Re(e)d This Blog

as you may have noticed, i haven’t written much lately– and it isn’t that I’ve been too busy, or that current events have ceased from happening. I’m currently experiencing such a deep pronounced rapid dissolution of my expectations for a world facing the right direction, that i’m having a hard time bringing into focus the particulars which need to have light shed on them.

i was never a huge Obama guy, but i held a secret hope that under his influence, the walls which buttress western style crony capitalism would undergo the kind of entropy associated with tectonic shifts beneath the surface of culture– i really felt like having a community organizer president who grew up middle class could have been the beginning of a shift in the hegemony of kleptocracy which has slowly replaced the government of rugged individual liberties that was our founding fathers democratic ideal.

but the new 100 days isn’t shaping up how my imagination had hoped- instead we have escalated war, even more blatant financial thievery conspired and created through the white house, a renewed focus on the privatization of education, strict adherence to a failed health care model, etc, etc. And if the facts on the ground weren’t bad enough, the general sentiment is that he’s doing a great job, and things are really turning around. My worst nightmare scenario is playing out before my eyes– the ideological trends which culminated in the Bush presidency and which drew such a heated electoral response from the masses has simply continued unabated. We have the same ideological underpinnings, rebranded, and everyone loves it.

What do i do with my anxieties when i have nothing hopeful to mix them with? Do i just come on here and spit invective? That process doesn’t quell the sickening feeling that reading the FT gives me. Times of crisis are times of change, and whomever has the best idea’s lying around will get them implemented, and i had true hope that some of the ideas inspired by the angels of our better nature would triumph-but where are they? Where is our single payer health care? Where are our rewritten farm subsidy laws? Where is our diminution of violence in Afganistan, Pakistan, Palestine, Iraq, Darfur, Sri Lanka, Tibet? Where are my accounting rules intended to reset the securitized assets to the realities of people’s credit card balances and foreclosure proceedings? How come we’re still denying visas to Islamic teachers with job offers at established colleges?  Why are we claiming the ’states secrets’ defense in court preventing the due process of justice for the families of foreign innocents killed by private contractors? Why does our stimulus bill give additional tax cuts to rich americans when state governments are laying off thousands of employees?

i felt like my expectations for the ‘new’ administration were low enough; that i had hedged my bets. But now that a truth is being shown in actions which was capable of being obscured with words, my heart sinks, and my hope fades.

Economics

Today the market gained a full 5%, bringing it out of the briny and terrible depths to which it had plunged late last week– could this be a sign of recovery? 

The answer is … kind of.

Most analysts link today’s success to two bits of news, one of which is massively more important than the other. Citi posted earnings for the first two months of the year, and Ben Bernanke had a little chat with the press.

So, to quickly debunk the first one- CITI did indeed post positive earnings, but that is before they finish their ’special line items’. Those line items include things like ‘writing down bad debt’ … which is where the action is. Most of the banks have posted operating profits, but when they have to reduce their asset values to reflect the reality of the value, they end up in the hole for the time period being reviewed. This Citi excitement doesn’t mean much until they announce their full q1 information.

Ben Bernanke is really what pushed the value of the market higher today, because he came out and hinted at a policy shift in accounting practices which would benefit the banks [and any other company invested heavily in debt derivatives] by allowing them to hide the drop in asset value which is rapidly occurring.

The accounting method is called ‘mark to market’, and i wrote all about it a few weeks ago, but it looks like Bernanke may push for, as he asserted today that “Further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their pro-cyclical effects without compromising the goals of disclosure and transparency”

That is all economist speak for ‘allow the banks to lie about the street value of their assets, so that even as the real world economic pain effects people’s home prices, job security, and consumer spending tendencies, the big financial services companies aren’t required to write down their assets.

Depending on how the accounting policy changes, it may lure scared money back into the stock market, allowing opportunistic short term traders to push the market higher. The only problem is that none of the real problems will have been fixed, and we’ll have simply kicked the can down the road… after already pouring over a trillion free dollars into the largest banks in the world. 

Economics

The federal govt has been diligently spending our great-grandchildren’s money in an attempt to stave off the Depression-reference-inspiring plethora of financial issues affecting our entire world. This began with the controlled injections into Bear Stearns and continued through the AIG bailout and really hit its financial pinnacle with the inception of the TARP plan of 2008.

