What did we learn from this press conference? That the members of our media become dumber and more out of touch with every passing year. Before long I suspect that prepubescent children could ask better questions.
It's not just the "gotcha" journalism to which we've been endlessly subjected for the past 20 or 30 years. It is the shear stupidity on display. And that was clear with the first question. The reporter wondered why, given the problems with AIG, the government wanted greater regularity authority. Doh? One could almost see Obama wondering if she were really that dumb or if it was simply a setup question so he could explain about the lack of current authority to wind down non-bank institutions.
I'd say more but, quite frankly, I'd have to watch the whole mess over again to isolate the one or two semi-reasonable questions that were asked and it, quite frankly, is not worth the time.
If you have not yet watched the press conference or have seen only TV excerpts, go to C-SPAN and watch the last 30 seconds or so. Obama's answer to the final dumb question tells you all you have to know about one of our biggest media problems: that they have the attention spans of infants.
Tuesday, March 24, 2009
Wednesday, March 18, 2009
Systemic Risk
It's obvious that Americans do not understand what is meant by systemic risk. Worse, I suspect that most of the members of the various House and Senate oversight committees do not understand it either.
Paulson, Geitner, Bernanke: they all understand it. But the knowledge is so complete, so innate, they simply do not realize that other people do NOT understand what they mean, how it is assessed, what the risks are. Or, perhaps, they know their Congressional overseers do not understand, but they haven't figured out how to explain it without showing that the emperor has no clothes (that a lot of those in Congress have not a clue.)
Worse, the ignorance related to this issue goes further. On Monday, Mar. 17, 2009, Pulitzer Prize-winning journalist Gretchen Morgenson said two truly idiotic things on Terry Gross's Fresh Air.
First, she couldn't understand why U.S. taxpayers should pay off foreign counterparties of AIG. Apparently the NYT's crackerjack financial reporter doesn't realize that our financial system does not stop at the country's border. We live in a worldwide financial market. Americans invest abroad. Foreigners invest here. The banks are actually rather tightly connected. Nor does it occur to her, apparently, that obligations (treaty, legal, etc.) also do not stop at the Atlantic and Pacific Oceans. Further, if there were no legal or self-interest reason for doing this (because massive bank failures in Europe would, and to some extent have, effect us), there would still be a moral obligation.
The worldwide financial crisis (not the recession which probably would have happened anyways) began in the U.S. with our sub-prime mortgages, our inadequate or non-existent, or lax regulatory systems, and our glorious "quants" who invented all these instruments that have come close to destroying not just our financial system but the world's. This mess was made in the U.S. and we have an obligation to help our partners while we help ourselves.
Second, she couldn't understand why the President couldn't just break the employment contracts at AIG because they're no different than the bankruptcy cramdown (allowing judges to force a write-down of first home mortgages in bankrupt proceedings).
Hmmmmm. The President can't do either. He hasn't the legal authority. As a matter of fact there has been enormous resistance in the Congress to the proposed bankruptcy cramdown bill (passed in the House but not, at this date, in the Senate) precisely because "contracts must be respected". Nobody in the Executive branch, including the President, has the authority to abrogate, willy nilly, any kind of contract between willing parties.
Barney Frank, to his credit, admits it is not a good idea for the Federal Government to get in the business of, through statutes, canceling contracts. And I, quite frankly, do not like the idea of using the IRS to punish people we think ought to be punished. No matter how such a law is written, I figure some innocents will be caught. And, again, if the Congress can do that in this case, where there is lots of public support, what if it did it for less universally approved reasons?
Frank thinks it makes more sense to exercise our rights as owners of AIG. I will note, however, that Liddy's lawyers told him that if they broke the contracts, the employees could sue, would probably win and it would end up costing even more. I'm not a lawyer. I have no idea if this is true. But the retention bonuses do seem to be issued on a "pay for performance" basis rather than a just "you're here" basis which makes them more rational than otherwise might be thought.
P.S. As I have said before, I am not an accountant, a lawyer, an auditor or a finanacial analyst. I do not work in the financial services industry. My opinions are based on a lot of reading and hundreds of hours of watching C-SPAN and my own commonsense.
Paulson, Geitner, Bernanke: they all understand it. But the knowledge is so complete, so innate, they simply do not realize that other people do NOT understand what they mean, how it is assessed, what the risks are. Or, perhaps, they know their Congressional overseers do not understand, but they haven't figured out how to explain it without showing that the emperor has no clothes (that a lot of those in Congress have not a clue.)
