Statement of Senator Obama on moving financial legislation forward


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Statement of Senator Obama on Moving Financial Legislation Forward


Yesterday, within the course of a few hours, the failure to pass the economic rescue plan in Washington led to the single largest decline of the stock market in two decades.

Might have been worse if they had passed the plan!!!

While I, like others, am outraged that the reign of irresponsibility on Wall Street and in Washington has created the current crisis,

All a result of institutional structure that put the incentives in place in place to do what was done.

Including the way Washington works.

I also know that continued inaction in the face of the gathering storm in our financial markets would be catastrophic for our economy and our families.

At this moment, when the jobs, retirement savings, and economic security of all Americans hang in the balance, it is imperative that all of us – Democrats and Republicans alike – come together to meet this crisis.

The bill rejected yesterday was a marked improvement over the original blank check proposed by the Bush Administration. It included restraints on CEO pay, protections for homeowners, strict oversight as to how the money is spent, and an assurance that taxpayers will recover their money
once the economy recovers.

None of that matters for the ‘success’ of the plan which is doubtful, as it’s not much more than an asset swap, and with the changes, the additions of incentives for CEOs not to participate.

Given the progress we have made, I believe we are unlikely to succeed if we start from scratch or reopen negotiations about the core elements of the agreement. But in order to pass this plan, we must do more.

One step we could take to potentially broaden support for the legislation and shore up our economy would be to expand federal deposit insurance for families and small businesses across America who have invested their money in our banks.

The majority of American families should rest assured that the deposits they have in our banks are safe. Thanks to measures put in place during the Great Depression, deposits of up to $100,000 are guaranteed by the federal government.

While that guarantee is more than adequate for most families, it is insufficient for many small businesses that maintain bank accounts to meet their payroll, buy their supplies, and invest in expanding and creating jobs. The current insurance limit of $100,000 was set 28 years ago and has not been adjusted for inflation.

That is why today, I am proposing that we also raise the FDIC limit to $250,000 as part of the economic rescue package – a step that would boost small businesses, make our banking system more secure, and help restore public confidence in our financial system.

Misses the point. Moving to $250,000 does nothing for the banking system. The cap needs to be removed, and the Fed given the mandate to lend unsecured to member banks in unlimited quantities.

Institutionally, this can be facilitated by extending FDIC insurance to Fed deposits at member banks.

That way, any ultimate bank insolvencies and losses continue to be charged to the FDIC.

I will be talking to leaders and members of Congress later today to offer this idea and urge them to act without delay to pass a rescue plan,” said Barack Obama.

A baby step in the right direction.

Not enough to make a difference.

Doesn’t address the issue of aggregate demand and homeowner’s ability to pay as employment stagnates.


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Re: Mosler plan, short version


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>   
>   Warren,
>   I like adding the tax holiday.
>   

Thanks, we were all pushing that as a better alternative than the Bush tax cut plan 5 or so years ago.

While not as constructive as, for example, an infrastructure project, and likely to drive up energy consumption, it will get immediate results, ‘cure’ the financial crisis (people will better afford their mortgage payments) and the ‘recession,’ and is far better than what they are proposing which does little or nothing.

>   
>   Why do you want the Fed to establish 1 month, 2 month, and 3 month rates?
>   

To eliminate interbank markets domestically at least out that far. Six months would be even better, and 30 years even better, but at some point it gets beyond political understanding, and most of the benefit comes from the very front of the curve where most of the interbank lending takes place, or tries to!


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Mosler Plan, short version


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Short version updated for current events.

If you agree, please distribute, including your Congressman, Fed officials, FDIC contacts, etc.

  1. Have the FDIC remove the $100,000 cap on deposits and extend insurance coverage to include Fed deposits at member banks.
  1. Have the Fed set 1 month, 2 month, and 3 month lending rates for member banks in addition to the fed funds rate, which, with the above, it can now lend to unsecured in unlimited quantities on demand.
  2. This:

    • Instantly normalizes bank liquidity, returning it to where it was designed to be all along.
    • Largely eliminates the need for banks to use the interbank market.
      functionally replaces the TAF and the Treasury lending facility without their shortcomings.
  1. Declare a payroll tax holiday and have Congress put the full faith and credit of the US behind all social security and medicare to eliminate the function of the trust fund regarding solvency.
  2. This supports demand. The taxes can be restored as needed should the economy be deemed ‘too hot’.

  • Crisis ends within hours.
  • Markets recover instantly.
  • Economy recovers instantly.
  • Financial sector muddles through as restored incomes and growth allow the institutions to grow out of their issues.

This can be looked as a plan that ‘gives the tax payers their money back’ vs the reverse from the current TARP that has no direct effect on anything in any case.