Currently on the docket are measures worth easily double that of the previous attempts, and each merit explicatory intensity- the 2009 Stimulus Plan and the 2^nd half of the TARP funds which are about to be distributed.

2009 Stimulus Plan

Since it was first introduced, the plan has ballooned to almost 900bn [as estimated by the Congressional Budget Oversight Committee]. The intended goal of this kind of stimulus plan is to get the economy moving again—to force money, scared to leave its house, back into the general moving stream. In order to ensure that measures being taken are going to be of positive effect in that direction, we need to think about how the economy in the US has normally worked in the last decades—we want to grease the wheel, not reinvent it.*

[*this isn’t to discount the opinion that we should use this opportunity to begin to transform our economy, in fact, I am very much in that crowd… but the intended and stated purpose of the stimulus plan is to get things moving, not change how they move]

People often say that we have a ‘service economy’ or that we have a ‘consumer economy’ … what this means in practice is that we have a system in which we make money selling things [mostly imported from China] to each other. In order to put grease onto that wheel, we need to put money into the hands of people who’re going to spend it.

There seem to be two schools of thought on how to do this- one is to offer tax cuts, and one is to use government spending. I think that there is a way to use each of these avenues to create a combined plan which can work from both directions.

Government spending should be used to make sure that unemployment doesn’t get any higher- the ways this should be focused is on helping states and cities meet their budget shortfalls with the condition that they can’t scale down their staffing. Government spending should also be used in incentivizing burgeoning markets to develop, preferably those that can have ancillary benefits; those of alternative energy and ecologically sustainable food. Examples of this would be hiring alternative energy companies to renovate government buildings, replacing the government auto fleet with alternative energy vehicles, shifting school and state institutional food purchasing to ecologically sustainable distribution, and others. This kind of spending in developing markets will create the need for additional jobs. Since these areas have been cottage industries up to this point, they’ll have to develop infrastructure to handle the increased demand, necessitating heavy hiring.

Tax cuts can also be used to stimulate the economy- but they should be the kind of cuts which provide money for people to spend, not the kind which encourage people to spend.

Most people in this country live hand-to-mouth, paycheck to paycheck. Pawn shops, credit cards, check cashing, layaway plans… all of these exist to service the demographic which spends every dollar it has [the US has a historically low savings rate, and its due to this lower income demographic]. If we can put dollars into those people hands, we can PROMISE that they’re going to be spent- the people living around the poverty line clearly have upward flexibility in their standard of living, and they’ll use whatever monies they have available to do so. The easiest and fastest way to get them those monies is to suspend the Payroll Tax.

You know your tax withholding? Well most of that goes to payroll tax/social security, and if you make more than 100k, you stop paying those taxes. To cut or suspend the payroll tax is to guarantee that you put extra dollars into the hands of the people who’re going to spend it, and disincline it from making its way into the hands of people more likely to save it [the wealthy, for obvious reasons, have high savings rates]. This concept was clearly spoken by Jerry Springer during the exploratory phase of his bid for senate in 2003:

I understand the need to juice up the economy. But why in the world are they giving me a tax cut? Do they think that if I get a large check back from the government that I will suddenly go out and spend more money? Wealthy people like me can and do already buy what we need and want…that’s why we’re called “wealthy.” Instead of giving me a tax cut, how about looking at reducing the payroll tax? 4 out of 5 Americans pay more in the payroll tax than they do in the income tax…yet nobody talks about cutting the payroll tax for regular, ordinary, working folks. I would. Because when you cut the payroll tax for regular people, they will spend every dime of that cut…because they have to. Specifically, i’d like to see major relief on the first $10 to $20 thousand dollars a person earns…everyone spends the first $10 to $20k they earn because that’s what they live on…what they buy groceries with, what they pay the mortgage or rent with; what they make the car payment with. So they’d spend every dime —and that would truly juice up the economy.

