David Faber's noontime CNBC program featured as its main guest former Reagan budget director David Stockman.
It's not hard to see why Faber's management wanted Stockman on today. I'm old enough to recall that the the one-time Reagan administration member went over the hill on his boss' tax cuts, publicly calling them misguided, and much worse.
He hasn't changed his tune in twenty-some years. Throughout the interview, Stockman swore that 'you can't cut your way to growth,' decried a Republican House as unable to grapple with the 'real issues,' and dismissed the electorate's concern over recent spending and legislation as 'yesterday's problems.'
Must be nice to be able to be so smug about problems yet to be solved. Stockman didn't present any empirical evidence for his personal views on taxes and spending.
Trouble is, Stockman was largely discredited by the economic boom brought about by Reagan's tax cuts and slowing of spending growth. That latter phenomenon wasn't an absolute 'spending cut,' but it was a substantial reduction in the rate of growth of spending on various entitlements and discretionary budget items.
I find it noteworthy that Faber didn't invite, instead of Stockman, now out of government for nearly three decades, someone like Mitch Daniels, a much more recent OMB director, and current governor of Indiana. Daniels wasn't even invited for a sort of pro-con debate with Stockman.
It goes to show how desperate CNBC was to find a figure with the correct, though aged, credentials, to mount his soapbox and spout the network's familiar politically liberal line.
Showing posts with label Congress. Show all posts
Showing posts with label Congress. Show all posts
Tuesday, November 02, 2010
Friday, July 23, 2010
WSJ vs. The Joint Committee On Taxation
The issue of federal and, for that matter, state and local tax policy is one as old as the income tax amendment. Ronald Reagan was excoriated for wanting to cut taxes, yet his tax cuts spurred a 20-year US economic expansion.
Thus, a recent battle in the editorial pages of the Wall Street Journal is noteworthy. In answer to an earlier staff editorial, director of the Congressional Joint Committee on Taxation, Thomas Barthold, fired back in a letter published in Wednesday's edition of the paper. The Journal responded with its lead staff editorial that day, in which these passages appeared,
The director of the Joint Committee on Taxation, Thomas Barthold, takes us to task in a nearby letter for exaggerating the revenue impact and economic benefits of the investment tax cuts of 2003. (See "The Obama Tax Trap," July 2.) This is a debate we're delighted to have, and Members of Congress should want to have it too if they ever want to cut taxes again.
In a 2005 paper "Dynamic Scoring: A Back-of-the-Envelope Guide," Harvard economists Greg Mankiw and Matthew Weinzierl looked at the revenue feedback effects of tax cuts. They concluded that in all of the models they considered "the dynamic response of the economy to tax changes is too large to be ignored. In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes." We could cite other evidence that squares with what happened after tax cuts in the 1960s, 1980s and in 2003.
So how well did Joint Tax do when it predicted a giant revenue decline from the 2003 investment tax cuts? Not too well. We compared the combined Congressional Budget Office and Joint Tax estimate of revenues after the 2003 tax cuts were enacted with the actual revenues collected from 2003-2007. (See the nearby table.)
In each year total federal revenues came in substantially higher than Joint Tax predicted—$434 billion higher than forecast over the five years. We readily admit that some of this extra revenue flowed from the housing bubble. When that mania turned to panic and the economy went into recession, revenues collapsed. But the 2003-07 growth spurt wasn't all housing related, any more than the late-1990s stock boom was all phony merely because the dot.com bubble later burst. The last decade saw growth in technology (Google, the iPod), energy, professional services, biotech and even manufacturing.
As for capital gains tax receipts, they nearly tripled from 2003 to 2007, even though the capital gains tax rate fell to 15% from 20%. (See the second table.) Yet the behavioral models that Mr. Barthold celebrates predicted that the capital gains cuts would cost the government just under $10 billion from 2003-07 when the actual capital gains revenues over five years were $221 billion higher than JCT and CBO predicted.
Mr. Barthold also claims it is a "non sequitur" to say that the $786 billion, or 44%, rise in federal revenues from 2003-07 was at least partially a result of the tax rate reductions. Why? Because, he says, "in normal economic times, general economic growth and inflation will lead to an increase in revenues from one year to the next with no changes in tax policy."
True enough, but the revenue growth from 2003-07 was anything but "normal." The 44% increase in revenues compares with a 25% average over the last 30 years. Tax revenues increased by 12% in 2006, the second largest single year gain in revenues in 25 years. The highest was 15% in 2005.
Joint Tax now says that rescinding the Bush investment tax cuts will raise about $500 billion in revenue over the next five years. So on January 1 we will enact one of the largest tax increases in history, coming out of one of the deepest recessions in a century, because computer models that we know are wrong are telling Congress that this will raise far more revenue than the increases will raise in reality.
That last statement from the committee regarding the effects of letting the Bush tax cuts lapse is troubling, isn't it? Does anyone believe economic growth will be enhanced through higher taxes?
As it is, the committee has made horrendous estimation errors, in the wrong direction, on prior tax policy effect on tax revenues.
Further, Barthold's letter of reply was a qualitative, shoot-from-the-hip sort of thing, with none of the sensible basic analysis which appeared in the Journal's staff editorial reply. For example, comparing growth in tax revenues in a certain year or period with the long-run average, to assess whether it was really inevitable, or an extraordinary growth rate.
From the exchange, Barthold appears to be both naive and sloppy. Not to mention simply wrong in his and his staff's lack of understanding of the need for dynamic modeling of consumer and investor reactions to tax rate changes.
Thus, a recent battle in the editorial pages of the Wall Street Journal is noteworthy. In answer to an earlier staff editorial, director of the Congressional Joint Committee on Taxation, Thomas Barthold, fired back in a letter published in Wednesday's edition of the paper. The Journal responded with its lead staff editorial that day, in which these passages appeared,
The director of the Joint Committee on Taxation, Thomas Barthold, takes us to task in a nearby letter for exaggerating the revenue impact and economic benefits of the investment tax cuts of 2003. (See "The Obama Tax Trap," July 2.) This is a debate we're delighted to have, and Members of Congress should want to have it too if they ever want to cut taxes again.
In a 2005 paper "Dynamic Scoring: A Back-of-the-Envelope Guide," Harvard economists Greg Mankiw and Matthew Weinzierl looked at the revenue feedback effects of tax cuts. They concluded that in all of the models they considered "the dynamic response of the economy to tax changes is too large to be ignored. In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes." We could cite other evidence that squares with what happened after tax cuts in the 1960s, 1980s and in 2003.
So how well did Joint Tax do when it predicted a giant revenue decline from the 2003 investment tax cuts? Not too well. We compared the combined Congressional Budget Office and Joint Tax estimate of revenues after the 2003 tax cuts were enacted with the actual revenues collected from 2003-2007. (See the nearby table.)
In each year total federal revenues came in substantially higher than Joint Tax predicted—$434 billion higher than forecast over the five years. We readily admit that some of this extra revenue flowed from the housing bubble. When that mania turned to panic and the economy went into recession, revenues collapsed. But the 2003-07 growth spurt wasn't all housing related, any more than the late-1990s stock boom was all phony merely because the dot.com bubble later burst. The last decade saw growth in technology (Google, the iPod), energy, professional services, biotech and even manufacturing.
As for capital gains tax receipts, they nearly tripled from 2003 to 2007, even though the capital gains tax rate fell to 15% from 20%. (See the second table.) Yet the behavioral models that Mr. Barthold celebrates predicted that the capital gains cuts would cost the government just under $10 billion from 2003-07 when the actual capital gains revenues over five years were $221 billion higher than JCT and CBO predicted.
Mr. Barthold also claims it is a "non sequitur" to say that the $786 billion, or 44%, rise in federal revenues from 2003-07 was at least partially a result of the tax rate reductions. Why? Because, he says, "in normal economic times, general economic growth and inflation will lead to an increase in revenues from one year to the next with no changes in tax policy."
