Monthly Archives: September 2009

Mike Norman: The Greatest Wealth Transfer

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Mike Norman Economics

The Greatest Wealth Transfer…

Citigroup to scale back U.S. footprint; limit lending to wealthy

There is perhaps no greater trend emerging from the Obama Administration than the trend of wealth flowing to the top.

For a president that promised change and more equity for working people, this development is truly astonishing.

From Tarp to the forced bankruptcy of U.S. automakers to tariffs on tire imports from China to the Public Private Partnership initiative and above all…the complete absence of any middle class tax cut, this Administration has, either deliberately or unwittingly, engineered one of the greatest wealth transfers from the lower classes to the most wealthy.

This Citigroup story is just another example. The beleagured bank is being forced to pare back its mighty U.S. presence, where it served tens of millions of everyday Americans, including many small businesses, and now focus on lending money to the only ones who have any left: the wealthy.

Because the Administration, including the Federal Reserve, failed to understand the very nature of our own banking system–that commerical banks are already public/private partnerships and quasi-agents of the goverment–they were given support with huge strings attached when there shouldn’t have been any. Moreover, because the government has failed in its obligation to sustain employment and output (yes…OBLIGATION!) banks have no choice but to go where the money is.

This is a terrible, terrible, abrogation of government’s responsibility and worse, a weak and cowardly act by the president by going back on his promise to help working people.

There is plenty of history to show that large doses of government spending–broad and actual spending–are necessary to avoid economic collapse and, indeed, to sow the seeds for future long-term economic growth. A real leader would have overridden the wrong-headed advice of his political advisors and done what was necessary to restore jobs, incomes and a decent standard of living for all Americans, as promised, and not just the 1% at the top.


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The Fed, interest rates, deficit spending, and loan growth

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Loan growth is also to some degree a function of interest rates. Lower rates = lower loan growth due to the reduced compounding of interest for many borrowers.

Additionally the increased federal deficit spending is restoring income and savings of financial assets, reducing the nedd to borrow to sustain spending.

Fed Effort to Stoke Growth May Be Undermined by ‘Tight’ Credit

By Scott Lanman

Sept. 22 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke’s efforts to stoke a U.S. economic recovery may be undermined by the central bank’s other goal of restoring the banking system to health.

A Fed report released last week shows banks had $6.85 trillion of loans and leases outstanding to businesses and households as of Sept. 9, down for a fifth straight week and below the record $7.32 trillion in October 2008. Real estate loans, the biggest portion, stood at $3.79 trillion, up $7.5 billion from the prior week while down from a peak of $3.9 trillion.


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Ireland asset purchase proposal

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On Mon, Sep 21, 2009 at 7:38 AM, Greg wrote:

Hi Warren

What are your thoughts regarding the scheme in Ireland announced this past week whereby the government takes real estate assets from the big banks in return for bonds (at a discount implying some sort of bank subsidy) and whereby said banks can in turn repo those bonds at the ECB for cash?

Of course the devil will be in the details but it seems to me this will require all of us to rethink garlic belt sov. risk, the Euro, and the ECB if it comes to fruition.

Haven’t seen the details but reads to me like the govt is simply purchasing real estate assets?

That leads to the usual questions of pricing, etc. the proved unworkable in the US and probably a lot of other places.

Banks are already public/private partnerships with govt guaranteeing the deposits.

So there are several other things the govt might do to get to the same end.

For example, allow the banks to put the designated assets in segregated accounts with specified capital set aside for those assets, wherein losses that exceed that capital specified for the seg account are covered by the govt and not the rest of the banks capital.

That way the govt still functionally owns the assets it’s trying buy but doesn’t have the servicing and accounting and brokerage issues associated with an actual purchase by the cb. and the banks are fully regulated and supervised.

The US govt could have done same with the mbs it has bought for itself and saved itself the accounting nightmare and expense and substantial fees to brokers from buying those secs directly.

And, as you say, in the Eurozone this adds a risk to the national govt itself. So far it seems markets aren’t disposed to challenge their liquidity, and the Fed rescued them last year with the unlimited dollar swap lines (unsecured loans) to the ECB that totalled maybe 600 billion globally.


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Data Review

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Karim writes:

‘Mixed’

Claims

  • Initial down 12k to 545k
  • Continuing + Emergency + Extended up 161k

Housing

  • Starts up 0.2% in August with single family down 3%, first drop in this sector since Feb
  • Permits up 2.7% with single family down 0.2%, first drop in this sector since March

Philly Fed

  • Headline improves 10pts to 14.1, but details on the weak side (headline not a weighted avg of components)
  • Prices Paid less Prices Received, new orders, and number of employees all worsen. Improvement most notable in current shipments.


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quick macro update

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Market functioning has finally returned, helped by the Fed slowly getting around to where it should have been even before all this started- lending unsecured to its banks, setting its target rate and letting quantity adjust to demand. It’s not technically lending unsecured, but instead went through a process of accepting more and varied collateral from the banks until the result was much the same as lending unsecured.

A couple of years back (has it been that long?) when CPI and inflation expectations were rising, the Fed said it was going to restore market function first, and then work on inflation. It’s taken them this long to restore market functioning (eventually implementing in some form the proposals I put forth back then regarding market functioning) and with the inflation threat subdued by the wide output gap it looks like they are on hold for a while, though they would probably like to move to a ‘more normal’ stance when it feels safe to do so. That would mean a smaller portfolio (not that it actually matters) and a modest ‘real rate of interest’ as a fed funds target is also based on their notion of how things work.