Cuts in income tax, capital gains, distribution tax, estate tax, increasing tax credits on large purchases like homes or cars… those are tax cuts which favor the wealthy— when the country’s ills are based in the plight of a working class rife with unemployment and home foreclosure, and you’re going to spend tax money to help alleviate the problems, why would you spend money on people who’re still capable of buying houses or cars? Tax cuts that encourage spending from populations who have the increased possibility of saving are inherently going to generate less economic activity than tax cuts which allow more money to end up in the wallets of people who spend all of their money every week.

[for those of you interested in a description of the same phenomena but economist-ese, please read this: its a report written in December by faculty at Economics Dept at Stanford, Pete Klenow. Totally incredible.]

http://klenow.com/Discussion_of_Payroll_Tax_Cut.pdf

2^nd of the TARP

While the dominant proportion of the news is being dedicated to the Stimulus package, Tim Geithner is quietly making changes to banking regulation and preparing to handout the $350bn balance of the TARP bill—he’ll be making a large announcement on Monday.

One of the greatest opportunities we have in this crisis is that we can require greater transparency into the books and asset values of our financial institutions— we can leverage the free money we’re giving them into compulsory adherence to a system which requires them to declare the true value of everything on, and off, of their books. One of the fundamental issues which allowed us to build a financial house of cards was that investors didn’t have a clear picture of the risks associated with the banks different assets. The traunches of mortgage backed securities, Collateralized Loan Obligates, revolving debt backed securities … all of these things fluctuate daily based on variables- respectively foreclosure rates, business loan defaults, credit card writeoffs. Even though the realities of those factors change on a daily basis, the banks holding those assets have been slow to admit value changes. The timing and cadence of admitting those value shifts can be seen in the fact that while foreclosure rates began to climb, and then spike, in late 2006, the banks didn’t begin to write down those losses until q1 of 2008 — what took so long? Why didn’t the banks admit that their assets were consistently diminishing? Simple; because they didn’t have to. It is the responsibility of the government to produce and enforce the rule of law to protect the [economic and other] safety of the citizens of the United States, and individual businesses cannot be expected to act against their interests if they and their competitors are not compelled by the law.

In the face of this need, and opportunity, Tim Geithner is considering a relaxation of the current laws requiring banks to valuate their assets based on market conditions—he wants the banks to be able to effectively set whatever ‘fair’ value they want, independent of market factors [the process of identifying the values of your assets based on current market factors is called ‘mark to market accounting’].

To top this off, In the worst kind of political sleight-of-hand, Obama and the press are chastising the executives, while Geithner is simultaneously promising them greater secrecy to act in whatever manner is in their personal best interest- heavily restricting the bilions of bonus dollars in exchange for deregulating the trillions of asset dollars.

Let’s see what the announcement looks like on Monday.

Economics giethner, jerry springer, mark to market, pete klenow, stimulus

Stop America’s illegal detention systems. Tighten emissions regulations on cars. Trillion dollar stimulus plan to create jobs and help homeowners.

What more could an American public ask for?

Encompassed in there are our most obvious aspirations for the positive development of the country we live in, some of them are the keystone reasons that Barack Obama was elected president of this great nation.

In the last few weeks he’s garnered a lot of good press for making headway in these directions, though the progress seems more symbolic than practical– the devil is in the details, and with a few swipes of a pen those grand ideals can be brokered into PR stunts, carrying lofty iconic power but lacking any of the teeth needed for effective policy construction, and resting on the fact that the electorate only comprehends a shallow depth in the issues.

Guantanemo Bay prison is a festering boil on the face of American foreign policy—lambasted in every press, well known the world over, Gitmo serves as a potent reminder of American Imperialism at it’s worst, and it deserves to be immediately closed [hopefully in favor of a memorial to the people tortured there]. However, Gitmo isn’t the end of our detention policy, and you can do only limited good without closing the CIA floating jails, the network of ‘black sites’ across Eastern Europe, and most importantly, significantly altering our policy regarding ‘extraordinary rendition’ [the process of apprehending people in a foreign nation and moving them, without legal process, to a third party nation with laxer human rights laws-- this was made ‘legal’ in a presidential order by Clinton in 1995]. Has Obama made any mention of these other elements, no—he simply wants the camera’s to get him closing Gitmo and locking it behind him.