True enough, but the revenue growth from 2003-07 was anything but "normal." The 44% increase in revenues compares with a 25% average over the last 30 years. Tax revenues increased by 12% in 2006, the second largest single year gain in revenues in 25 years. The highest was 15% in 2005.
Joint Tax now says that rescinding the Bush investment tax cuts will raise about $500 billion in revenue over the next five years. So on January 1 we will enact one of the largest tax increases in history, coming out of one of the deepest recessions in a century, because computer models that we know are wrong are telling Congress that this will raise far more revenue than the increases will raise in reality.
That last statement from the committee regarding the effects of letting the Bush tax cuts lapse is troubling, isn't it? Does anyone believe economic growth will be enhanced through higher taxes?
As it is, the committee has made horrendous estimation errors, in the wrong direction, on prior tax policy effect on tax revenues.
Further, Barthold's letter of reply was a qualitative, shoot-from-the-hip sort of thing, with none of the sensible basic analysis which appeared in the Journal's staff editorial reply. For example, comparing growth in tax revenues in a certain year or period with the long-run average, to assess whether it was really inevitable, or an extraordinary growth rate.
From the exchange, Barthold appears to be both naive and sloppy. Not to mention simply wrong in his and his staff's lack of understanding of the need for dynamic modeling of consumer and investor reactions to tax rate changes.
Tuesday, July 20, 2010
The Emerging Congressional Credit Score Fiasco
While watching CNBC this morning, I was shocked to see/hear a debate involving, I believe, a House member, and another guest, concerning a bill to shield consumer credit scores from the effects of mortgage modification.
We saw, in 2007 & 2008, what happened when credit rating agencies dumbed-down their ratings for CDOs and various mortgage-backed instruments. It resulted in a catastrophe as many investors, overly reliant on ratings from S&P, Fitch or Moodys, simply took AAA ratings on faith and bought instruments which later were found to perform far below the expectations of their credit ratings.
Now we have Congress trying to whitewash consumer credit scores.
The argument put forward by the Congresswoman on CNBC was that mortgage modifications are simply contracts between two consenting parties, and, therefore, involve no forgiveness nor default or delinquency on any loan.
The argument against allowing this hiding of true consumer credit history is that any modification is, in fact, the failure of the consumer to honor the terms of the original contract and, thus, be in default or delinquency on an instrument to which they were a party. Additionally, it's very disingenuous to say that banks are doing modifications out of their own free will, when, in fact, the current administration coerced banks into suspending foreclosures and offering modifications, instead.
So we have yet another situation in which the federal government is attempting to alter useful private industry measures and practices, distort reality and rewrite history.
Combined with the recent FINREG bill, this should add impetus to financial institutions to back away from lending to all but the best-collateralized, least-risky consumers.
Everybody else, especially those with anything approaching a middling, sanitized credit score, will probably be denied credit.
I guess this proves that Congress has learned nothing from the recent financial sector meltdown and its own role in the mess, via Fannie, Freddie and too-complex regulatory processes.
Can we say "unintended consequences?"
We saw, in 2007 & 2008, what happened when credit rating agencies dumbed-down their ratings for CDOs and various mortgage-backed instruments. It resulted in a catastrophe as many investors, overly reliant on ratings from S&P, Fitch or Moodys, simply took AAA ratings on faith and bought instruments which later were found to perform far below the expectations of their credit ratings.
Now we have Congress trying to whitewash consumer credit scores.
The argument put forward by the Congresswoman on CNBC was that mortgage modifications are simply contracts between two consenting parties, and, therefore, involve no forgiveness nor default or delinquency on any loan.
The argument against allowing this hiding of true consumer credit history is that any modification is, in fact, the failure of the consumer to honor the terms of the original contract and, thus, be in default or delinquency on an instrument to which they were a party. Additionally, it's very disingenuous to say that banks are doing modifications out of their own free will, when, in fact, the current administration coerced banks into suspending foreclosures and offering modifications, instead.
So we have yet another situation in which the federal government is attempting to alter useful private industry measures and practices, distort reality and rewrite history.
Combined with the recent FINREG bill, this should add impetus to financial institutions to back away from lending to all but the best-collateralized, least-risky consumers.
Everybody else, especially those with anything approaching a middling, sanitized credit score, will probably be denied credit.
I guess this proves that Congress has learned nothing from the recent financial sector meltdown and its own role in the mess, via Fannie, Freddie and too-complex regulatory processes.
Can we say "unintended consequences?"
Thursday, June 17, 2010
Congressional "Fact Finding": Today's BP Hearing
I've watched a fair amount of today's Congressional hearing featuring BP CEO Tony Hayward, and I must admit that both Hayward and most of the members of Congress have behaved dreadfully.
It started yesterday, when retiring Michigan Democrat Bart Stupak apparently said Hayward would be "sliced" up by the Congress' members during the hearing. The absence of fairness and decorum in the House is truly stunning. It's living down to our Founding Fathers' view of the chamber as filled with mannerless rabble.
One Texas Republican Representative, in his opening statement, correctly characterized the $20B fund which BP was coerced by the administration into offering as a "shakedown." Every single other member whom I've heard speak has basically used the hearing to grandstand, bully and embarrass Hayward, while admitting absolutely no culpability on the part of federal regulators or the Congress' own legislation which has required deep water drilling in the first place.
Hayward, for his part, is about the worst guy BP could possibly have as its public face. When a demonstrator was forcibly removed from the proceedings, Hayward sported a grin from ear to ear that looked remarkably inappropriate.
Michigan Democrat "Tailpipe Johnny" Dingell repeated the performance he crafted for the Goldman Sachs CDO hearing, requiring "yes" or "no" replies to questions he knew that Hayward could not answer, because they were operationally-oriented and applied to lower-level BP or contractor employees engaged in managing the actually drilling on the rig which exploded.
Hayward looked totally out of touch with the operations of his company during that exchange. It's sort of hard to believe that he wouldn't have brought either documentation concerning the rig's operation, or a lieutenant with more direct knowledge of the decisions about which questions were asked. Additionally, he gave needlessly vague, circuitous replies to many questions, which did give the distinct impression that he desired to be evasive. His expression was often disdainful, which doesn't come across as either sympathetic or empathetic. In the situation at hand, that's a mistake.
Never the less, Dingell made a telling point. He homed in on whether BP had made decisions based on saving money and time. The overall impression left by Hayward is that BP saved, at best, less than $20MM and maybe a few weeks' of time by apparently skipping on steps which would have resulted in safer drilling and perhaps the avoidance of the deep water blowout.
I've noticed in Hayward a disturbing trait. Maybe it's because he's British, or maybe because he is of the particular class he is, but his answers impart a decidedly distant, uncaring tone. He seems profoundly detached from the incident, offering only an annoyingly repetitive "very sorry" at every turn.
Combined with his chairman's gaffe yesterday referring to the "small people" along the affected Gulf Coast, Hayward didn't help BP's cause or image today.
Truth be told, in its zeal to roast BP's CEO, the members of Congress apparently failed to understand that, by the necessity of operation of a large company, Hayward couldn't answer, under oath, most of the detailed rig operation questions put to him. Anyone watching for more than ten minutes would have, I think, like me, quickly deduced that the Congressmen were simply piling on an easy target with ludicrous questions, given that Hayward wasn't the supervising manager of the failed rig.
In short, a lot of wasted time.
But, additionally, as I'll discuss tomorrow, like the Goldman hearings on CDOs, and earlier bank CEO grillings, yet another example of why global businesses should think twice now before choosing to enter the US market.
It started yesterday, when retiring Michigan Democrat Bart Stupak apparently said Hayward would be "sliced" up by the Congress' members during the hearing. The absence of fairness and decorum in the House is truly stunning. It's living down to our Founding Fathers' view of the chamber as filled with mannerless rabble.
One Texas Republican Representative, in his opening statement, correctly characterized the $20B fund which BP was coerced by the administration into offering as a "shakedown." Every single other member whom I've heard speak has basically used the hearing to grandstand, bully and embarrass Hayward, while admitting absolutely no culpability on the part of federal regulators or the Congress' own legislation which has required deep water drilling in the first place.