Worse, the ignorance related to this issue goes further. On Monday, Mar. 17, 2009, Pulitzer Prize-winning journalist Gretchen Morgenson said two truly idiotic things on Terry Gross's Fresh Air.
First, she couldn't understand why U.S. taxpayers should pay off foreign counterparties of AIG. Apparently the NYT's crackerjack financial reporter doesn't realize that our financial system does not stop at the country's border. We live in a worldwide financial market. Americans invest abroad. Foreigners invest here. The banks are actually rather tightly connected. Nor does it occur to her, apparently, that obligations (treaty, legal, etc.) also do not stop at the Atlantic and Pacific Oceans. Further, if there were no legal or self-interest reason for doing this (because massive bank failures in Europe would, and to some extent have, effect us), there would still be a moral obligation.
The worldwide financial crisis (not the recession which probably would have happened anyways) began in the U.S. with our sub-prime mortgages, our inadequate or non-existent, or lax regulatory systems, and our glorious "quants" who invented all these instruments that have come close to destroying not just our financial system but the world's. This mess was made in the U.S. and we have an obligation to help our partners while we help ourselves.
Second, she couldn't understand why the President couldn't just break the employment contracts at AIG because they're no different than the bankruptcy cramdown (allowing judges to force a write-down of first home mortgages in bankrupt proceedings).
Hmmmmm. The President can't do either. He hasn't the legal authority. As a matter of fact there has been enormous resistance in the Congress to the proposed bankruptcy cramdown bill (passed in the House but not, at this date, in the Senate) precisely because "contracts must be respected". Nobody in the Executive branch, including the President, has the authority to abrogate, willy nilly, any kind of contract between willing parties.
Barney Frank, to his credit, admits it is not a good idea for the Federal Government to get in the business of, through statutes, canceling contracts. And I, quite frankly, do not like the idea of using the IRS to punish people we think ought to be punished. No matter how such a law is written, I figure some innocents will be caught. And, again, if the Congress can do that in this case, where there is lots of public support, what if it did it for less universally approved reasons?
Frank thinks it makes more sense to exercise our rights as owners of AIG. I will note, however, that Liddy's lawyers told him that if they broke the contracts, the employees could sue, would probably win and it would end up costing even more. I'm not a lawyer. I have no idea if this is true. But the retention bonuses do seem to be issued on a "pay for performance" basis rather than a just "you're here" basis which makes them more rational than otherwise might be thought.
P.S. As I have said before, I am not an accountant, a lawyer, an auditor or a finanacial analyst. I do not work in the financial services industry. My opinions are based on a lot of reading and hundreds of hours of watching C-SPAN and my own commonsense.
These are not Bailouts; They are Loans or Purchases
We need different terminology. To me a "bailout" is a gift. I'm sunk in credit card debt, I go to my folks, ask them to bail me out. And they do. At no cost to me. That's a bailout.
That's not what we've done with any of these companies. We've loaned them money on which they must pay interest or dividends. The Fed has acquired assets, in lieu of cash, which they can sell later on when the markets have recovered. We acquired equity via preferred or common stock.
Whether or not you agree with the original decisions, we are now committed and our only objective should be to ensure that these investments, unlike those in our 401Ks, actually generate a profit or, at worst, make us whole some years down the road.
Please remember Chrysler way back when. That loan, too, was widely criticized, but Chrysler paid the load back early and in full and at a profit to the taxpayers. So it has been done before. Not on this scale, of course, but it can succeed.
That's not what we've done with any of these companies. We've loaned them money on which they must pay interest or dividends. The Fed has acquired assets, in lieu of cash, which they can sell later on when the markets have recovered. We acquired equity via preferred or common stock.
Whether or not you agree with the original decisions, we are now committed and our only objective should be to ensure that these investments, unlike those in our 401Ks, actually generate a profit or, at worst, make us whole some years down the road.
Please remember Chrysler way back when. That loan, too, was widely criticized, but Chrysler paid the load back early and in full and at a profit to the taxpayers. So it has been done before. Not on this scale, of course, but it can succeed.
AIG, Bailouts: Temper Tantrums vs. Commonsense
OK, I have had enough of these temper tantrums, these "cut your nose to spite you face" Congressional and public rampages.
