Archive for May, 2009

Big swinging deregulators

30 May 2009

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” ‘As Treasury secretary starting in 1999, [Larry Summers] shepherded a couple of bills that helped deregulate financial markets, and he has made it clear that he doesn’t buy the notion that these laws caused the financial crisis.” — David Leonhardt, New York Times, 25 November 2008 (more here)

In this weekend’s NYT Magazine, Summers’ old boss, Bill Clinton, takes full responsibility for the failure to regulate credit derivatives, those most opaque and easily abused of financial instruments.  We already knew that Summers, his predecessor Robert Rubin, and Fed Chairman Alan Greenspan backed the blanket exemption of credit derivatives from regulation.  What we did not know until this week, however, was just how much they regarded financial deregulation as a holy sacrament.  (OK, so we did know that about “Alan Shrugged” Greenspan.)

A Washington Post feature on Brooksley Born, the head of the Commodity Futures Trading Commission at the time, makes this plain.  In 1998 Born wrote a “concept paper” pondering the possible merits of derivatives regulation, prompting a circling of the wagons by Summers, Rubin, Greenspan, and Securities and Exchange Commission chairman Arthur Levitt:

‘In early 1998, Born’s plan to release her concept paper was turning into a showdown. Financial industry executives howled, streaming into her office to try to talk her out of it. Summers, then the deputy Treasury secretary, mounted a campaign against it, CFTC officials recalled.

‘”Larry Summers expressed himself several times, very strongly, that this was something we should back down from,” [Born aide Daniel] Waldman recalled.

‘In one call, Summers said, “I have 13 bankers in my office and they say if you go forward with this you will cause the worst financial crisis since World War II,” recounted [Michael] Greenberger, a University of Maryland law school professor who was Born’s director of the Division of Trading and Markets.’

Cognitive capture, anyone?

The paper was released, and it didn’t cause a crisis.  Unregulated credit default swaps, on the other hand . . .

Mark Thoma has a synopsis of the Post story on Economist’s View.  (Hat tip: Baseline Scenario.)

(For a helpful primer on the rise and fall of the original BSDs, see Daniel Gross’s Slate column of 25 September 2008.)

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The phantom inflation menace, and a credit crunch update

30 May 2009

Krugman has it right here, in yesterday’s NYT. I’d been planning a post on the recent spate of fear-mongering about the deficit, and Krugman covers a lot of the same ground.  One of the arguments against deficits is that they may lead to high inflation down the road, if the government leans on the central bank to “inflate away the debt” (i.e., jack up the price level so as to reduce the real burden of the national debt), but Krugman notes that there are precious few such examples in recent (post-WWII) history.  He concludes:

‘. . . it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

‘Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.

‘Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.’

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Bill Clinton accepts some blame for the crisis

27 May 2009

It’s part of a lengthy cover story in Sunday’s New York Times Magazine.  There’s a good synopsis of it here in The New Republic online, and another one by NYT economics writer David Leonhardt, with annotations, here on the Times‘s Economix blog.  Some highlights:

Clinton says he totally blew it in acceding to Greenspan’s call that derivatives should be unregulated.

He also says that his backing of Gramm-Leach-Bliley (i.e., allowing banks and investment banks and insurance companies to merge) would have been wise only if, as he expected, there was going to be appropriate regulation and oversight of the new financial supermarkets.  Had he known there would be none in the next two presidential terms, he would have opposed it.

Very interesting.  He’s a lot more open about his administration’s shortcomings in this department than, say, Larry Summers has been.  Just in the little bits I saw, Clinton is thoughtful and persuasive.

He also touches on the important distinction between regulations/prohibitions and oversight, with financial supermarkets as a case in point.  When you can count on having good regulators who provide adequate oversight, then you can allow certain activities that might otherwise better be prohibited.  Then again, is “deregulation with proper oversight” too clever by half (not to mention oxymoronic)?  We shouldn’t be learning about this policy approach a decade after these deregulatory policies were put in place.  Who was speaking up for proper oversight during the Bush years?

Unemployment, U-6, and U-turns

14 May 2009

Ever since Fed Chairman Ben Bernanke said a few weeks ago that we may be glimpsing the first “green shoots” of recovery, it’s been a cockeyed-optimism fest among media commentators.  As always, developments in the stock market have gotten way too much attention (Paul Krugman wryly noted on TV that the stock market has predicted six of the last one recoveries), and they’ve done much to fuel the optimism.  As of yesterday’s close the S&P 500 is up more than 30% from its low of 676.53 just two months ago (March 9). Sucker’s rally or not, it’s moving in the right direction.

Commentators have also seized on the BLS’s latest unemployment release as a good tiding, which would seem like a reach given that the official unemployment rate rose from 8.5% in March to 8.9% in April.  The cliche of the day is that employment has “bottomed out.”  Let’s crunch the April numbers:

Too big to say no to

4 May 2009

Banking news of note this past week:

  • A bill to allow bankruptcy court judges to modify the terms of troubled mortgages, “cramming down” the amounts owed so as to avoid foreclosures and make these debts and troubled assets more manageable, failed in the Senate, getting just 45 votes.   En route to the bill’s failure, its chief sponsor, Sen. Dick Durbin (D-IL) said the banks “are still the most powerful lobby on Capitol Hill. And they frankly own the place.”  The NYT noted that the White House, despite backing the bill, did not go to bat for it in its final days.
  • The Treasury has delayed the release of its “stress tests” of the 19 largest banks, apparently because their credulous-looking certification that all 19 banks are currently solvent is not rosy enough for some of the banks, notably Citigroup.  Word is that Citi and Bank of America are contesting the results, even though the tests (1) appear to have used the banks’ own questionable data on the values of their toxic assets and (2) minimize the amount of hypothetical “stress” these banks might be subject to, by entertaining only fairly optimistic worst-case scenarios.  Various economists have said the tests were rigged in the banks’ favor, but evidently some banks are pushing to make them even more so.  Yves Smith offers the full bill of indictment here.

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