Category Archives: Banking

the President’s speech and markets

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The speech made it clear there has been a shift to ‘fiscal responsibility’ with plans to pay back the 2 trillion in new debt, all well down the road. The spending freeze will pay half of it over time, and the rest from less specified sources that included tax increases for people making over 250,000, banks, etc. The health care plan is also supposed to reduce the deficit and paygo may be back.

And no additional fiscal relaxation of consequence apart from the current jobs bill working its way through congress.

The jobs initiatives mentioned were minor.

And rather than come up with a way for congressman inherently uncooperative due to the current institutional structure, there was simply a call for them to somehow act in the public interest.

So it looks like the economy is on its own for the most part, with an agonizingly slow and irregular recovery, and neither side coming up with substantially better ideas.

This isn’t a bad environment for stocks, as there’s nothing to suggest negative earnings shocks, and productivity gains can keep supporting at least modest earnings growth, and high unemployment helps keep down costs, and helps keep interest rates low which helps valuations.

The announced export push would be a negative for our standard of living and real terms of trade, but pretty good for stocks as well.

And clearly there’s nothing more the Fed can do, as it’s becoming increasingly clear the moves they have already made have had no positive impact on aggregate demand. They have only restored ‘market functioning.’

Removing some of their liquidity measures does mean there’s again a chance the pressures will appear in libor settings if something starts shaking the tree.

Like Greece, or Iran, or something like that.

Each time the President speaks I’m hoping for some meaningful new ideas but have yet to hear any.

But, again, not a bad environment for stocks, and interest rate forwards continue to look reasonably cheap as well, particularly as concerns about QE and 0 rates as causes of inflation subside.


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Tea Party Plan for Dems- Cut to the Front with Tax Cuts

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Tea Party Plan for Democrats — Cut to the Front with Tax Cuts

At Saturday’s Tea Party conference in Dallas I’ll be outlining how Tea Party Democrats can run against Obama administration policies that are counter to both Tea Party and traditional Democratic values. It is the Washington elite that have moved away from the ideals of Jefferson and Jackson with policies that are, at best, regressive, elitist, and destructive to our quality of life. And who’s benefiting? Not the millions who voted Democratic who are losing their jobs and their homes. And with GDP now moving higher while unemployment rises, all that additional wealth is flowing up to the top. This Democratic President and Congress was not elected to enrich the bankers, insurance executives, drug companies, and union leaders at the expense of the rest of us, in a perversion of true core Democratic values. Unfortunately, the so-called economic experts have confused themselves and their political masters with contrived explanations for the way the economy works, and their limited vision has limited the range of policy choice. The result has been a monumental economic and social disaster caused by an obvious shortage of aggregate demand. The spending power needed to make mortgage payments, car payments, and do a bit of shopping- all of which would fix the economy and end the financial crisis- just isn’t there.

The answer is a full payroll tax holiday, where the US Treasury would make all FICA payments for both employees and employers that regressively remove 15% of every pay check from dollar one up to $106,800 of income. The take home pay of a husband and wife with a combined income of $100,000 per year would increase by over $650 a month, and quickly restore output and employment. Rather than funding the banks from the top down with an improbable trickle down theory that would have made Reagan blush, this tax cut restores the incomes necessary to support all economic activity from the bottom up. Instead of funding the financial sector with $trillions, the payroll tax holiday instead simply stops taking $trillions away from people working for a living.

Unfortunately, the Democratic elite has been not only against this kind of tax cut, even though it is a tax so regressive that no self respecting Democrat should tolerate for a single moment, because they think the Federal Government has to actually get revenue to be able to spend. However, that anachronistic gold standard reality has long been replace by our current, non convertible currency regime and floating exchange rate policy. Chairman Bernanke told Congressman Pelley exactly how the Federal Government spends today last May:

(PELLEY) Is that tax money that the Fed is spending?
(BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

Our govt has only one way to spend- they ‘mark up’ numbers in bank accounts. The funds don’t ‘come from’ anywhere any more than the 6 points for a touchdown posted on scoreboard at a football game ‘come from’ anywhere. Nor does govt. get anything when it taxes- the IRS just changes numbers down in our bank accounts.

The fact is, the US Government never has nor doesn’t have dollars. It’s the scorekeeper for the dollar. It just changes numbers in bank accounts.

So why tax? To regulate aggregate demand. Taxation is the thermostat. When the economy is too hot, raise taxes to cool it down. When it’s too cold, like it surely is today, a payroll tax holiday will warm it back up to operating temperature.

The Democratic elite have it wrong and their wrongheaded ways are doing serious damage to the US economy and the people struggling under their failed economic agenda. And their latest moves towards what they call ‘fiscal responsibility’ will only cut demand further and make things worse.

Tea Party Democrats can lead the way towards true fiscal responsibility, which means setting taxes at the right level needed to sustain output and employment. And today that means a full payroll tax holiday.


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China bank halts roll-over of some loans

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Lending expansion often follows inflation, as higher asset prices and higher incomes support larger loan balances.

Cutting lending as this article implies can set off downward spirals and rising unemployment if domestic demand isn’t somehow supported by
enhancing consumer incomes.