Hayward, for his part, is about the worst guy BP could possibly have as its public face. When a demonstrator was forcibly removed from the proceedings, Hayward sported a grin from ear to ear that looked remarkably inappropriate.
Michigan Democrat "Tailpipe Johnny" Dingell repeated the performance he crafted for the Goldman Sachs CDO hearing, requiring "yes" or "no" replies to questions he knew that Hayward could not answer, because they were operationally-oriented and applied to lower-level BP or contractor employees engaged in managing the actually drilling on the rig which exploded.
Hayward looked totally out of touch with the operations of his company during that exchange. It's sort of hard to believe that he wouldn't have brought either documentation concerning the rig's operation, or a lieutenant with more direct knowledge of the decisions about which questions were asked. Additionally, he gave needlessly vague, circuitous replies to many questions, which did give the distinct impression that he desired to be evasive. His expression was often disdainful, which doesn't come across as either sympathetic or empathetic. In the situation at hand, that's a mistake.
Never the less, Dingell made a telling point. He homed in on whether BP had made decisions based on saving money and time. The overall impression left by Hayward is that BP saved, at best, less than $20MM and maybe a few weeks' of time by apparently skipping on steps which would have resulted in safer drilling and perhaps the avoidance of the deep water blowout.
I've noticed in Hayward a disturbing trait. Maybe it's because he's British, or maybe because he is of the particular class he is, but his answers impart a decidedly distant, uncaring tone. He seems profoundly detached from the incident, offering only an annoyingly repetitive "very sorry" at every turn.
Combined with his chairman's gaffe yesterday referring to the "small people" along the affected Gulf Coast, Hayward didn't help BP's cause or image today.
Truth be told, in its zeal to roast BP's CEO, the members of Congress apparently failed to understand that, by the necessity of operation of a large company, Hayward couldn't answer, under oath, most of the detailed rig operation questions put to him. Anyone watching for more than ten minutes would have, I think, like me, quickly deduced that the Congressmen were simply piling on an easy target with ludicrous questions, given that Hayward wasn't the supervising manager of the failed rig.
In short, a lot of wasted time.
But, additionally, as I'll discuss tomorrow, like the Goldman hearings on CDOs, and earlier bank CEO grillings, yet another example of why global businesses should think twice now before choosing to enter the US market.
Federal Government Lies & Fantasies Concerning Regulations & The Oil Industry
One of the aspects of the recent BP undersea oil gusher is a sudden flurry of lies from Congress and the administration regarding regulation in the sector.
To hear the president and selected members of Congress tell it, the oil industry has been unregulated for, oh, just about a decade. Sound convenient in terms of presidential terms?
Yet, I vividly recall then-CEO of ExxonMobil, Lee Raymond, caustically observing all the sudden experts in oil refining, when gasoline prices hit new highs several years ago amidst shortages. Raymond, among others, replied to the accusation by government that no new refineries had been built in the US since about 1968, by pointing to the complex, expensive and time-consuming permitting process.
Sounds like regulation to me.
Raymond explained that it was far easier, faster and cheaper to expand an existing refinery than to build a new one from scratch. Nobody, at least until they can't buy a gallon of gasoline, seems to want a refinery in their backyard.
How is it that the same administration and Congress that looks elsewhere for the cause of the recent financial crisis, while overlooking their own complicated regulatory schemes and agencies, can repeat the act in the energy arena?
Whatever regulatory processes exist would seem to have been deemed appropriate by Congress. If the MMS was 'captured' by industry participants, then Congress' legislation pertaining to the agency must have allowed for that.
Who's fault is that? Not BP's.
Perhaps regulations were inadequate. But it's a joke to suggest there are none, or they are totally unenforced. And then blame industry firms for that.
Last time I looked, only Congress could pass legislation in this country, not publicly-held companies.
Taking this travesty a step further, it's simply ludicrous to ignore Congress' legislative culpability in the oil gusher mess, then use the disaster as a reason to swear off of oil and nuclear.
If we are to believe the president, nobody has ever tried to find alternative, renewable energy sources, despite the immense payoff which would accrue to the first person or company to patent such discoveries.
As no less than, I believe, Jack Welch intoned on CNBC yesterday morning, if technology and ideas existed to build functioning, profitable alternative energy markets and businesses, someone would have done so already.
Having a president use a crisis of oil exploration to declare an end to our use of oil is just plain stupid. It's even more stupid to then propose to throw more unaffordable federal dollars into subsidies for non-existent replacement energy sources.
How is the US supposed to remain competitive if the only way to bring new energy sources to market is to subsidize them with government money? By definition, they'll be uncompetitive on a cost basis. Otherwise, those discoveries would already be providing said energy.
It's disappointing to see an administration and Congress so totally ignorant of economics that they believe that nobody has tried to find profitable renewable energy sources, and, thus, are only awaiting government handouts to make such ideas a profitable reality.
Now, that's a fantasy.
To hear the president and selected members of Congress tell it, the oil industry has been unregulated for, oh, just about a decade. Sound convenient in terms of presidential terms?
Yet, I vividly recall then-CEO of ExxonMobil, Lee Raymond, caustically observing all the sudden experts in oil refining, when gasoline prices hit new highs several years ago amidst shortages. Raymond, among others, replied to the accusation by government that no new refineries had been built in the US since about 1968, by pointing to the complex, expensive and time-consuming permitting process.
Sounds like regulation to me.
Raymond explained that it was far easier, faster and cheaper to expand an existing refinery than to build a new one from scratch. Nobody, at least until they can't buy a gallon of gasoline, seems to want a refinery in their backyard.
How is it that the same administration and Congress that looks elsewhere for the cause of the recent financial crisis, while overlooking their own complicated regulatory schemes and agencies, can repeat the act in the energy arena?
Whatever regulatory processes exist would seem to have been deemed appropriate by Congress. If the MMS was 'captured' by industry participants, then Congress' legislation pertaining to the agency must have allowed for that.
Who's fault is that? Not BP's.
Perhaps regulations were inadequate. But it's a joke to suggest there are none, or they are totally unenforced. And then blame industry firms for that.
Last time I looked, only Congress could pass legislation in this country, not publicly-held companies.
Taking this travesty a step further, it's simply ludicrous to ignore Congress' legislative culpability in the oil gusher mess, then use the disaster as a reason to swear off of oil and nuclear.
If we are to believe the president, nobody has ever tried to find alternative, renewable energy sources, despite the immense payoff which would accrue to the first person or company to patent such discoveries.
As no less than, I believe, Jack Welch intoned on CNBC yesterday morning, if technology and ideas existed to build functioning, profitable alternative energy markets and businesses, someone would have done so already.
Having a president use a crisis of oil exploration to declare an end to our use of oil is just plain stupid. It's even more stupid to then propose to throw more unaffordable federal dollars into subsidies for non-existent replacement energy sources.
How is the US supposed to remain competitive if the only way to bring new energy sources to market is to subsidize them with government money? By definition, they'll be uncompetitive on a cost basis. Otherwise, those discoveries would already be providing said energy.
It's disappointing to see an administration and Congress so totally ignorant of economics that they believe that nobody has tried to find profitable renewable energy sources, and, thus, are only awaiting government handouts to make such ideas a profitable reality.
Now, that's a fantasy.
Tuesday, June 15, 2010
The Oil Industry Strikes Back- At BP!
I caught the opening statements of several oil company CEOs this morning. Most notable were those by ExxonMobil CEO Rex Tillerson and ChevronTexaco's John Watson.
Each of them took pains to criticize BP's inadequately-engineered drilling operation. It was quite clear that, in advance of a presidential address this evening focusing on the BP oil gusher, the industry and energy legislation, these two CEOs wanted to go on record, forcefully, stating that the BP mess is no accident.
From Tillerson's and Watson's comments, it was unmistakable that they view BP's operations as substandard and unsafe. They want to distance themselves from BP's approach, draw attention to their own, better safety records, and hopefully assist in heading off any damaging restrictions on deep-water drilling.