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Telegraph: Eurozone risks


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Highlights are in yellow. Problem is it needs a fiscal response, and this all has nothing to do with interest rates.

Banking crash hits Europe as ECB loses traction


by Ambrose Evans-Pritchard

(Telegraph) Analysts say German finance minister Peer Steinbrueck may have spoken too soon when he crowed last week that the US would lose its status as a superpower as a result of this crisis. He told Der Spiegel yesterday that we are “all staring into the abyss.”

Germany — over-leveraged to Asian demand for machine tools, and Mid-East and Russian demand for luxury cars — is perhaps in equally deep trouble, though of a different kind.

The combined crises at both Fortis and Dexia have sent tremors through Belgium, which is already traumatized by political civil war between the Flemings and Walloons. Fortis is Belgium’s the biggest private employer.

It is unclear whether the country has the resources to bail out two banks with liabilities that dwarf the economy if the crisis deepens, although a joint intervention by the Netherlands and Luxembourg to rescue Fortis has helped Belgium share the risk. Together the three states put E11.2 billion to buy Fortis stock.

This tripartite model is unlikely to work so well in others parts of Europe, since Benelux already operates as a closely linked team. The EU lacks a single treasury to take charge in a fast-moving crisis, leaving a patchwork of regulators and conflicting agendas.

Carsten Brzenski, chief economist at ING in Brussels, said the global crisis was now engulfing Europe with devastating speed.

We are at imminent risk of a credit crunch. Key markets are not functioning properly. The Europeans thought the sub-prime crisis was just American rubbish that the US should clean up itself, but now they are finding out that it is their rubbish too,” he said.

Data from the International Monetary Fund shows that European banks hold 75 percent as much exposure to toxic US housing debt as US banks themselves. Moreover they have mounting bad debts from the British, Spanish, French, Dutch, Scandinavian, and East European housing markets, where property bubbles reached even more extreme levels that in the US.

The interest spread between Italian 10-year bonds and German Bunds have ballooned to 92 basis points, the highest since the launch of the euro. Bond traders warn that the spreads are starting to reflect a serious risk of European Monetary Union breakup and could spiral out of control in a self-feeding effect.

As the eurozone slides into recession, the ECB is coming under intense criticism for keeping monetary policy too tight. The decision to raise rates into the teeth of the crisis in July has been slammed as overkill by the political leaders in France, Spain, and Italy.

Mr Sarkozy has called an emergency meeting of the EU’s big five powers next week to fashion a response to the crisis.

Half of the ECB’s shadow council have called for a rate cut this week, insisting that the German-led bloc of ECB governors have overstated the inflation risk caused by the oil spike earlier this year.

Jacques Cailloux, Europe economist at RBS, said the hawks had won a Pyrrhic victory by imposing their hardline monetary edicts on Europe. “They have won a battle but lost the war. The July decision will hardly go down in history books as a great policy decision,” he said.


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2008-09-30 USER


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ICSC UBS Store Sales YoY (Sep 30)

Survey n/a
Actual 1.10%
Prior 1.30%
Revised n/a

 
Still positive but weak.

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ICSC UBS Store Sales WoW (Sep 30)

Survey n/a
Actual -0.20%
Prior -1.00%
Revised n/a

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Redbook Store Sales Weekly YoY (Sep 30)

Survey n/a
Actual 1.00%
Prior 1.20%
Revised n/a

 
Still positive but weak.

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Redbook Store Sales MoM (Sep 30)

Survey n/a
Actual -1.30%
Prior -1.20%
Revised n/a

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ICSC UBS Redbook Comparison TABLE (Sep 30)

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S&P CS Composite 20 YoY (Jul)

Survey -16.00%
Actual -16.35%
Prior -15.92%
Revised -15.91%

 
Down year over year, but the rate of decline has slowed.

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S&P Case Shiller Home Price Index (Jul)

Survey 166.90
Actual 166.23
Prior 167.69
Revised 167.71

 
Decelerating rate of decline.

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S&P Case Shiller Home Price Index MoM (Jul)

Survey n/a
Actual -0.88%
Prior -0.52%
Revised n/a

 
From this angle it looks like the declines have moderated and could soon be over as inventories shrink and incomes continue higher.

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Case Shiller ALLX 1 (Jul)

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Case Shiller ALLX 2 (Jul)

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Chicago Purchasing Manager (Sep)

Survey 53.0
Actual 56.7
Prior 57.9
Revised n/a

 
Better than expected and remaining above 50. Employment moved up to 49.

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Chicago Purchasing Manager TABLE 1 (Sep)

 
Employment gapped up to 49?