He’s imposing stricter regulations on auto emissions… sort of. He’s actually allowing the states to enact policy ‘which does not exceed the governmental policy’ 4 years earlier than the Fed is planning on doing it. So that means that instead of the Bush plan to raise efficiency from 27 mpg to 35 mpg in 2020, he’s allowing the states that feel so inclined to require that change by 2016. Is this what change looks like? What about the California Clean Air Act of 1995 which required automakers to create ZERO EMMISION cars and market them such that 10% of their cars would be as such within 5 years. That would make a huge difference in the amount of greenhouse gas created, and foreign oil burned—this new law does nothing but speed up the timeline on a miniscule alteration—is increasing average car efficiency by a few mpg the radical change this country so desperately requires?

The Stimulus plan is possibly the worst part—he should be sending our country into debt in order to stave off a major meltdown in the short term … but you can’t do it with Reagan Era tax cuts. Every time they talk about the plan, it becomes more tax cuts and less infrastructure—Josh commented on my last piece to inform that the plan is less than 20% infrastructure at this point. We need to put people to work, we need to fix our aging country. We don’t need to give tax cuts to people whether they need them or not.

Don’t let the symbolic change distract you from the static nature of greater picture—Washington is still doing business as usual, its just launching a new Brand.

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Economics auto, emissions

On Thursday 1/15, the congress authorized the release of the second half of the TARP funds, putting another $350B into the hands of the  Treasury Secretary … and just like the first half, with no requirements. Just a blank check. The main difference from the first time around is that this one didn’t make headlines.

with the news being dominated by Gaza, heroic plane crashes, and Obama appointments, there wasn’t any real attention being paid while the checks were being written. When the second half of the TARP money got handed out by Congress, there should have been some requirements;

1- The Treasury can’t give money to organizations without those organizations first enduring a ‘bank holiday’ style audit– who knows what these companies have hidden in the backs of their books? who knows what toxic assets lurk behind the scenes…. and i don’t want our tax dollars handed out to companies we don’t understand.

2- In order to receive money, an organization has to declare the actions they’ll take with the money– and the only acceptable actions are commercial paper lending, or mortgage loan refinancing. The dollars can’t be used to buy other banks, pay dividend, cash in stock options, or end up in exorbitant executive pay.

But Congress didnt do that, and another opportunity to make powerful change is lost to us. Check back in shortly when we hear more stories about how the banks took the bailout money and bought other struggling banks, or wrote down the exact value in toxic assets. Check back in to see the LIBOR rate not change, and the commercial paper rate remain sky high.

And this decision was suggested by the Bush admin, but was signed, sealed, and delivered by Obama himself.

http://www.nytimes.com/2009/01/16/us/politics/16stimulus.html?scp=2&sq=tarp%20obama&st=Search

Economics

I’ve been waiting patiently for more information to be released on Obama’s 2009 stimulus plan- other than a dollar figure and some platitudes– and got a a little taste from the Washington Post- an op-ed from Larry Summers about the “American Recovery and Reinvestment Plan” 

This brief piece of writing didn’t do much to avail my ravenous interest, but it does give some buried clues as to the guiding principle that the plan will have.

The most important part of the piece was the clear idea being presented that this isn’t going to be package whose planning, execution, and oversight is going to reside within the realm of government — to quote Mr. Summers;  ”The Obama plan represents not new public works but, rather, investments that will work for the American public.”

That kind of language is code for privatized stimulus– the govt is going to hand no-bid contracts out to its best-of-friends, and when it comes time to account for how the money got spent, there are going to be question marks over everyone’s heads. This could be the domestic stimulus version of the Iraq reconstruction- the govt takes your tax dollars, and writes checks to private companies to do as they see fit. [This is confirmed with another Summers quote; "more than 80 percent of these 3 million jobs will be in the private sector"]

During FDR’s presidency, lots of tax dollars went into lots of stimulus and public works projects… and lots of them didn’t work. Since the programs were government run, public discourse could change their direction, even to the point of cancelling them. In a privatized stimulus package, the taxpayer money all gets spent up front, and you just have to hope that these for-profit corporations have the best interests of the entire country in mind. 

Those kinds of hopes have worked pretty well so far, haven’t they?