Commentators on CNBC referred to these CEOs 'throwing BP under a bus.' But that's not really quite true.
All that Tillerson and Watson did was provide their very informed opinions on the nature of the BP mess, i.e., it was the result of bad management and operations.
Even as I write this, various uninformed talking heads on CNBC are accusing the other oil CEOs as unwisely breaking ranks. One even cited Jack Welch, referring to some comment the former GE CEO was alleged to have made earlier today, or yesterday, that the execs must stick together because this is an industry problem.
No, it's not. That was Tillerson's and Watson's shared point. It's not an 'industry issue,' because nobody else in the deep-water drilling sector has managed to effect this sort of disaster.
If the Welch attribution is true, it just shows how far out of touch with reality Jack has become in recent years.
As I listened to the two prominent oil firm CEOs adamantly state their cases, it was obvious they were taking the opportunity, only hours before the scheduled presidential address, to give Congress and the viewing public their own, different view of events and reality.
Each of them took pains to criticize BP's inadequately-engineered drilling operation. It was quite clear that, in advance of a presidential address this evening focusing on the BP oil gusher, the industry and energy legislation, these two CEOs wanted to go on record, forcefully, stating that the BP mess is no accident.
From Tillerson's and Watson's comments, it was unmistakable that they view BP's operations as substandard and unsafe. They want to distance themselves from BP's approach, draw attention to their own, better safety records, and hopefully assist in heading off any damaging restrictions on deep-water drilling.
Commentators on CNBC referred to these CEOs 'throwing BP under a bus.' But that's not really quite true.
All that Tillerson and Watson did was provide their very informed opinions on the nature of the BP mess, i.e., it was the result of bad management and operations.
Even as I write this, various uninformed talking heads on CNBC are accusing the other oil CEOs as unwisely breaking ranks. One even cited Jack Welch, referring to some comment the former GE CEO was alleged to have made earlier today, or yesterday, that the execs must stick together because this is an industry problem.
No, it's not. That was Tillerson's and Watson's shared point. It's not an 'industry issue,' because nobody else in the deep-water drilling sector has managed to effect this sort of disaster.
If the Welch attribution is true, it just shows how far out of touch with reality Jack has become in recent years.
As I listened to the two prominent oil firm CEOs adamantly state their cases, it was obvious they were taking the opportunity, only hours before the scheduled presidential address, to give Congress and the viewing public their own, different view of events and reality.
Wednesday, May 05, 2010
Congress Remains Silent On The Modern Bank of The United States- Fannie & Freddie
Robert Wilmers, CEO of M&T Bank Corporation, wrote a hard-hitting editorial in yesterday's Wall Street Journal entitled, bluntly, "What About Fan and Fred Reform?"
In the past few weeks, much has occurred in Congress and the administration which smacks of trying to supercharge the rush to poorly-thought, badly-drafted finance so-called "reform."
The Dodd bill is, of course, quite far from real, effective reform. And that's if we actually believed that the Congressional panel formed to investigate the recent financial crisis had completed its job. And various pundits and officials had contributed credible, objective testimony, while meaningful, measurable criteria were advanced and adopted for assessing the US financial system's health and effectiveness.
Mr. Wilmers is the CEO of a rather quotidian commercial bank. It's not a former investment bank now reborn as a commercial bank. It's not a money center bank in New York.
Thus, Mr. Wilmers' observations have some credibility and a lack of obvious bias.
He wrote, at length, about how huge and problematic Congress has allowed the two GSEs to become,
"Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.
We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.
At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they'd sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.
To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.
Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall federal deficit—as properly they should be—the 2009 deficit would be greater by $291 billion."
Does anyone seriously doubt that any attempt at effective regulatory change of this sector will fail without addressing- and fixing- Fannie and Freddie?
Then Mr. Wilmers concludes with this knockout blow,
"According to a 2004 Congressional Budget Office study, the two GSEs enjoyed $23 billion in subsidies in 2003—primarily in the form of lower borrowing costs and exemption from state and local taxation. But they passed on only $13 billion to home buyers. Nevertheless, one former Fannie Mae CEO, Franklin Raines, received $91 million in compensation from 1998 through 2003. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million. In 2009, even after the financial crash and as these two GSEs fell deeper into the red, the top five executives at Fannie Mae received $19 million in compensation and the CEO earned $6 million.
This is not private enterprise—it's crony capitalism, in which public subsidies are turned into private riches. From 2001 through 2006, Fannie and Freddie spent $123 million to lobby Congress—the second-highest lobbying total (after the U.S. Chamber of Commerce) in the country. That lobbying was complemented by sizable direct political contributions to members of Congress.
Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie and powerful interests are allied with the status quo. I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, admitted he would never push for significant change because "they've done so much for me, my colleagues and my staff." "
When I read these last three paragraphs, I was instantly reminded of President Andrew Jackson's campaign against Nicholas Biddle's Second Bank of the US. A quasi-governmental entity so entwined with the federal government's officials and Congress that the two could not wean themselves from the Bank.
Biddle contributed to many Congressional campaigns, calling to mind Wilmers' reference to his member of Congress friend.
The Second Bank of the US dominated politics for four years. Fannie and Freddie could do so, now. They are that powerful, corrupt, and entangled with the nation's financial troubles and system.
In the past few weeks, much has occurred in Congress and the administration which smacks of trying to supercharge the rush to poorly-thought, badly-drafted finance so-called "reform."
The Dodd bill is, of course, quite far from real, effective reform. And that's if we actually believed that the Congressional panel formed to investigate the recent financial crisis had completed its job. And various pundits and officials had contributed credible, objective testimony, while meaningful, measurable criteria were advanced and adopted for assessing the US financial system's health and effectiveness.
Mr. Wilmers is the CEO of a rather quotidian commercial bank. It's not a former investment bank now reborn as a commercial bank. It's not a money center bank in New York.
Thus, Mr. Wilmers' observations have some credibility and a lack of obvious bias.
He wrote, at length, about how huge and problematic Congress has allowed the two GSEs to become,
"Congress may be making progress crafting new regulations for the financial-services industry, but it has yet to begin reforming two institutions that played a key role in the 2008 credit crisis—Fannie Mae and Freddie Mac.
We cannot reform these government-sponsored enterprises unless we fully confront the extent to which their outrageous behavior and reckless business practices have affected the entire commercial banking sector and the U.S. economy as a whole.
At the end of 2009, their total debt outstanding—either held directly on their balance sheets or as guarantees on mortgage securities they'd sold to investors—was $8.1 trillion. That compares to $7.8 trillion in total marketable debt outstanding for the entire U.S. government. The debt has the implicit guarantee of the federal government but is not reflected on the national balance sheet.
To date, the federal government has been forced to pump $126 billion into Fannie and Freddie. That's far more than AIG, which absorbed $70 billion of government largess, and General Motors and Chrysler, which shared $77 billion. Banks received $205 billion, of which $136 billion has been repaid.
Fannie and Freddie continue to operate deeply in the red, with no end in sight. The Congressional Budget Office estimated that if their operating costs and subsidies were included in our accounting of the overall federal deficit—as properly they should be—the 2009 deficit would be greater by $291 billion."
Does anyone seriously doubt that any attempt at effective regulatory change of this sector will fail without addressing- and fixing- Fannie and Freddie?
Then Mr. Wilmers concludes with this knockout blow,
"According to a 2004 Congressional Budget Office study, the two GSEs enjoyed $23 billion in subsidies in 2003—primarily in the form of lower borrowing costs and exemption from state and local taxation. But they passed on only $13 billion to home buyers. Nevertheless, one former Fannie Mae CEO, Franklin Raines, received $91 million in compensation from 1998 through 2003. In 2006, the top five Fannie Mae executives shared $34 million in compensation, while their counterparts at Freddie Mac shared $35 million. In 2009, even after the financial crash and as these two GSEs fell deeper into the red, the top five executives at Fannie Mae received $19 million in compensation and the CEO earned $6 million.