3-Top China bank ICBC halts roll-over of some loans

ICBC says lending pace has slowed at end of January

* Latest signal of tightening that may rein in growth

* Official newspaper says some banks have recalled loans

* Chinese regulator renews demand for even pace of lending


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Obama speech

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Obama: Bank Regulators May Have Gotten Too Tough

Jan. 22 (AP) —President Barack Obama said on Friday that regulatory oversight of the country’s banks might now be erring too much on the side of caution, potentially hindering the flow of credit to small businesses.

This is definitely the case. It’s called regulatory overreach, as previously discussed on my website.

“The banks feel as if regulators are looking over their shoulder, discouraging them from lending,” Obama told a town-hall style meeting in Elyira, Ohio during a trip to promote his jobs and health care policies.

Obama said it was not his intention to interfere with bank supervision. But he had told Treasury Secretary Timothy Geithner to make sure that the country has not “seen the pendulum swing too far”, with regulators now being too tough after being too slack in the past.

Including the risk weight rules that require non senior impaired securities to functionally be marked at 0.

On other issues, it was a combative Obama that exhorted Congress to pass a new job-creation bill, taking a populist appeal to America’s recession-racked Rust Belt in an effort to recapture the excitement of his campaign.

Obama weaved us-against-them rhetoric into his appearances, telling a town hall audience that he “will never stop fighting” for an economy that works for the hard-working, not just those already well off.

He said a jobs bill emerging in Congress must include tax breaks for small business hiring and for people trying to make their homes more energy efficient — two proposals he wasn’t able to get into a bill the House passed last month.

He also pitched fiscal responsibility and deficit reduction. Not sure how he proposes to do both, as below.

And he used the word “fight” or some variation of it over a dozen times. The House-passed $174 billion stimulus package faces a stern test in the Senate, in part because it is financed with deficit spending.

He strongly defended unpopular actions he has taken to bail out banks and insurers and to rescue automakers from collapse. Such measures have not gone over well in many quarters, and have been derided as moves that expanded government intervention and swelled the deficit.

The measures were seen as a helping hand for Wall Street while many on Main Street walked the unemployment lines.

Obama said that propping up the financial industry was as much about regular Americans as wealthy bankers. “If the financial system had gone down, it would have taken the entire economy and millions more families and businesses with it,” he argued.

As before, he states his belief in a top down solution.

Similarly, allowing GM and Chrysler to go under might have satisfied calls to force businesses to reap the consequences of bad decisions.

Cleaning up Chrysler to hand it over to Fiat to import Fiats to compete with GM seems a confused strategy to me.

But he also said, “Hundreds of thousands of Americans would have been hurt, not just at those companies themselves, but at other auto companies and at their suppliers and dealers, here in Ohio, up in Michigan, and all across this country.”

Missing the macro benefits by seeing only the very micro results in sub optimal solutions.

“He’s done a lot, but they are all negative things,” said Ray Angell, 65, of Twinsburg, Ohio, a conservative active in the anti-tax Tea Party movement, mentioning the stimulus package and climate change proposals.


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Obama to Propose New Limits on Banks

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Out of the frying pan and into the fire…

Proposal Set to Curb Bank Giants

By Damian Paletta and Jonathan Weisman

Jan. 21 (WSJ) — President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return, at least in spirit, to some of the curbs on finance put in place during the Great Depression, according to congressional sources and administration officials.

The past decade saw widespread consolidation among large financial institutions to create huge banking titans. If Congress approves the proposal, the White House plan could permanently impose government constraints on the size and nature of banking.

Mr. Obama’s proposal is expected to include new scale restrictions on the size of the country’s largest financial institutions. The goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces. It couldn’t be learned what precise limits the White House will endorse, or whether Mr. Obama will spell out the exact limits on Thursday.

Mr. Obama is also expected to endorse, for the first time publicly, measures pushed by former Federal Reserve Chairman Paul Volcker, which would place restrictions on the proprietary trading done by commercial banks, essentially limiting the way banks bet with their own capital. Administration officials say they want to place “firewalls” between different divisions of financial companies to ensure banks don’t indirectly subsidize “speculative” trading through other subsidiaries that hold federally insured deposits.

The proposal could have the biggest effect on Bank of America Corp., Wells Fargo & Co., and J.P. Morgan Chase & Co., which control a large amount of U.S. deposits, as well as Goldman Sachs, Morgan Stanley and Citigroup Inc., which have a large presence on Wall Street.

If the proposal took effect, big banks could be forced to wall off certain activities in their investing banking units—which trade and underwrite securities and make their own bets on markets—from their traditional businesses, which make loans and take deposits.

The investing banking units have grown dramatically in recent years, were far more profitable than the banking operations and were at the heart of the financial crisis.

The industry has undergone a major consolidation during the financial crisis, leaving the top four banks with an unprecedented market share in businesses such as deposit taking, credit cards and mortgages.

The rules could also keep banks out of the business of running hedge funds, investing in real estate or private equity, all businesses that have become important, profitable parts of these banks. The collapse of two highly leveraged hedge funds began the process that led to the collapse of Bear Stearns.