It is more obvious now that the automatic fiscal stabilizers did turn the tide around year end, as the great Mike Masters inventory liquidation came to an end, and the Obamaboom began. The ‘stimulus package’ wasn’t much, and wasn’t optimal for public purpose, but it wasn’t ‘nothing,’ and has been helping aggregate demand some as well, and will continue to do so. It has restored non govt incomes and savings of financial assets to at least ‘muddle through’ levels of modest GDP growth, and we are now also in the early stages of a housing recovery, but not enough to keep productivity gains from continuing to keep unemployment and excess capacity at elevated levels.

This also happens to be a good equity environment- enough demand for some top line growth, bottom line growth helped by downward pressures on compensation, and interest rates helping valuations as well. There will probably be ups and downs from here, but not the downs of last year.

There also doesn’t seem to be much public outrage over the unemployment rate, with GDP heading into positive territory. Expectations of what government can do are apparently low enough such that jobs being lost at a slower rate has been sufficient to increase public support of government policies.

The largest macro risk remains a government that doesn’t understand the monetary system and is therefore unlikely to make the appropriate fiscal adjustments should aggregate demand suddenly head south for any reason.

And here’s a new one, just when I thought I’d heard it all:

‘Black Swan’ Author Taleb Wants His Vote for Barack Obama Back

By Joe Schneider

Sept. 16 (Bloomberg)— U.S. PresidentBarack Obama has failed to appoint advisers and regulators who understand the complexity of financial systems,Nassim Taleb, author of “The Black Swan,” told a group of business people in Toronto.

“I want my vote back,” Taleb, who said he voted for Obama, told the group.

The U.S. has three times the debt, relative to the country’s economic output, or gross domestic product, as it had in the 1980s, Taleb said. He blamed rising overconfidence around the world. U.S. Federal Reserve Chairman Ben Bernanke, who was appointed to a second term last month by Obama, contributed to that misperception, Taleb said.

“Bernanke thought the system was getting stable,” Taleb said, when it was on the verge of collapse last year.

Debt is a direct measure of overconfidence, he said. The national debt, according to the U.S. Debt Clock Web site, is at $11.8 trillion.

The nation must reduce its debt level and avoid “the moral sin” of converting private debt to public debt, he said.

“This is what I’m worried about,” Taleb said. “But no one has the guts to say let’s bite the bullet.”

As the founder of New York-based Empirica LLC, a hedge-fund firm he ran for six years before closing it in 2004, Taleb built a strategy based on options trading to protect investors from market declines while profiting from rallies. He now advises Universa Investments LP, a $6 billion fund that bets on extreme market moves.


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King Comments on rate paid Bank Reserves

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Might be secretly worried about the relatively strong currency.

Many of them still think rates matter for the level of their currency even though the BOE research says they don’t matter.

>   
>   (email exchange)
>   
>   On Tue, Sep 15, 2009 at 5:34 AM, Dave wrote:
>   
>   BOE King states that BoE will look at reducing deposit rate on reserves
>   
>   Front end rallies, 1*1 at 2.565% currently, had traded as high as 2.68%
>   prior to announcement
>   

  • KING SAYS LOWER RATE COULD MEAN MORE BUYING OF S-TERM GILTS
  • KING SAYS IT MAYBE A USEFUL SUPPLEMENT, WON’T BE MAJOR CHANGE
  • KING SAYS BOE WILL REFLECT ON LOWERING DEPOSIT RATE
  • KING SAYS YOU COULD HAVE LOWER REMUNERATION RATE FOR RESERVES
  • KING SAYS BOE IS LOOKING AT REDUCING DEPOSIT RATE FOR RESERVES
  • KING SAYS THERE’S LIMIT TO HOW FAR BOE CAN GO ON RESERVES
  • KING SAYS BOE DOESN’T WANT RESERVES UNNECESSARILY HIGH
  • KING SAYS ASSET PURCHASES AUTOMATICALLY RAISE BANK RESERVES


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NPR discussion

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>   
>   (email exchange)
>   
>   On Mon, Sep 14, 2009 at 10:45 AM, wrote:
>   
>   By the way, you didn’t hear NPR this morning, but there was the usual hagiography
>   about how the Fed averted a Great Depression last year because it “created”
>   trillions of dollar to support the banking system.
>   
>   But my understanding is that ONLY the Treasury creates money and the Fed simply
>   tries not very successful) to determine a price for the money that is created by
>   TSY.
>   
>   When you look at it this way, the narrative changes considerably.
>   

Yes!

The Fed did loan to banks and act as broker of last resort between banks who had Fed funds and banks who needed them, but that should always be done in the normal course of business.

So I do give them credit for figuring out how to do what they were charged to do from inception in 1913, since Bernanke et al had to play the cards they were dealt.

But even now they haven’t figured out they should just trade Fed funds in unlimited quantities with member banks, at their target rate, and instead use an alphabet soup of programs to get that done indirectly.


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Your thoughts on wall street remaining intact

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A Year Later, Little Change on Wall St.

As previously suggested, wealth is flowing to the top from the bottom as gdp grows some, unemployment climbs, and wages languish:

Despite the predictions last year about pay cuts, those bonuses appear secure. Kian Abouhossein, an analyst at J.P. Morgan in London, predicted this week that eight major American and European banks would pay the 141,000 employees in their investment banking units $77 billion in 2011 — about $543,000 per worker, not far from the 2007 peak — even after minor regulatory changes are adopted.

>   
>    Can the mortgage fraud environment return?
>   

Lenders/investors will be smarter for a while, best guess. But always ripe for the next fraud.


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