There are two choices re AIG and the other bailouts. And both are nothing but bets.
1. Let all these companies (AIG, Citi, BofA, the auto companies, etc.) go bankrupt and just hope that the world doesn't collapse. You want to risk a global depression? A stock market down to 0? You think these are exaggerations? If the financial world collapses, not even the full faith and credit of the U.S. is likely to save you. If you're right and I'm wrong, well, you can say "I told you so".
This is what can also be thought of as one side of the "sunk cost" decision. Yes, we've invested multi billions of dollars but that's no reason to send good billions after bad billions.
2. Monitor, regulate, exercise strong oversight and help all of these companies to recover. The consequences? The economy improves and all the taxpayers get paid back. It's possible that one or more of these companies will fail no matter what we do but, at a minimum, the money we've invested will have given us the time to wind them down in a more orderly fashion. Will this take time? Yes. The economy isn't going to recover tomorrow and none of these companies can fully recover until the economy does. But only children should expect things to happen tomorrow. So what if it takes 4 or 5 or 6 years to full unwind everything? In the history of the country, that's about the length of the Revolutionary War, the Civil War or WWII. And it's a lot shorter period than the Great Depression.
This is partly much the other side of the "sunk cost" assessment: I've already put so much money into this hole, I might as well keep going and hope for the best.
Me, I'm the cautious and optimistic sort. I prefer choice #2.
There are two choices re AIG and the other bailouts. And both are nothing but bets.
1. Let all these companies (AIG, Citi, BofA, the auto companies, etc.) go bankrupt and just hope that the world doesn't collapse. You want to risk a global depression? A stock market down to 0? You think these are exaggerations? If the financial world collapses, not even the full faith and credit of the U.S. is likely to save you. If you're right and I'm wrong, well, you can say "I told you so".
This is what can also be thought of as one side of the "sunk cost" decision. Yes, we've invested multi billions of dollars but that's no reason to send good billions after bad billions.
2. Monitor, regulate, exercise strong oversight and help all of these companies to recover. The consequences? The economy improves and all the taxpayers get paid back. It's possible that one or more of these companies will fail no matter what we do but, at a minimum, the money we've invested will have given us the time to wind them down in a more orderly fashion. Will this take time? Yes. The economy isn't going to recover tomorrow and none of these companies can fully recover until the economy does. But only children should expect things to happen tomorrow. So what if it takes 4 or 5 or 6 years to full unwind everything? In the history of the country, that's about the length of the Revolutionary War, the Civil War or WWII. And it's a lot shorter period than the Great Depression.
This is partly much the other side of the "sunk cost" assessment: I've already put so much money into this hole, I might as well keep going and hope for the best.
Me, I'm the cautious and optimistic sort. I prefer choice #2.
Media Missing in Action: AIG Bonuses and Loans
OK, Liddy's 3/18/09 testimony has been illuminating - although many of the members of the committee don't seem to be listening.
The Bonuses
These are NOT performance bonuses. They are retention bonuses for people in AIG-FP, the source of most of the problems. The purpose of the bonuses was to pay people to stay until they had wound down their positions. The people who have left, who signed the contracts in Jan. 2008, left because they had wound down the positions they were expected to wind down. And they got their retention bonuses because they had fulfilled their contractual obligations. Those still working are being paid their retention bonuses because they have not yet wound down their positions but are still working to do so.
This division had, at the start of 2008, as I understand it, 2.3 trillion in notational value of positions. Today, 50% has been wound down - so now it's about 1.2 trillion. In short, progress has been made. Each contract is complex and, sad to say, the people who made the contracts probably know more about how to wind them down than somebody new. Think about the effort requried for a new employee, from outside the company, to replace you in your job.
What Liddy feared is that if he failed to pay the retention bonuses, the people required to wind down their positions would simply have walked out the door. And these are positions that must be managed daily. Given the 50% decrease in the value of these positions since Liddy took over, they seem to be doing their jobs.
If you've ever been employed by a company that went bankrupt or was acquired by another company (as I have), you know that people are still needed to wind down the company: to fire employees, to work with the acquiring company to integrate systems, etc. - people who know they will lose their jobs when the integration is completed or everything has been sold (think about Circuit City employees who stuck around to sell every last item they could before they, too, lost their jobs). A bonus can keep them from walking out the door and making the bankruptcy or acquisition that much more difficult.