If investors believe the new rules could take effect, they could sell off the shares of most of the big financial stocks in the belief these companies would be facing years of turmoil and potentially lower profits.

Messrs. Obama and Volcker are scheduled to meet tomorrow in advance of the White House announcement.

The White House’s proposal, one aide said, wouldn’t resurrect the exact limits put in place by the Depression-era Glass Steagall Act, which essentially walled off commercial banks from investment banks and was repealed in 1999. Instead, the White House proposal would seek to return the “spirit of Glass Steagall,” meant to limit large banks from becoming too big and complex that create enormous risk.


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China

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Looks like the kids who came how with western degrees may have gotten their way.
That’s the last thing the world needs right now.

Liu Mingkang, head of the China Banking Regulatory Commission (CBRC), said in an interview Jan. 20 that several Chinese banks had been asked to restrain their lending after proving to have inadequate capital reserves. Chinese media reports claimed that new bank loans so far in January have risen to as high as 1 and 1.5 trillion yuan ($146-$220 billion) — approaching or equaling the massive hike in January 2009. As a result, several major Chinese commercial banks (whose names were not given) were given oral commands to stop new lending for the rest of the month.

The problem for China is that the entire economy depends on extremely loose lending policies, and when credit slows, companies in the critical manufacturing and trade sectors get squeezed. A great many Chinese companies rely on external consumers for their profits, but while exports showed growth for the first time in December, they face the usually slow months of January and February; only when spring comes around will it really be clear whether global demand has recovered sufficiently to support China’s exporters. Thus, exports are no refuge yet, and since Beijing has no intention of knocking the legs out of growth, it will continue shoving credit into the system.


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CHINA RAISES BANKS’ RESERVE REQUIREMENT RATIO 50bps

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Seems everyone has this wrong? All reserve requirements do is raise the cost of funds for the banks, not the quantity of funds they can loan.

Stephen Green’s thoughts on China:

CHINA RAISES BANKS’ RESERVE REQUIREMENT RATIO 50bps: This is a significant move. Rrr hikes require state council to sign off so this signals that sc is on board with mild tightening earlier than most (incl us) had factored in. This move now is significant too as its a first shot across the banks bows in a very aggresive loan month, esp as excess reserves in the system are are at relatively low levels (around 2pc we believe). Banks need 1-2pc for settlement needs so that means this move will bite. Pboc also probably calculated that they had to move now before we get into second half jan, early feb, before the chinese new year, when pboc has to inject liquidity (since firms and households withdarw cash for presents etc). Markets will be in a bit of shock with this move. The next move is another rrr hike in march as they withdraw post hoiliday liqudity and then we believe 2 rates hikes.

Tina Zhang


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reuters post

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Mosler’s 11 steps to fix the economy

1. A full ‘payroll tax holiday’ where the US Treasury makes all FICA payments for us (15.3%). This will restore ’spending power’ and, by allowing households to make their mortgage payments, will fix banks from the bottom up. It may also keep prices down as competitive pressures may lead businesses to cut prices, passing on their tax savings to consumers even as sales increase.

2. A $500 per capita federal distribution to all the states to sustain employment in essential services, service debt, and reduce the need for state tax hikes. This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP would be restored.

3. A federally-funded $8/hr job and healthcare benefits for anyone willing and able to work. The economy will improve rapidly with my first two proposals and the private sector far more readily hires folks that are already employed. In 2001 Argentina implemented this proposal, putting to work 2 million people who had never held a ‘real’ job. Within 2 years, 750,000 of those 2 million were employed by the private sector.

4. Making banks utilities. The following are disruptive, serve no public purpose and should be done away with:

–Secondary market transactions
–Proprietary trading
–Lending against financial assets
–Business activities beyond approved lending and bank account services.
–Contracting in LIBOR. Fed funds should be used.
–Subsidiaries of any kind.
–Offshore lending.
–Contracting in credit default insurance.

5. Federal Reserve — The liability side of banking is the wrong place to impose market discipline.

The Fed should lend in the fed funds market to all member banks to ensure permanent liquidity. Demanding collateral from banks is disruptive and redundant, as the FDIC already regulates and supervises all bank assets.

6. The Treasury should issue nothing longer than 3 month bills. Longer term securities serve to keep long term rates higher than otherwise.

7. FDIC

–Remove the $250,000 cap on deposit insurance. Liquidity is no longer an issue when fed funds are available from the Fed.
–Don’t tax good banks for losses by bad banks. This serves only to raise interest rates.

8. The Treasury should directly fund the housing agencies to eliminate hedging needs while directly targeting mortgage rates at desired levels.

9. Homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the government at the lower of the mortgage balance or fair market value of the home.

10. Remove ’self imposed constraints’ that are disruptive to operations and serve no public purpose.

–Dump the debt ceiling – Congress already votes on spending and taxes.
–Allow Treasury ‘overdrafts’ at the Fed rather than forcing it to sell notes and bonds. This is left over from the gold standard days and is currently inapplicable.

11. Federal taxes function to regulate aggregate demand, not to raise revenue per se, and therefore should be increased only to cool down an overheating economy, and not to ‘pay for’ anything.


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