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Chicago Purchasing Manager TABLE 2 (Sep)

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NAPM-Milwaukee (Sep)

Survey 44.0
Actual 46.0
Prior 43.0
Revised n/a

 
Better than expected and working its way out of the hole.

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Consumer Confidence (Sep)

Survey 55.0
Actual 59.8
Prior 56.9
Revised 58.5

 
Even this is moving up some though from very low levels, and as of September 23.

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Consumer Confidence ALLX 1 (Sep)

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Consumer Confidence ALLX 2 (Sep)


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Time for a payroll tax holiday


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Time for something they can all understand that would turn it all around like it never happened: a payroll tax holiday until the economy recovers.

It favors lower income workers.

It’s an immediate add to aggregate demand of over 3% per year annualized.

It lowers costs for businesses to help keep prices in check.

They can phase it back in to cool things down if the economy overheats.

And it would be a good time for Congress to put its full faith and credit behind promised social security checks regardless of the trust fund reserves.


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Can the euro payments system last the week?


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Euro equities and banks are now under attack, and the ECB is effectively borrowing hundreds of billions USD from the Fed via swap lines. The eurozone deposit insurance is by the national governments, not the ECN, which are credit constrained.

National government euro bonds have been supported by various CB/monetary authority allocations that are slowing with slowing net exports.

A major bank failure becomes infinitely more problematic in the eurozone than in the US, Japan, or UK, all who have deposit insurance at the ‘federal’ level.

The risk in the eurozone is the payments system completely shuts down, and re opens only when the ECB is allowed to conduct what amounts to fiscal transfers.

In a crunch, USD borrowings will need to be serviced from selling euros to buy USD and result in a sharply falling euro.

Yields on the national government bonds will move sharply higher due to credit concerns, as will credit default premiums in general.

For 10 years the euro ‘system’ has functioned reasonably well on the way up.

The systemic risk is only on the way down. And once in motion, it will unwind very quickly.

Protect yourself by not having any euro deposits, buying out of the money puts on the national government bonds and out of the money puts on the euro.

And then hope you lose those bets!


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Elaboration on the Mosler Plan


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The combination of removing the FDIC cap and extending FDIC insurance to include Fed deposits at member banks will normalize bank liquidity instantly, and at no ‘cost’ to government, by removing these ‘self-imposed constraints’ on bank liquidity that serve no function beyond contributing to the current liquidity crisis.

Supporting demand is a separate matter. Supporting lending will help, but there is no substitute for supporting incomes.

The TARP will not normalize bank liquidity or add to demand. It’s just an asset exchange. Not a bad thing, but nothing that dramatically changes anything.

And, unfortunately, and not to further complicate matters regarding the financial crisis, anything that does succeed in restoring growth will increase gasoline consumption and support prices at new highs in short order.

The over riding theme for Congress is the notion of ‘public purpose’.

New comments highlighted in yellow:

  1. Money fund issue:

    Remove the $100,000 cap on insured bank deposits. This adds no risk to government. And it will eliminate the need for money funds which the cap created in the first place.

Reasons for the cap: small banks will lose money to large banks.

When combined with 5., below, the Fed lending unsecured and in any size to any solvent member bank this objection vanishes:

  1. Banks:

    Lower the discount rate to the fed funds target rate and eliminate the need for collateral. This is how it should have been anyway. This goes hand in hand with eliminating the cap on FDIC insured deposits. The easiest way to facilitate this may be to extend FDIC insurance to Fed deposits at member banks. Then the Fed won’t need to demand collateral when it lends, and that alone will go a long way to normalizing bank liquidity. This would also mean banks would pay for FDIC insurance on any Fed deposits.

    Bank assets and solvency are already highly regulated, and how they are funded doesn’t alter the risk of loss due to insolvency for the government.

    An interbank market serves no public purpose. Eliminate it out to six months by offering discount lending out to 6 months.

    If banks can borrow all they want from the Fed they have no reason to borrow from each other.

    In addition to the FOMC setting the fed funds rate target, it can also set the rate for 3 and 6 month borrowing at the discount window. This both gets the job done and also replaces the TAF and TSLF type of experiments.

The banking model that has served us well since the depression provides for:

  • Deposit insurance to prevent runs on banks, the eliminating the liability side as the place of market discipline. There was and is a good reason for this- it doesn’t work, and never has worked. In fact, using bank liabilities for market discipline is what triggered the bank runs of the early 1930’s and before, that resulted in the rule changes. Let me suggest it is counterproductive to let a bank like WAMU fail for, as stated by the FDIC, liquidity reasons and not insolvency.
  • Strict regulation of capital ratios, loan (asset) quality, diversification, interest rate risk, etc.

