behavior of extreme right-wingers in USA politics - clearly Governor Palin and her supporters - are strikingly similar, although physical violence has not yet occurred. Repeated verbal violence has however and as algasema notes comments from crowds that Governor Palin addresses are threatening physical violence.
Posted by: Wendell Murray | October 10th, 2008 at 3:08 pm | Report this commentYes HF are largely unregulated - but some have chosen to be regulated. In any case, it’s a fallacy to believe they are “unregulated” - they are not banks so don’t have the same restrictions and priviledges. But they do need to keep their house in order otherwise investors will walk away and just as crucially they have to comply to their brokers / prime brokers requirements. In effect, this is like a market-based regulation: now, you can’t be taken seriously by investors if you don’t have at least 2 prime broking relationship and you prob need a GS or MS on one side and a DB, JPM, Citi on the other.
Posted by: fxtrader | October 10th, 2008 at 4:04 pm | Report this commentAnd of course, there have been some scandals around HFs, but it’s also been the case with banks. (WestLB, Bawag, Barings etc…) So those complaining that HFs are inherently more risky because of laxer regulation than banks are missing the point.
Society needs to protect the plumbing of banking - it’s equally important to both HF traders and to joe bloggs. It’s the foundations of capitalism. It needs to behave like boring, yet reliable pipes. But risk taking (gambling depending on your views) should still be encouraged. Right now, we’re having to bail out the banks - but frankly we’d want to bail out only the plumbing part not the gambling part which should be allowed to fail, like any other failing company in a market economy. And of course, we simply cannot bail out one side without the other in the current system. Forcing part of the banks into a “utilities model” would help with confidence. (btw, banks are and always have been confidence tricks - every bank in the world is by nature insolent if confidence goes)
I’m afraid the catastophic failures are much bigger than either Obama or McCain and all the kings horses and all the kings men(or the kings taxpayers) will be able to make right. Fiscal responsibility has been thrown out the window. Some of the same unscrupulous characters who got us into this mess (Barney Frank, Chris Dodd, Christopher Cox, Hank Paulson) are now heading up the ‘rescue plan’. The collusion of these crooks to steal what’s left of our money is mind boggling. Bailing out my irresponsible neighbor who used his house as an ATM machine, and dishonest obscenely over-leveraged banks who paid their CEO’s tens of millions of dollars even as they were going bankrupt makes my physically ill. The free market is dead. The raping of the American people continues.
Posted by: James Dean | October 14th, 2008 at 12:34 am | Report this comment