This is not private enterprise—it's crony capitalism, in which public subsidies are turned into private riches. From 2001 through 2006, Fannie and Freddie spent $123 million to lobby Congress—the second-highest lobbying total (after the U.S. Chamber of Commerce) in the country. That lobbying was complemented by sizable direct political contributions to members of Congress.
Changing this terrible situation will not be easy. The mortgage market has come to be structured around Fannie and Freddie and powerful interests are allied with the status quo. I recall a personal conversation with a member of Congress who, despite saying he understood my concerns about the two GSEs, admitted he would never push for significant change because "they've done so much for me, my colleagues and my staff." "
When I read these last three paragraphs, I was instantly reminded of President Andrew Jackson's campaign against Nicholas Biddle's Second Bank of the US. A quasi-governmental entity so entwined with the federal government's officials and Congress that the two could not wean themselves from the Bank.
Biddle contributed to many Congressional campaigns, calling to mind Wilmers' reference to his member of Congress friend.
The Second Bank of the US dominated politics for four years. Fannie and Freddie could do so, now. They are that powerful, corrupt, and entangled with the nation's financial troubles and system.
Tuesday, March 30, 2010
The Grand Inquisitors
I think we've finally reached the point of total hilarity and Kafkaesque intrusion of government into the private sector.
Democratic Representatives Henry Waxman and Bart Stupak are shocked....SHOCKED!!!!!....that some companies have publicized higher expense recognitions they are making in the wake of the recent passage of a universal health care law.
The Congressmen, angered at being embarrassed by the reaction of some in the business community to the new realities of health care insurance expenses, are demanding the appearance of the presumed-guilty executives before a Congressional Committee.
Of course, this is perhaps extra embarrassing for Stupak, because he pretended to agonize over the pro-life consequences of the bill, before caving in for a meaningless executive order. Now, his faux pro-life cover blown, he also looks stupid for having voted for a bill that will, contrary to his colleagues' and his own affirmations, raise the costs of doing business.
Caterpillar, John Deere, Verizon and a few other companies, in compliance with the Congressionally-mandated Sarbanes-Oxley law, adjusted their expenses for the effects of the new health care law only days after its passage.
Now, they are being called to task for obeying that law.
You see, many in the business community warned over the past year that passage of this ill-advised legislation would result in higher costs to businesses. But Democrats ignored this, as they ignored any suggestions for health care reform which would not result in a totally socialized health insurance and care system.
Now that the law has been passed, by the thinnest of party-line majorities, Democrats in the House are outraged that their claims are being disputed by some executives at large US companies.
It should be quite the show. After all, Sarbanes-Oxley makes it a crime for executives to sign off on corporate filings which they know to be false. So we know this week's disclosures of the higher expenses are real, and true. Otherwise, the affected executives could be charged and convicted of perjury and violations of Sarbanes-Oxley.
Of course, it's ironic that the CEOs being summoned to Washington would, if they used the same approach to accounting that Congress used in the bill, and which the CBO blessed, they'd be in jail. The assumptions and tax/benefit mismatches, intentionally gamed by Democrats and the president to force a misleading, nonexistent 'savings' in the federal budget, wouldn't pass GAAP muster.
The inconvenient truth, to use a popular leftist phrase, is that economic realities are hitting the idealistic, misleading Democratic claims for the health care sector reorganization within a week of the bill becoming law.
Think of how much more bad news will be coming from the private sector as a result of this bad law in the coming months, prior to the November mid-term elections.
Democratic Representatives Henry Waxman and Bart Stupak are shocked....SHOCKED!!!!!....that some companies have publicized higher expense recognitions they are making in the wake of the recent passage of a universal health care law.
The Congressmen, angered at being embarrassed by the reaction of some in the business community to the new realities of health care insurance expenses, are demanding the appearance of the presumed-guilty executives before a Congressional Committee.
Of course, this is perhaps extra embarrassing for Stupak, because he pretended to agonize over the pro-life consequences of the bill, before caving in for a meaningless executive order. Now, his faux pro-life cover blown, he also looks stupid for having voted for a bill that will, contrary to his colleagues' and his own affirmations, raise the costs of doing business.
Caterpillar, John Deere, Verizon and a few other companies, in compliance with the Congressionally-mandated Sarbanes-Oxley law, adjusted their expenses for the effects of the new health care law only days after its passage.
Now, they are being called to task for obeying that law.
You see, many in the business community warned over the past year that passage of this ill-advised legislation would result in higher costs to businesses. But Democrats ignored this, as they ignored any suggestions for health care reform which would not result in a totally socialized health insurance and care system.
Now that the law has been passed, by the thinnest of party-line majorities, Democrats in the House are outraged that their claims are being disputed by some executives at large US companies.
It should be quite the show. After all, Sarbanes-Oxley makes it a crime for executives to sign off on corporate filings which they know to be false. So we know this week's disclosures of the higher expenses are real, and true. Otherwise, the affected executives could be charged and convicted of perjury and violations of Sarbanes-Oxley.
Of course, it's ironic that the CEOs being summoned to Washington would, if they used the same approach to accounting that Congress used in the bill, and which the CBO blessed, they'd be in jail. The assumptions and tax/benefit mismatches, intentionally gamed by Democrats and the president to force a misleading, nonexistent 'savings' in the federal budget, wouldn't pass GAAP muster.
The inconvenient truth, to use a popular leftist phrase, is that economic realities are hitting the idealistic, misleading Democratic claims for the health care sector reorganization within a week of the bill becoming law.
Think of how much more bad news will be coming from the private sector as a result of this bad law in the coming months, prior to the November mid-term elections.
Tuesday, March 16, 2010
David Malpass For Senate!
I know this seems to be a political post, but there are business aspects to this headline.
This morning, on CNBC, it was announced that "a former chief economist for Bear Stearns has filed to run for a Senate seat."
Initially, I wondered if they were referring to their CNBC colleague, Larry Kudlow. But with his age and substance abuse/rehab background, I thought this was unlikely.
Turns out it's the well-respected economist David Malpass. He has filed to run for the New York Senate seat currently filled by a political appointee.
When asked why he'd be more effective as one Senator among 100, as opposed to continuing to freely express himself as an independent economist, Malpass earnestly stated that he felt it was important to make that Senate seat vote correctly. As an example, he criticized Hillenbrand's recent consent to raise the debt ceiling. A vote Malpass characterized as reaching into every American family's home and slapping a higher tax on its children and grandchildren, in order to eventually service and retire the extra trillions of debt recently enabled by Congress.
Further, Malpass alluded to being able to provide better economic knowledge in the Senate than currently exists.
It should be a very interesting race to follow. As a Republican, Malpass already has an uphill fight. Then, again, with the state's horrendous financial mess as a backdrop, it's just possible even New York Democrats will vote for national fiscal restraint, in the person of Mr. Malpass.
Put another way, if we have a second-rate standup comic in the Senate, albeit under a cloud of election-theft, why not a respected economist in a straight-up, legitimate victory?
This morning, on CNBC, it was announced that "a former chief economist for Bear Stearns has filed to run for a Senate seat."
Initially, I wondered if they were referring to their CNBC colleague, Larry Kudlow. But with his age and substance abuse/rehab background, I thought this was unlikely.
Turns out it's the well-respected economist David Malpass. He has filed to run for the New York Senate seat currently filled by a political appointee.
When asked why he'd be more effective as one Senator among 100, as opposed to continuing to freely express himself as an independent economist, Malpass earnestly stated that he felt it was important to make that Senate seat vote correctly. As an example, he criticized Hillenbrand's recent consent to raise the debt ceiling. A vote Malpass characterized as reaching into every American family's home and slapping a higher tax on its children and grandchildren, in order to eventually service and retire the extra trillions of debt recently enabled by Congress.
Further, Malpass alluded to being able to provide better economic knowledge in the Senate than currently exists.
It should be a very interesting race to follow. As a Republican, Malpass already has an uphill fight. Then, again, with the state's horrendous financial mess as a backdrop, it's just possible even New York Democrats will vote for national fiscal restraint, in the person of Mr. Malpass.