Economics

There has been a specter haunting the business articles in major newspapers and media sources, a term who’s simple utterance makes financiers tremble; deflation. Deflation is the process by which *all* of the numbers get smaller. The process during which ‘money’ becomes ‘more expensive’.

Theoretically, in the 1920s, you could take a dollar to the treasury and exchange it for $1 in gold. There was a physical standard by which $1 was judged. In the 1930s, the dollar was taken off of the gold standard so that FDR and his brain trust could manipulate the US economy more effectively in the service of lifting the Great Depression.

When there isn’t a physical standard which sets the value of the dollar, you can use the laws of supply and demand to change the ‘real value’ of a dollar— you know how your grandparents say ‘when I was a kid, I used to use a quarter to buy breakfast, lunch, dinner, a pair of dungarees, a buggy whip, one of those ‘newsies’ hats, and a slide rule- and I still had change!’ …. When you take them out to a $12 movie? Well, that was because when they were kids, there were less dollars out there, making each one more valuable. In the time since then, lower interest rates, increased overall debt, and the creation of fancy derivatives have increased the immediate supply of money, making each dollar less valuable. That process of increasing the total amount of available dollars, and the subsequent loss of value on each dollar is ‘inflation’.

Now that the subprime mortgage bubble is burst, the shrapnel is bursting bubbles in the financial services industry, which in turn is wrecking havoc everywhere. The vanishing act that those dollars are performing is lowering the quantity of dollars available for use, thusly increasing the ‘real value’ of each dollar. Decreasing value of people’s 401[k]s, decreasing home values, 50% off sales at Macy’s BEFORE Christmas, 2.7% decrease in the Consumer Price index in the last 2 months; this is deflation.

It’s happening, and there are two particular ways that it effects the working class;

1- cost of living/income variance

For the working class, the ratio between your cost of living and your income is potentially the most important mathematical equation in your life, as that simple ratio is the numerical value that is the quantitative description of your ‘standard of living’. If the cost of living is only $500 and you make $750 a week, your ratio is a positive one; 2:3.

If you move to rural Louisiana, and your income shifts down to $300 a week, your standard of living would stay the same if the cost of living shifts down to $100 a week; still a positive 2:3 ratio. As long as both numbers move in unison, there isn’t much of a day-to-day difference between those two situations- however, during deflation those numbers don’t move in unison, they move in variance.

Both ‘cost of living’ and ‘income’ are initially determined from the supplier/employer side, and business ideology will treat those two categories with opposite strategies, which will create an increasing variance.

A classical theory in economics is that prices are ‘sticky on the way down’ – meaning that the producer is going to slooooowly reduce the prices of things till it finds the ‘sweet spot’ – they’re going to reduce prices slowly and cautiously as they don’t want to err on the side of ‘too cheap’ … they’d rather just move the price again down next week if it doesn’t work. [see any retail outlet in the last 2 months]

However, when determining compensation for services, employers are working in the opposite direction, opting to err on the side of offering too little. They assume that they aren’t going to lose the potential employee with a ‘lowball’ estimate, and can always back down and offer a larger compensation if need be.

Those opposite ideologies create an increasing variance in the ‘standard of living’ ratio over time.

2-Locking it in.

Over the course of the last 15 years, the wealth gap in this country has greatly increased through the working class burdening itself with debts—college, credit cards, houses—the working class in America has more debt than any nation has ever had. These debts were incurred during a sustained period of inflation- when money was cheap. When deflationary forces begin in earnest, that money will still have to be paid back, but it’ll happen when dollars are more scarce and hence, more expensive. On the flip side, if you generated profits during that time, the new scarcity of dollars make the ones you have even more valuable- so, if you were ExxonMobile for example, and you generated the largest corporate profits in world history 6 quarters in a row in the 2000s, you’ll become even more rich and powerful, because those dollars sitting in your bank account become worth more as the overall numbers for everything get smaller. Deflation means incomes get smaller, while old debts stay the same. If paying back $120,000 in college loans is hard with the average income at $45,000 … what happens when the average income drops to $35,000 and you still owe $120,000 to FAFSA?