    Loan quality is measured by credit analysis, and not mark to market, also to better serve public purpose. Banking is a matter of liabilities provided either directly or indirectly by government, and regulated and supervised assets.

  1. Broker/dealers:

    Let them go. If they don’t survive, at worst their assets will be distributed by the bankruptcy court if it goes that far. They do nothing that I know of that serves public purpose and/or the real economy that banks can’t do. And the banks are already regulated and supervised.

  1. Insurance companies:

    Policy holders should be government insured and insurance company assets, and capital regulation should be updated. You will know insurance regulation doesn’t go far enough if there are too many government losses to make policy holders whole.

    AIG got short credit (sold insurance on securities at low prices) and lost all their capital as risk and the price of insurance went up. Looks to me like a failure of regulation that allowed that much risk.

  1. Home ownership:

    Continue to fund the agencies via the Treasury to keep costs of funds at a minimum.

    Have the agencies ‘buy and hold’ new originations, and thereby eliminate that portion of the secondary markets. The secondary markets serve no public purpose, beyond working past flaws in the institutional structure that should instead be addressed.

    Increase and enforce criminal penalties for mortgage application fraud. Its functionally the same as robbing a bank.

To the question of how to keep homeowners in their properties if it decided that suits public purpose:

  • Use the existing housing agencies to buy foreclosed properties at the lower of the mortgage balance or the appraised value.
  • Allow the agencies to rent to the prior owner at a fair market rent.
  • Give the owner a minimum of 1 year to arrange to buy his house back from the government.
  • Allow the housing agencies the right to sell the house on the market after one year is not already sold to the prior owner.

This will be a major administrative effort, but it’s the only way I can see to get that job done.

  1. Growth and employment:

    Offer (directly or indirectly) a Federally funded $8 per hour full time job to anyone willing and able to work that includes health care benefits. An employed buffer stock is a more effective stabilizer and price anchor. It’s also less costly in real terms, than the unemployed buffer stock we currently maintain.

    Eliminate the various payroll taxes as needed to sustain demand.

    Implement needed infrastructure upgrades and repairs.

The financial sector needs the above three proposals to restore long term solvency. Their financial assets are only as good as the borrower’s ability to make his payments. There is no substitute for rising employment and incomes to support all sectors, including the financial sector.

The quickest and easiest way to support demand would be a payroll tax holiday that doesn’t end until the economy recovers as desired.

  1. con’td

    Eliminate health care as a marginal cost of production. People aren’t more likely to get ill if they are employed; in fact, the opposite is likely the case.

    The current system distorts pricing, and results in a suboptimal outcome for the economy’s ability to sustain prosperity.

This is the absolute argument against business paying for health care. No economist would disagree, but it seems to get ignored.

Once again we are seeing that using the liability side of banking for market discipline doesn’t work.

That’s why deposit insurance exists in every sustainable banking system in the world.

The remaining weak link in US banking system liquidity is the interbank market.

The reason we have an interbank market is the remaining institutional structure that utilizes the liability side of banking for market discipline.

This includes the $100,000 cap on FDIC insured bank deposits, and the Fed demanding collateral from banks when it lends.

Remove these two remaining obstacles for Fed member banks, and bank liquidity normalizes with no ‘cost’ or additional risk to government.

Unfortunately, no one in government seems to comprehend basic monetary operations and reserve accounting.


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Re: Fed goes ballistic


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(email exchange)

>   
>   This morning the Fed announced a massive expansion of its dollar liquidity
>   facilities. Three measures were announced: (1) an increase in total TAF
>   auctions from $150 billion to $300 billion, all coming in 84-day funds (2)
>   forward TAF auctions of an additional $150 billion, with the auctions to be
>   conducted in November for funds available for one or two weeks surrounding
>   the year-end and
>   

The TAF would be unlimited, unsecured, and the Fed would set the rate in advance if they had a clear understanding of reserve accounting and monetary operations. It’s about price, not quantity.

>   (3) an increase in the currency swaps with foreign central banks (ECB, BoE,
>   BoC, BoJ, SNB, RBA, and the Scandis) taking the total outstanding from $290
>   billion to $620 billion. In addition, these swap lines were extended through
>   April 30, 2009; previously they were authorized through January 30, 2009.
>   

This is a different matter, and more serious and disturbing- foreign central banks borrowing $ from the Fed to support the $ needs of their local banking systems.

Should those banking systems go down and this program gets large enough it could take down their currencies like any other external debt.


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2008-09-29 Weekly Credit Graph Packet


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IG On the Run Spreads (Sep 29)

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IG6 Spreads (Sep 29)

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IG7 Spreads (Sep 29)

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IG8 Spreads (Sep 29)

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IG9 Spreads (Sep 29)


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