Put another way, if we have a second-rate standup comic in the Senate, albeit under a cloud of election-theft, why not a respected economist in a straight-up, legitimate victory?
Friday, February 26, 2010
More Congressional Ineptitude
Maxine Waters is not the only incompetent House member. Not by a long shot.
Yesterday, as I watched/listened to the so-called health care summit, Fox News cut to an interview by Megyn Kelly with Florida Democratic Representative Debbie Wasserman-Schultz.
It was, to say the least, revealing.
Kelly asked Schultz to explain why Democrats continue to push a 2,300 page health care bill too complex for anyone to fully comprehend, when so many polls indicate that about 55% of voters want a new health care bill to be written from scratch by both parties, together, and something like only 30% of voters want the current proposed legislation.
Schultz replied with a laundry list of items which she claimed voters were for, on an individual basis. Among the items she listed were:
-low insurance premiums or small increases
-no dropping coverage because of sickness
-insurance available for pre-existing conditions
-coverage of all Americans
What Schultz and, for that matter, Kelly, overlooked and ignored, is the flaw inherent in asking interviewees on a questionnaire for multiple, serial responses on attributes of a choice.
Back in the late 1970s, when I attended graduate business school, conjoint analysis was already a fairly mature, well-regarded technique in marketing research. That was over 30 years ago!
What conjoint analysis does is allow respondents to choose, usually in either paired-comparisons or rank ordering tasks, between various sub-optimal combinations of attributes.
In the case of health care, for example, a 'choice' might be low premium increases, but no pre-existing condition coverage and coverage for 90% of Americans.
By working through such choices, respondents reveal their relative values for each attribute. The key is being forced to choose among alternatives combining various levels of the various attributes.
Why isn't Congress commissioning some conjoint analysis-based research to provide members with information on what Americans value most, and least, among the possible, but expensive, attributes of a health care reform bill?
This is the sort of omission that drives me crazy. Sad to say, a look at Schultz's bio tells you a lot. She was a carpetbagging resident in her district when she went to work for a state legislator. She then ran for his vacated seat at the tender age of 26, won it, and served the maximum number of terms. Then she ran for Congress.
So, once again, as in the case of Carolyn Maloney or, for that matter, my old civics teacher, longtime Bob Michel aide and current Secretary of Transportation, Ray LaHood, we have a Representative with no more than perhaps 3-4 years of experience actually working for a living. And those years were quite long ago.
No wonder our elected representatives provide so few modern, easily-available techniques to assist in resolving policy questions. They truly are clueless, because they've spent too much of their adult lives as professional office-holders.
And, again, as I did at the end of my post about Maxine Waters, I want to stress the business implications of this post. Provisions of the current health care bill will cause businesses to dump their employees into government-run plans. This will cause health insurance costs to skyrocket, increasing our national debt and, eventually, raising taxes. This will lead to less job creation and lower economic growth rates.
It's important for all of us to push back ill-advised, stupid legislation and government overreach. It begins by getting rid of lifetime officeholders of all parties, and striving to elect experienced, non-professional candidates for a few terms, so that their goals and those of ordinary citizens who work for a living are aligned.
Yesterday, as I watched/listened to the so-called health care summit, Fox News cut to an interview by Megyn Kelly with Florida Democratic Representative Debbie Wasserman-Schultz.
It was, to say the least, revealing.
Kelly asked Schultz to explain why Democrats continue to push a 2,300 page health care bill too complex for anyone to fully comprehend, when so many polls indicate that about 55% of voters want a new health care bill to be written from scratch by both parties, together, and something like only 30% of voters want the current proposed legislation.
Schultz replied with a laundry list of items which she claimed voters were for, on an individual basis. Among the items she listed were:
-low insurance premiums or small increases
-no dropping coverage because of sickness
-insurance available for pre-existing conditions
-coverage of all Americans
What Schultz and, for that matter, Kelly, overlooked and ignored, is the flaw inherent in asking interviewees on a questionnaire for multiple, serial responses on attributes of a choice.
Back in the late 1970s, when I attended graduate business school, conjoint analysis was already a fairly mature, well-regarded technique in marketing research. That was over 30 years ago!
What conjoint analysis does is allow respondents to choose, usually in either paired-comparisons or rank ordering tasks, between various sub-optimal combinations of attributes.
In the case of health care, for example, a 'choice' might be low premium increases, but no pre-existing condition coverage and coverage for 90% of Americans.
By working through such choices, respondents reveal their relative values for each attribute. The key is being forced to choose among alternatives combining various levels of the various attributes.
Why isn't Congress commissioning some conjoint analysis-based research to provide members with information on what Americans value most, and least, among the possible, but expensive, attributes of a health care reform bill?
This is the sort of omission that drives me crazy. Sad to say, a look at Schultz's bio tells you a lot. She was a carpetbagging resident in her district when she went to work for a state legislator. She then ran for his vacated seat at the tender age of 26, won it, and served the maximum number of terms. Then she ran for Congress.
So, once again, as in the case of Carolyn Maloney or, for that matter, my old civics teacher, longtime Bob Michel aide and current Secretary of Transportation, Ray LaHood, we have a Representative with no more than perhaps 3-4 years of experience actually working for a living. And those years were quite long ago.
No wonder our elected representatives provide so few modern, easily-available techniques to assist in resolving policy questions. They truly are clueless, because they've spent too much of their adult lives as professional office-holders.
And, again, as I did at the end of my post about Maxine Waters, I want to stress the business implications of this post. Provisions of the current health care bill will cause businesses to dump their employees into government-run plans. This will cause health insurance costs to skyrocket, increasing our national debt and, eventually, raising taxes. This will lead to less job creation and lower economic growth rates.
It's important for all of us to push back ill-advised, stupid legislation and government overreach. It begins by getting rid of lifetime officeholders of all parties, and striving to elect experienced, non-professional candidates for a few terms, so that their goals and those of ordinary citizens who work for a living are aligned.
Thursday, February 25, 2010
"So Dumb, Her Head Must Hurt...."
Years ago, a college friend had a saying about really stupid people. It was,
"He's so dumb, his head must hurt."
This phrase came to mind yesterday morning as I heard and watched California Democratic Representative Maxine Waters question Fed Chairman Ben Bernanke.
Waters distinguished herself with a new low in ineptitude when she began by confusing the discount rate with the Fed Funds Rate. After Bernanke patiently explained the difference, Waters then spent long minutes insisting that mortgage interest rates must remain low, so she wanted Bernanke to guarantee and assure the House Financial Services Committee that market interest rates would not increase due to the increase in the discount rate.
Now, if you visit that link, you'll see a list of the House members on the committee. Because they are not listed in alphabetical order, it's a reasonable guess that they are in order of seniority. Thus, Waters is at least the third-longest serving Democrat on the panel. I know I've heard Waters' idiotic questions and comments on this committee for years.
Don't you think it's fair to expect such a long-serving committee member to know, by now, the difference between the discount window rate and the Fed Funds rate? How about expecting them to know a fair amount about the structure of the US financial system, basic economics, and some international trade economics, as well?
But, no, instead, we get Maxine Waters.
"So dumb, her head must hurt."
Just once, I'd like to, and would pay money to hear a Fed Chairman respond to a question like Waters' as follows,
'Ms. Waters, your question is idiotic. It conveys a total lack of understanding of the workings of the Fed.
How long have you been on this committee, Rep. Waters? Don't you think you owe it to your constituents and all American voters, to actually understand the matters before this committee?
Have you not taken the time, over the years you've been on this panel, to learn about our financial and economic system? Or are you simply overwhelmed by the subject matter?
Mr. Frank, this is ridiculous. I'm casting pearls before swine, here.
Please make sure, in the future, that the members on this committee have passed a basic test of knowledge on the subject matter that the committee oversees.
Until such time as you can assure me that all of your committee members have passed such a test, a test which I will sit with you to create, I will not bother to waste my valuable time sitting for questions from uninformed, stupid Members.
That is all for today. I have work to do.'