Yes, the dollar amounts are huge, but so are the salaries at companies like AIG. All you free-marketers out there, all you wealth-defenders out there, shouldn't be upset about the size of the bonuses.
Loans
To say that the American taxpayers have loaned the company 170 billion dollars misstates the case. AIG owes the Fed and the Treasury about 80 billion dollars. There is, I think I heard, a 30 billion dollar line of credit that has not yet been tapped. The rest consists of assets separated off into something called Maiden Lane 2 and 3 which are now assets on the Federal Reserve's balance sheet. These assets were bought for 30-40 cents on the dollar. Today, according to Liddy, their market value ranges from about 30 cents to 75 cents on the dollar. They are all performing assets. When the market improves, the Fed will sell these assets and the money will be repaid. If I understand this correctly, it is the equivalent of my accepting your house in payment of a debt. I pay you less than it is worth based on the conviction that, since I am rich enough to just hold it (and rent it out to cover ongoing expenses), I will be able to sell it some years in the future and make a nice profit.
All of this seems rather reasonable, if unpalatable, to me. But neither the media nor a lot of people on the committee grilling Mr. Liddy (all of whom precede their often vicious attacks with statements of praise for taking on a thankless job for $1/year and no stock options) do not seem to have either heard or understood Mr. Liddy's explanations.
In short, as far as I can tell from Mr. Liddy's statements, the company has made significant progress in winding itself down - in such a way so as not to create financial chaos.
The AIG mess should not have occurred in the first place, but one plays the cards one has to the best of one's ability. And I think that Liddy has done that.
The Bonuses
These are NOT performance bonuses. They are retention bonuses for people in AIG-FP, the source of most of the problems. The purpose of the bonuses was to pay people to stay until they had wound down their positions. The people who have left, who signed the contracts in Jan. 2008, left because they had wound down the positions they were expected to wind down. And they got their retention bonuses because they had fulfilled their contractual obligations. Those still working are being paid their retention bonuses because they have not yet wound down their positions but are still working to do so.
This division had, at the start of 2008, as I understand it, 2.3 trillion in notational value of positions. Today, 50% has been wound down - so now it's about 1.2 trillion. In short, progress has been made. Each contract is complex and, sad to say, the people who made the contracts probably know more about how to wind them down than somebody new. Think about the effort requried for a new employee, from outside the company, to replace you in your job.
What Liddy feared is that if he failed to pay the retention bonuses, the people required to wind down their positions would simply have walked out the door. And these are positions that must be managed daily. Given the 50% decrease in the value of these positions since Liddy took over, they seem to be doing their jobs.
If you've ever been employed by a company that went bankrupt or was acquired by another company (as I have), you know that people are still needed to wind down the company: to fire employees, to work with the acquiring company to integrate systems, etc. - people who know they will lose their jobs when the integration is completed or everything has been sold (think about Circuit City employees who stuck around to sell every last item they could before they, too, lost their jobs). A bonus can keep them from walking out the door and making the bankruptcy or acquisition that much more difficult.
Yes, the dollar amounts are huge, but so are the salaries at companies like AIG. All you free-marketers out there, all you wealth-defenders out there, shouldn't be upset about the size of the bonuses.
Loans
To say that the American taxpayers have loaned the company 170 billion dollars misstates the case. AIG owes the Fed and the Treasury about 80 billion dollars. There is, I think I heard, a 30 billion dollar line of credit that has not yet been tapped. The rest consists of assets separated off into something called Maiden Lane 2 and 3 which are now assets on the Federal Reserve's balance sheet. These assets were bought for 30-40 cents on the dollar. Today, according to Liddy, their market value ranges from about 30 cents to 75 cents on the dollar. They are all performing assets. When the market improves, the Fed will sell these assets and the money will be repaid. If I understand this correctly, it is the equivalent of my accepting your house in payment of a debt. I pay you less than it is worth based on the conviction that, since I am rich enough to just hold it (and rent it out to cover ongoing expenses), I will be able to sell it some years in the future and make a nice profit.
All of this seems rather reasonable, if unpalatable, to me. But neither the media nor a lot of people on the committee grilling Mr. Liddy (all of whom precede their often vicious attacks with statements of praise for taking on a thankless job for $1/year and no stock options) do not seem to have either heard or understood Mr. Liddy's explanations.