During times of deflation, savers are rewarded and borrowers punished- however, in our situation in the United States, those ‘savers’ are the fraction of the population who operated huge monolithic international corporations as profiteers, and the borrowers are the entirety of the US working class; those Americans who listened intently as the calm president told them to spend after 9/11, were beset by the siren song of commercials luring them into a lifestyle it regarded as ‘priceless’, ended up blinded by the apparent limitless potential of owning homes, and were culturally indoctrinated to believe that attending on-campus private colleges was a requisite to enter the productive world.

Unless you were born in the early 1930s, you’ve never seen a sustained period of deflation; so what do you do? There are hosts of governmental responses which would help offset the damaging elements [windfall profits on big oil from 1995-2008, effective stimulus package that includes reduced sales tax and increased import duties, financial bailout bills with a moratorium on home foreclosure, etc] … but those things can’t be done this weekend.

Pay down your debts. Think twice before you take out your credit card. Wait until you know why you want to go to college. Ignore commercials. Turn out the lights when you leave the room. Invite a friend over and make dinner. Talk to [or relive conversations with] someone who remembers the 1930s.

Consume less. Save more. Be grateful for what you do have.

Merry Christmas and happy holidays.

Economics christmas, deflation, exxonmobile, reed, reedthisblog, standard of living

when the financial industry and it’s lords came calling to washington [flying corporate jets], they were met with much handwringing… and left with a blank check for 800 billion dollars.

after the automakers were rebuffed for using the same tactics [and only asking for 24 billion], they did a little soul searching, and came back to washington with a slightly more concrete plan. 

that second plan was also rejected, by senate minority members who were deciding to, according to an internal memo leaked to msnbc,  ”stand firm and take their first shot against organized labor”

for the auto assistance to be shot down, while the wall st assistance was maintained, is class warfare, plain and simple. no matter what the reasons behind it, to give free money to the blue blooded rich paper pushers while denying aid to the blue collar middle class workers of this country is class warfare– but you don’t even have to read between the lines, its written in black and white on a distributed email amongst our nations representatives. no analysis required- the government decided to use this opportunity to take their ‘first shot’ at all of those 50k a year average middle american citizens.

now, less than a week after our representative congress decided not to help the struggling people of detroit, the white house has ridden in on a white horse to save the day- yipee! but wait, the details are the only important parts of these kinds of plans, so let’s take a quick look at the basics; this is from the AP newswire- quoted sections in green italics:

– Auto makers will get $13.4 billion in short-term financing from the Troubled Asset Relief Program, with an additional $4 billion to be made available in February, contingent on drawing down the second portion of the TARP funds.

so they decided to use some of the wall st. bailout money [thats what the Troubled Asset Relief Program is] to help the poor auto workers … not a bad idea, really. though clearly the automakers aren’t going to turn their businesses around during the traditional 3 hardest car industry months, and ESPECIALLY not in the midst of a financial crisis. so when the automakers have to come back in february to ask for more money, them getting it is contingent on giving the wall st.  folk in the Treasury Dept access to an additional 400billion. that doesnt sound like extortion, does it?

– If a company has not become financially viable by March 31, 2009, its loan will be called and all funds returned to Treasury.

as previously stated, we can’t really expect a 3 month car industry turnaround to happen- i hope no one reading this thinks that January and February are going to bring about a crazy car shopping spree… so, when march 31 comes around, and their still not viable, what happens?

– Debts owed to the government would outrank other debts.

oh, then the govt gets to take back the 17.4 billion it loaned them. so… what was the point of this whole exercise? if you were going to just string them along for 4 months before sticking a fork in them, why even bother?

–UAW [United Auto Workers Union] will be asked to accept stock rather than cash for the billions of dollars of pension and retiree health care liabilities being shifted from the companies to the union.

wait. what? so … when the executives sign this loan, it’s going to convert all of the workers pensions and retiree benefits into stock in the company? and then when the companies don’t turn themselves 180 degrees around by march 31st and are forced into bankruptcy by the government calling in their debt … then the workers pensions and retirement benefits will vanish with that bankruptcy? WHAT?!?! 

as this proposal becomes solidified, let us all pay close attention, because the destruction of the common man’s wealth in this kind of scale could be devastating, and can lead to the setting of precedents which can affect all of us little people everywhere.