This is why so many of us cringe at the prospect of Congress having more and more power over all facets of American life. Congressional members sit on committees, the subjects of which they have absolutely no knowledge.
It's frightening that these people think they can regulate or oversee anything. Few seem to have even held a private sector job recently.
Just imagine you were Ben Bernanke and had to continually explain complex, inexact economic matters to more than 30 Maxine Waters clones.
It's not a political matter, nor a partisan issue. It's about the ability of Americans to conduct business in the face of inept, inexperienced and unqualified federal legislators trying to accrete more power to themselves, while remaining ignorant of how business and economics actually work.
It's enough to make you go insane, isn't it?
"He's so dumb, his head must hurt."
This phrase came to mind yesterday morning as I heard and watched California Democratic Representative Maxine Waters question Fed Chairman Ben Bernanke.
Waters distinguished herself with a new low in ineptitude when she began by confusing the discount rate with the Fed Funds Rate. After Bernanke patiently explained the difference, Waters then spent long minutes insisting that mortgage interest rates must remain low, so she wanted Bernanke to guarantee and assure the House Financial Services Committee that market interest rates would not increase due to the increase in the discount rate.
Now, if you visit that link, you'll see a list of the House members on the committee. Because they are not listed in alphabetical order, it's a reasonable guess that they are in order of seniority. Thus, Waters is at least the third-longest serving Democrat on the panel. I know I've heard Waters' idiotic questions and comments on this committee for years.
Don't you think it's fair to expect such a long-serving committee member to know, by now, the difference between the discount window rate and the Fed Funds rate? How about expecting them to know a fair amount about the structure of the US financial system, basic economics, and some international trade economics, as well?
But, no, instead, we get Maxine Waters.
"So dumb, her head must hurt."
Just once, I'd like to, and would pay money to hear a Fed Chairman respond to a question like Waters' as follows,
'Ms. Waters, your question is idiotic. It conveys a total lack of understanding of the workings of the Fed.
How long have you been on this committee, Rep. Waters? Don't you think you owe it to your constituents and all American voters, to actually understand the matters before this committee?
Have you not taken the time, over the years you've been on this panel, to learn about our financial and economic system? Or are you simply overwhelmed by the subject matter?
Mr. Frank, this is ridiculous. I'm casting pearls before swine, here.
Please make sure, in the future, that the members on this committee have passed a basic test of knowledge on the subject matter that the committee oversees.
Until such time as you can assure me that all of your committee members have passed such a test, a test which I will sit with you to create, I will not bother to waste my valuable time sitting for questions from uninformed, stupid Members.
That is all for today. I have work to do.'
This is why so many of us cringe at the prospect of Congress having more and more power over all facets of American life. Congressional members sit on committees, the subjects of which they have absolutely no knowledge.
It's frightening that these people think they can regulate or oversee anything. Few seem to have even held a private sector job recently.
Just imagine you were Ben Bernanke and had to continually explain complex, inexact economic matters to more than 30 Maxine Waters clones.
It's not a political matter, nor a partisan issue. It's about the ability of Americans to conduct business in the face of inept, inexperienced and unqualified federal legislators trying to accrete more power to themselves, while remaining ignorant of how business and economics actually work.
It's enough to make you go insane, isn't it?
Sunday, January 24, 2010
Regarding Bernanke's Reappointment
How the winds have changed in just a few short weeks!
I have, on my desk, a Wall Street Journal editorial from the weekend edition of 9-10 January by Judy Shelton. In it, she lampoons the Fed chairman for admitting in a recent speech only,
"the timing of the housing bubble does not rule out some contribution from monetary policy."
Apparently Bernanke still won't face up to the fact that government forces were responsible for the first steps leading to the recent financial sector turmoil. First Greenspan kept interest rates too low for too long. Coupled with that, Congress, through the CRA and misguided direction to Fannie Mae and Freddie Mac, encouraged, as well as demanded, that mortgage loans be made to unqualified home buyers.
Yes, with that stage set, commercial, investment and mortgage banks were too aggressive in their pursuit of profits through residential home financing. But they simply joined the party that the Fed and Congress had started.
Now that the voting public is angry at the federal government for having rescued banks which should have been allowed to fail, Bernanke's reappointment carries more risk than it did only a few months ago.
Personally, I believe that Bernanke responded incorrectly to the developing financial sector debacle as far back as the late summer of 2007. With post-1929 securities markets and banking reforms in place, including deposit insurance, bank insolvency is no longer something to be papered over. Furthermore, there was little sign that monetary liquidity had ever truly dried up in 2007 or 2008.
What worried federal officials was the solvency of Bear Stearns, Lehman, AIG, Morgan Stanley, Goldman Sachs and Citigroup, not the overall liquidity in the US.
Additionally, at a time of administration and Congressional overreach in several legislative areas, the Fed is now seen as having behaved in an unconstitutional manner in the AIG case. And its rush, with Treasury, to force-feed federal funding to large banks which could have safely been put into receivership to thin out the sector's overcapacity, is now seen as favoring large business and financial interests at the literal expense of taxpayers.
This has suddenly become very unpopular. Especially in the wake of the election to the US Senate of Republican Scott Brown last Tuesday.
For once, I'm with Larry Kudlow, of CNBC, in thinking that John Taylor would be a good replacement for helicopter Ben. Rather than avoid a depression, our recent challenges have been how to productively and effectively shed excess financial sector capacity without having monetary policy become either overly restrictive, or overly stimulative.
I personally think Bernanke is damaged goods now. He pulled the wrong levers during the recent financial crisis, helped things spin out of control, only to have to apply too much force to rein them back in, while apparently engaging in some illegal behavior by coercing BankofAmerica to close its purchase of Merrill Lynch.
Regardless of its effect on the equity markets, I am actually pleased to see that Bernanke's reconfirmation for Fed chairman is now a long shot.
I have, on my desk, a Wall Street Journal editorial from the weekend edition of 9-10 January by Judy Shelton. In it, she lampoons the Fed chairman for admitting in a recent speech only,
"the timing of the housing bubble does not rule out some contribution from monetary policy."
Apparently Bernanke still won't face up to the fact that government forces were responsible for the first steps leading to the recent financial sector turmoil. First Greenspan kept interest rates too low for too long. Coupled with that, Congress, through the CRA and misguided direction to Fannie Mae and Freddie Mac, encouraged, as well as demanded, that mortgage loans be made to unqualified home buyers.
Yes, with that stage set, commercial, investment and mortgage banks were too aggressive in their pursuit of profits through residential home financing. But they simply joined the party that the Fed and Congress had started.
Now that the voting public is angry at the federal government for having rescued banks which should have been allowed to fail, Bernanke's reappointment carries more risk than it did only a few months ago.
Personally, I believe that Bernanke responded incorrectly to the developing financial sector debacle as far back as the late summer of 2007. With post-1929 securities markets and banking reforms in place, including deposit insurance, bank insolvency is no longer something to be papered over. Furthermore, there was little sign that monetary liquidity had ever truly dried up in 2007 or 2008.
What worried federal officials was the solvency of Bear Stearns, Lehman, AIG, Morgan Stanley, Goldman Sachs and Citigroup, not the overall liquidity in the US.
Additionally, at a time of administration and Congressional overreach in several legislative areas, the Fed is now seen as having behaved in an unconstitutional manner in the AIG case. And its rush, with Treasury, to force-feed federal funding to large banks which could have safely been put into receivership to thin out the sector's overcapacity, is now seen as favoring large business and financial interests at the literal expense of taxpayers.
This has suddenly become very unpopular. Especially in the wake of the election to the US Senate of Republican Scott Brown last Tuesday.
For once, I'm with Larry Kudlow, of CNBC, in thinking that John Taylor would be a good replacement for helicopter Ben. Rather than avoid a depression, our recent challenges have been how to productively and effectively shed excess financial sector capacity without having monetary policy become either overly restrictive, or overly stimulative.
I personally think Bernanke is damaged goods now. He pulled the wrong levers during the recent financial crisis, helped things spin out of control, only to have to apply too much force to rein them back in, while apparently engaging in some illegal behavior by coercing BankofAmerica to close its purchase of Merrill Lynch.