In short, as far as I can tell from Mr. Liddy's statements, the company has made significant progress in winding itself down - in such a way so as not to create financial chaos.
The AIG mess should not have occurred in the first place, but one plays the cards one has to the best of one's ability. And I think that Liddy has done that.
Kanjorski's AIG Hearing - Mar. 18, 2009
I've been watching these financial hearings for months and have concluded that Rep. Bachus, while perhaps the quintessential Southern gentleman, understands banking and finance no more than I do. But I was impressed by his opening statement for its lucid commonsense assessment of the issue (AIG's bailout and bonus payment) at a time when the media, the talk shows, the web, and, above all, Congress, has been whipping up hysteria equivalent to that which usually precedes a country's going to war.
And if Hypocrisy has a pantheon of heroes, surely Congress must rank at the top. I haven't done a count, but I suspect that many of the Representatives and Senators who opposed the bankruptcy cramdown for first-home mortgages (allowing, for the first time, a bankruptcy judge to write down the principal) on the grounds that mortgages were sacred contracts now consider contracts to be in, I think, Ackerman's words, "legal technicalities".
And, from the part of the hearing I've seen, I was more than a little bemused to see a Republican ask the GAO to investigate the conference committee hearing on the stimulus package which specifically exempted employment contracts from being abrogated. He apparently is unaware of the separation of powers. Or perhaps he thinks the executive branch should routinely investigate Congressional hearings and deliberations.
And if Hypocrisy has a pantheon of heroes, surely Congress must rank at the top. I haven't done a count, but I suspect that many of the Representatives and Senators who opposed the bankruptcy cramdown for first-home mortgages (allowing, for the first time, a bankruptcy judge to write down the principal) on the grounds that mortgages were sacred contracts now consider contracts to be in, I think, Ackerman's words, "legal technicalities".
And, from the part of the hearing I've seen, I was more than a little bemused to see a Republican ask the GAO to investigate the conference committee hearing on the stimulus package which specifically exempted employment contracts from being abrogated. He apparently is unaware of the separation of powers. Or perhaps he thinks the executive branch should routinely investigate Congressional hearings and deliberations.
Friday, March 13, 2009
Jon Stewart vs. Jim Cramer: Takedown Part II
The Daily Show's Mar. 4, 2009 takedown of CNBC was brilliant, biting, and funny.
Stewart's interview with Jim Cramer on Mar. 12, 2009 was one of the most serious and substantive analysis (if not the most) of the purpose of the CNBC network that I have ever seen.
Jim Cramer was way, way, way out of his league.
Jim Cramer Extended Interview
First, Cramer assumed that he was the only target. Second, he completely failed to understand Stewart's fundamental issue: that CNBC was not giving value to the people who invest in pension funds and 401Ks, that it was, rather, a shill for Wall Street. Worse, it misrepresents itself as being for the former. Cramer simply did not get it.
This was a serious and often uncomfortable interview by Stewart, but it showed just how feckless the MSM (and the blogosphere for that matter) has been when it comes to business reporting.
Stewart's interview with Jim Cramer on Mar. 12, 2009 was one of the most serious and substantive analysis (if not the most) of the purpose of the CNBC network that I have ever seen.
Jim Cramer was way, way, way out of his league.
Jim Cramer Extended Interview
First, Cramer assumed that he was the only target. Second, he completely failed to understand Stewart's fundamental issue: that CNBC was not giving value to the people who invest in pension funds and 401Ks, that it was, rather, a shill for Wall Street. Worse, it misrepresents itself as being for the former. Cramer simply did not get it.
This was a serious and often uncomfortable interview by Stewart, but it showed just how feckless the MSM (and the blogosphere for that matter) has been when it comes to business reporting.
Thursday, March 12, 2009
Tracking the TARP: How Practical?
Since everybody in the media and in Washington wants to know where the TARP money went, I've been thinking about the mechanics. (Please note: I'm not an accountant or an auditor and, although I am an IT person, I don't know how bank systems are designed.)
As I believe the CEO of BofA told one committee, the government's money doesn't get a color-code. And some in Congress do recognize that money is fungible. This, however, only makes them angrier (as if being angry would make money less fungible or more trackable).
Input
So, anyways, in this thought experiment, let's start on the input side. I assume it is easy to set up a new account called "TARP" and, for all I know, that is what the banks have done. It's the output side that is the problem.