Economics 17.4 billion, automakers, first shot against organized labor, gettelfinger, pension, tarp, uaw

only earlier today i posted a brief on Mary Schapiro, and my disappointement in her appointment … and this evening i found a silver lining.

Before i discuss it, i need to make sure everyone understands ‘credit default swaps’ and the market that trades them.

a person can buy a bond from a company- basically an IOU from the company that pays with interest. however, if you buy a  bond from a company that goes out of business before the bond matures, your bond is worthless. a credit default swap is a financial instrument originally designed to allow people to buy ‘insurance’ on their corporate bonds, paying a small percentage of the total value of the bond in exchange for the safety and peace of mind.

the problem is that the credit default swaps market is completely unregulated- its a giant backroom betting game where companies and individuals who don’t own bonds at all buy credit default swaps on those companies that they see as having the possibility of going bankrupt. experts estimate that the CDS market is 10 times larger than the bond market it’s supposed to operate as a safety net for. 

the CDS market is the massive tentacled beast which connects all business with financial components– its how come lehman brothers defaulting bankrupted AIG, and reduced the ‘off the book value’ of GE– the CDS market is a web of contracts connecting all businesses, and guaranteeing a wave of defaults and writedowns following any large bankruptcy.

this is a quote from Mary Schapiro to the board of her for-profit regulatory agency in october of this year- [i know its a long quote, but its pretty excellent]

“My final principle of regulation is the following: We must bring large systematically important yet unregulated participants in the financial markets under the regulatory umbrella and we must develop centralized clearing houses and exchange trading facilities for products that can affect the capital of our large institutions. Of course, I am principally speaking of the credit default swap market. I have been advocating a centralized clearing house to eliminate counterparty risk for nearly 15 years. Credit default swaps and other over-the-counter derivatives are being traded in volumes that could not have been foreseen even a few years ago. A turn in the CDS market can threaten the capital adequacy of a large firm. At the same time, a firm with a large CDS position, with many counterparties around the world, may be a firm that the federal government feels compelled to support with taxpayer money. At a minimum, this market needs a centralized clearing house so that the participants are known, adequate margin or collateral supports positions and the risks from counterparty failure are minimized.”

so, thats my silver lining, she at least pays lip service to the importance of regulation and transparency of the CDS market, though as with anything else complex and dangerous, the devil is in the details, and we’ll have to wait for innaugeration day and shortly after to see what kinds of new rules get added, and what kinds of teeth those rules get.

Economics

Mary Schapiro was appointed to the SEC before, so this isnt a new party for her. she has a long resume in financial regulation- she was appointed by Reagan in 88 as the commissioner of the SEC, in 89 she was reappointed by Bush I, and in 94 Clinton switched her to the Commodity Futures Trading Commission [[a sister regulatory agency to the SEC, where it handles the s&p instead of the stock market].

here is where her career took a slightly different turn- she left governmental regulation and went into the ‘for profit’ regulatory field– there is a company which regulates the stock market, and the companies pay them to act a fair arbitrage. now, in a wild opinion, i would guess that this organization operates in a similar fashion to the ’security’ at private universities; the college doesnt want to report its drug abuses, sexual attacks, etc. because it adds negative statistics and bad press, so instead of using real police, they operate with ‘campus security’ so that the school can just expel you and not have to report the incidents. so, after 8 years in governmental regulation, she moved into the rent-a-cop arena.

just to round out her resume, she was one of the 19 people chosen by bush II to sit on his ‘financial literacy council’. 

so, if our overall public complaint is that the last 20 years of lax regulation has led us into uncharted and perilous waters, and the precipice of danger lies open before us …. THEN WHY ARE WE APPOINTING THE PEOPLE WHO BUILT THIS SYSTEM. if she was going to regulate what was happening with any kind of success, don’t you think the last 20 years would look different?

i was hesitant to even talk about this, because those of us which are critical of obama’s choices thus far are starting to sound like a broken record- ‘blah blah, obama chose another clinton/bush/reagan era economist to head/chair/advise, this isnt change blah’ — but i feel the need to keep on and point these facts out. he hasn’t appointed a single consumer advocate, labor activist, ‘developmentalist’ economist …. nothing. just more and more members of the same ideological community which got us here.

Economics Mary, Obama, Schapiro, SEC