Output
I suppose one could tag the TARP money, but that would mean changing who knows how many computer systems in these banks. It would probably take years and cost a bundle. Not a realistic idea. And this is why, I assume, it is so hard for Treasury or anybody to answer the question of "where did the TARP money go?"
But let's take a very simple, and unrealistic, system. One input account labeled "TARP". All the hundreds or thousands of loan officers in all the branches of these banks are given access to this account. (Practically speaking, programmers would have to add all the controls needed to assure only authorized access and limits and to prevent waste, fraud and abuse. Naturally, the implementation of even this simplified system would take at least months - but for this thought experiment we will ignore this little problem.)
So, what do the loan officers do next? Well, given the mood in Washington and the country, they will be told to make all their loans from this one pot until they have reached their limit. Wonderful. Now we know where the TARP money went. Problem solved.
No, it isn't. Why? Because TARP was supposed to make it possible for banks to lend more than they would have lent without it. But in this very simple case, all we know is that the TARP money was spent. Had it not existed, the banks might have made all of those loans from their own non-TARP money. We would have no way of knowing if that was true or not.
What we need to know and why it's not easy to find out
Basically, we really want to know two things. First, who got the loans. Second, did the bank's lending increase over what it would have been otherwise.
We could answer the first question in my simple system. But I suspect that answering it in the real world is imposssible because of the complexity of the systems involved. (See Input and Output above.)
What about the second question? Well, one could compare loans this year to loans last year and if more are made now than before, we could assume that TARP was the cause.
Not so fast. We're in a major recession. For 4 months in a row, over 600,000 jobs have been lost. (There have been only 10 such months since records began.) An enormous amount of wealth has disappeared (predominantly in homes and 401Ks). People are saving, not spending. And they are not borrowing either. So, total loans could still be down this year - because people are not borrowing or because the borrowers are no longer credit-worthy - even though the TARP money is letting banks make more loans than they would have made otherwise. That is to say, one can't reach any conclusion about whether or not more loans have been made simply by comparing loan rates or amounts because the recession muddies the waters.
No doubt there are ways to track the TARP money (to some degree) that do not require a massive redesign of computer systems and that can take into account reduced borrowing, but I suspect they are not easy to implement and will, therefore, take time to develop and put in place.
Unfortunately, complexity is not something the media or Washington understands.
As I believe the CEO of BofA told one committee, the government's money doesn't get a color-code. And some in Congress do recognize that money is fungible. This, however, only makes them angrier (as if being angry would make money less fungible or more trackable).
Input
So, anyways, in this thought experiment, let's start on the input side. I assume it is easy to set up a new account called "TARP" and, for all I know, that is what the banks have done. It's the output side that is the problem.
Output
I suppose one could tag the TARP money, but that would mean changing who knows how many computer systems in these banks. It would probably take years and cost a bundle. Not a realistic idea. And this is why, I assume, it is so hard for Treasury or anybody to answer the question of "where did the TARP money go?"
But let's take a very simple, and unrealistic, system. One input account labeled "TARP". All the hundreds or thousands of loan officers in all the branches of these banks are given access to this account. (Practically speaking, programmers would have to add all the controls needed to assure only authorized access and limits and to prevent waste, fraud and abuse. Naturally, the implementation of even this simplified system would take at least months - but for this thought experiment we will ignore this little problem.)
So, what do the loan officers do next? Well, given the mood in Washington and the country, they will be told to make all their loans from this one pot until they have reached their limit. Wonderful. Now we know where the TARP money went. Problem solved.
No, it isn't. Why? Because TARP was supposed to make it possible for banks to lend more than they would have lent without it. But in this very simple case, all we know is that the TARP money was spent. Had it not existed, the banks might have made all of those loans from their own non-TARP money. We would have no way of knowing if that was true or not.
What we need to know and why it's not easy to find out
Basically, we really want to know two things. First, who got the loans. Second, did the bank's lending increase over what it would have been otherwise.
We could answer the first question in my simple system. But I suspect that answering it in the real world is imposssible because of the complexity of the systems involved. (See Input and Output above.)
What about the second question? Well, one could compare loans this year to loans last year and if more are made now than before, we could assume that TARP was the cause.
Not so fast. We're in a major recession. For 4 months in a row, over 600,000 jobs have been lost. (There have been only 10 such months since records began.) An enormous amount of wealth has disappeared (predominantly in homes and 401Ks). People are saving, not spending. And they are not borrowing either. So, total loans could still be down this year - because people are not borrowing or because the borrowers are no longer credit-worthy - even though the TARP money is letting banks make more loans than they would have made otherwise. That is to say, one can't reach any conclusion about whether or not more loans have been made simply by comparing loan rates or amounts because the recession muddies the waters.
No doubt there are ways to track the TARP money (to some degree) that do not require a massive redesign of computer systems and that can take into account reduced borrowing, but I suspect they are not easy to implement and will, therefore, take time to develop and put in place.
Unfortunately, complexity is not something the media or Washington understands.
Wednesday, March 11, 2009
TARP and the Congress: Neel Kashkari vs. Dennis Kucinich
Well, Mr. Kashkari underwent another multi-hour grilling by, this time, Kucinich's Oversight Subcommittee on Domestic Policy, and one wonders why he has chosen to subject himself to this continuing abuse.
The more I watch committee hearings on C-SPAN, the more I wonder how our country has survived. Although there are some smart people in the Congress, the number of idiots and ideologues (sometimes the same, sometimes not) surely exceeds their presence in the population (I hope).
First, Mr. Kashkari must deal with the incredible ignorance of the people who are questioning him. They know next to nothing about banking, about finance, about economics in general.
Second, they are like children who want their candy NOW! The stimulus package, passed less than a month ago hasn't worked yet! (The money has only started to trickle out the door). The 1/2 of the TARP given to the banks in the Fall hasn't stopped the recession. (Note: that wasn't its job. Its primary purpose was to stabilize the financial system.) And they don't understand that our financial institutions are in a precarious balancing act: they want to lend but they also have to maintain their capital levels (Tier 1 and, now, TCE)to avoid going bankrupt. Doesn't matter to these financial geniuses. The banks are supposed to do both.
Third, some are still angry because Treasury injected capital rather than bought up the bad assets - no matter that multiple people from the FED, FDIC and Treasury have explained what happened on multiple occasions. They still don't realize that buying up those assets has turned into a hugely complex problem - and Treasury, to its credit, realized it had to do something fast, something specifically authorized by the legislation (capital injection).
Fourth, he is constantly required to respond to conflicting ideological demands between the "free market over everything" and the "throw the bums out" groups.
Fifth, they don't understand that these multinational banks have customers and businesses around the world. They want the TARP money to be used "only" in the U.S. A few recognize that money is fungible, but still want to control how the banks conduct their business.
One of the dumbest questions/ideas came from Issa who thought it would have made more sense for the government to just buy up/renegotiate all the bad mortgages. It didn't occur to this doofus (although Kashkari did his best to gently point it out) that the government would have to hire thousands of employees who knew something about mortgages and those people would have to come from the very industries under scrutiny. Amazing, isn't it? Issa, foe of all government, convinced that the federal bureaucracy is the devil, thinks that same government should have gotten into the mortgage modification business down at the individual level.
The biggest complainer was Kucinich, appalled by the lack of oversight on how the money is being spent. Sure, it could probably be better. But since Sept., a new Administration has taken office, the economy has gone into a tailspin, banks are failing weekly, and the stock market may be headed toward 5000. You'd think it would have occurred to Kucinich that, just maybe, the Treasury has a lot on its plate and expecting penny-by-penny accounting of the money would be impossible under the best of circumstances and impossible given the speed with which the economy has deteriorated.
The more I watch committee hearings on C-SPAN, the more I wonder how our country has survived. Although there are some smart people in the Congress, the number of idiots and ideologues (sometimes the same, sometimes not) surely exceeds their presence in the population (I hope).
First, Mr. Kashkari must deal with the incredible ignorance of the people who are questioning him. They know next to nothing about banking, about finance, about economics in general.
Second, they are like children who want their candy NOW! The stimulus package, passed less than a month ago hasn't worked yet! (The money has only started to trickle out the door). The 1/2 of the TARP given to the banks in the Fall hasn't stopped the recession. (Note: that wasn't its job. Its primary purpose was to stabilize the financial system.) And they don't understand that our financial institutions are in a precarious balancing act: they want to lend but they also have to maintain their capital levels (Tier 1 and, now, TCE)to avoid going bankrupt. Doesn't matter to these financial geniuses. The banks are supposed to do both.
Third, some are still angry because Treasury injected capital rather than bought up the bad assets - no matter that multiple people from the FED, FDIC and Treasury have explained what happened on multiple occasions. They still don't realize that buying up those assets has turned into a hugely complex problem - and Treasury, to its credit, realized it had to do something fast, something specifically authorized by the legislation (capital injection).
Fourth, he is constantly required to respond to conflicting ideological demands between the "free market over everything" and the "throw the bums out" groups.
Fifth, they don't understand that these multinational banks have customers and businesses around the world. They want the TARP money to be used "only" in the U.S. A few recognize that money is fungible, but still want to control how the banks conduct their business.
One of the dumbest questions/ideas came from Issa who thought it would have made more sense for the government to just buy up/renegotiate all the bad mortgages. It didn't occur to this doofus (although Kashkari did his best to gently point it out) that the government would have to hire thousands of employees who knew something about mortgages and those people would have to come from the very industries under scrutiny. Amazing, isn't it? Issa, foe of all government, convinced that the federal bureaucracy is the devil, thinks that same government should have gotten into the mortgage modification business down at the individual level.
The biggest complainer was Kucinich, appalled by the lack of oversight on how the money is being spent. Sure, it could probably be better. But since Sept., a new Administration has taken office, the economy has gone into a tailspin, banks are failing weekly, and the stock market may be headed toward 5000. You'd think it would have occurred to Kucinich that, just maybe, the Treasury has a lot on its plate and expecting penny-by-penny accounting of the money would be impossible under the best of circumstances and impossible given the speed with which the economy has deteriorated.
Monday, March 9, 2009
Media Missing in Action: Small Business and Obama's Awful Tax Increase
Well, Republicans have been screaming for days about how Obama's tax increase on those earning over $250,000 will kill small business.
It turns out that only 3% of the small businesses in this country would be affected. (Thank you Peter Orszag for this rather important fact that none of our useless media ever bothered to ferret out.)
When faced with that fact, a Republican changed tactics. Yes, that's true. But that 3% employs 50+% of all small business employees. So?
And, remember, we're talking about turning back the top marginal tax rate to where it was in 2000. Less than a 4% increase.
But we are supposed to believe that a 4% tax increase on 3% of the small businesses in this country will cause these business people to ... what? Shut down their businesses? No, I don't think so. Refuse to expand or hire new employees? That's kind of hard to see, too. Don't most businesses expand when there is increased demand for their products? So unless a tax increase is confiscatory - costs the company more than it can earn through expansion - I find it truly difficult to imagine this outcome either. (Any of you small business people earning more than $250,000, please let me know if I am wrong.)
This reminds me of an argument that I haven't heard in a couple of decades:that the progressive income tax on individuals will cause them not to seek promotions. Because promotions come with salary increases, usually, and some salary increases come with increased taxes. Now, I have never known anybody to turn down a promotion because of an associated tax increase. Again, if the increase totally wipes out the salary increase, I suppose a person might refuse the promotion - but being primates, I suspect most of us would still go for the promotion.
It turns out that only 3% of the small businesses in this country would be affected. (Thank you Peter Orszag for this rather important fact that none of our useless media ever bothered to ferret out.)
When faced with that fact, a Republican changed tactics. Yes, that's true. But that 3% employs 50+% of all small business employees. So?
And, remember, we're talking about turning back the top marginal tax rate to where it was in 2000. Less than a 4% increase.
But we are supposed to believe that a 4% tax increase on 3% of the small businesses in this country will cause these business people to ... what? Shut down their businesses? No, I don't think so. Refuse to expand or hire new employees? That's kind of hard to see, too. Don't most businesses expand when there is increased demand for their products? So unless a tax increase is confiscatory - costs the company more than it can earn through expansion - I find it truly difficult to imagine this outcome either. (Any of you small business people earning more than $250,000, please let me know if I am wrong.)
This reminds me of an argument that I haven't heard in a couple of decades:that the progressive income tax on individuals will cause them not to seek promotions. Because promotions come with salary increases, usually, and some salary increases come with increased taxes. Now, I have never known anybody to turn down a promotion because of an associated tax increase. Again, if the increase totally wipes out the salary increase, I suppose a person might refuse the promotion - but being primates, I suspect most of us would still go for the promotion.
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