Regardless of its effect on the equity markets, I am actually pleased to see that Bernanke's reconfirmation for Fed chairman is now a long shot.
Saturday, July 18, 2009
Hank Paulson's Congressional Show Trial
I happened to see several minutes of Hank Paulson's Congressional show trial of last week. Specifically, I heard a Representative, from which party I honestly don't know, lambaste Paulson for having enjoyed a statutorily provided tax deferment on profits earned from premature sale of assets upon being confirmed Treasury Secretary.
Sounding like a mad dog with no common sense whatsoever, this thin, older-looking male Representative repetitively demanded to know how much in taxes Paulson had avoided paying due this provision.
This particular line of 'questioning' was quite far afield from the stated reason Paulson was appearing before the Committee, i.e., to determine whether he and/or Ben Bernanke used undue coercion on BofA CEO Ken Lewis to force him to complete the Merrill Lynch acquisition.
If we are to attract candidates of merit and suitable qualifications and accomplishments to cabinet-level offices, we can't have Congressional members behaving like Grand Inquisitors. Specifically, twisting legitimate actions of government servants to appear as something else- in this case, tax evasion by the rich.
We're all going to be much poorer, economically and otherwise, if our Congress continues to attempt to criminalize every aspect of any administration's behavior with which it disagrees.
Sounding like a mad dog with no common sense whatsoever, this thin, older-looking male Representative repetitively demanded to know how much in taxes Paulson had avoided paying due this provision.
This particular line of 'questioning' was quite far afield from the stated reason Paulson was appearing before the Committee, i.e., to determine whether he and/or Ben Bernanke used undue coercion on BofA CEO Ken Lewis to force him to complete the Merrill Lynch acquisition.
If we are to attract candidates of merit and suitable qualifications and accomplishments to cabinet-level offices, we can't have Congressional members behaving like Grand Inquisitors. Specifically, twisting legitimate actions of government servants to appear as something else- in this case, tax evasion by the rich.
We're all going to be much poorer, economically and otherwise, if our Congress continues to attempt to criminalize every aspect of any administration's behavior with which it disagrees.
Friday, March 27, 2009
The Folly Of The Mortgage "Cramdown" Plan
It's been a while since Congress' mortgage "cramdown" plan has received a lot of publicity. As I write this, I'm looking at a Wall Street Journal piece from the March 14-15 weekend edition entitled, "Mortgage 'Cramdown' Plan Hits Turbulence."
And how.
There is a high level approach to this topic that involves discussing capital markets, the rule of law, contracts, and such. I had originally intended to write that sort of piece.
But there's another level of coverage for this legislation that focuses on the local real estate markets, and that's where this post is now going.
About a week ago, I happened across a good friend and former professional international squash player who is now a local realtor. We began discussing the local market and pending governmental programs to 'help' the situation. She was not happy.
Elaine told me that the $8K credit for first-time home buyers is doing nothing around here, because the house prices are still so high that few, if any, initial buyers can afford them. She said the better solution was to have given anyone buying a home the $8K credit.
Then we turned to the subject of Congressional 'help' for delinquent or about-to-be-foreclosed mortgages.
Elaine concurred with the findings of research into delinquencies which I have read in the press within the past six months. To wit, homes that have mortgages fall into delinquency, then are given temporary relief, have a very high probability of becoming delinquent again and, eventually, entering foreclosure within six months.
Essentially, people typically become delinquent on their mortgage because there has been a job loss. They don't usually decide to take a European or Asian vacation, buy a second home, or a new car, and, thus, skip paying the mortgage on their primary residence for a month or two.
No, such drastic nonpayment events are usually the result of a job loss which exhausts the financial means of the owner of a home. If given a few months respite, the owner isn't magically given a new job, too. Just more time to resolve their delinquency.
All too often, i.e., more than half of the time, the owner re-enters a delinquent state and, then, foreclosure.
This is why cramdowns are a bad idea. It simply allows someone who can no longer afford their home to enjoy a court-ordered, unilateral rescission of the mortgage contract, effectively cutting the price of the home by forgiving some of the principal, and lowering the interest rate, too.
But, as my realtor friend noted, all this does is make taxpayers subsidize the current owner while they enjoy a price cut on their home, while anyone who was waiting to buy the home out of foreclosure at a lower price is denied that opportunity.
When normal housing markets are allowed to function, then people who can no longer afford their home due to having bought what they cannot now afford, the homes are sold out of foreclosure at lower, market-clearing prices, to new buyers who can now afford those homes.
The current foreclosure experiences across the US are not, at root, housing problems, but merely the consequences of employment problems.
You fix the latter with unemployment insurance, not mortgage relief via local court cramdowns.
Because of the looming Congressional mortgage relief, Elaine told me that delinquent homeowners and/or others wishing to sell are maintaining artificially high prices, or simply not listing yet. The result is a clogged and frozen local residential real estate market in which willing, qualified buyers are being denied the opportunity to gain access to homes that should be sold at market-clearing prices.
The mere hint of federal mortgage relief has frozen prices and is keeping the supply of homes tighter than it would be, were normal lending and market forces acting. Banks would be foreclosing, instead of halting those procedures, under TARP-related threats of Congressional penalties.
Since brokers aren't paid until homes sell, Elaine told me that she and her colleagues aren't even participating in workouts of delinquent mortgages anymore, because the owners' expectations of prices are too high to promise a sale anytime soon.
In short, the simple expression of Congressional action and interest in doing other than allowing normal market forces and the legal system operate in the instance of current residential mortgage finance, i.e., allowing lenders to handle delinquencies and foreclosures as usual, has seized up the entire residential housing market and caused existing homeowners to expect a taxpayer-financed price and interest rate reduction on their current homes, while waiting buyers are forced to subsidize this situation, while being denied their chance to finally realize their own dreams of home ownership, albeit on better-funded terms.
Things sure are upside down in the American housing market, thanks to boneheaded federal meddling.
And how.
There is a high level approach to this topic that involves discussing capital markets, the rule of law, contracts, and such. I had originally intended to write that sort of piece.
But there's another level of coverage for this legislation that focuses on the local real estate markets, and that's where this post is now going.
About a week ago, I happened across a good friend and former professional international squash player who is now a local realtor. We began discussing the local market and pending governmental programs to 'help' the situation. She was not happy.
Elaine told me that the $8K credit for first-time home buyers is doing nothing around here, because the house prices are still so high that few, if any, initial buyers can afford them. She said the better solution was to have given anyone buying a home the $8K credit.
Then we turned to the subject of Congressional 'help' for delinquent or about-to-be-foreclosed mortgages.
Elaine concurred with the findings of research into delinquencies which I have read in the press within the past six months. To wit, homes that have mortgages fall into delinquency, then are given temporary relief, have a very high probability of becoming delinquent again and, eventually, entering foreclosure within six months.
Essentially, people typically become delinquent on their mortgage because there has been a job loss. They don't usually decide to take a European or Asian vacation, buy a second home, or a new car, and, thus, skip paying the mortgage on their primary residence for a month or two.
No, such drastic nonpayment events are usually the result of a job loss which exhausts the financial means of the owner of a home. If given a few months respite, the owner isn't magically given a new job, too. Just more time to resolve their delinquency.
All too often, i.e., more than half of the time, the owner re-enters a delinquent state and, then, foreclosure.
This is why cramdowns are a bad idea. It simply allows someone who can no longer afford their home to enjoy a court-ordered, unilateral rescission of the mortgage contract, effectively cutting the price of the home by forgiving some of the principal, and lowering the interest rate, too.
But, as my realtor friend noted, all this does is make taxpayers subsidize the current owner while they enjoy a price cut on their home, while anyone who was waiting to buy the home out of foreclosure at a lower price is denied that opportunity.
When normal housing markets are allowed to function, then people who can no longer afford their home due to having bought what they cannot now afford, the homes are sold out of foreclosure at lower, market-clearing prices, to new buyers who can now afford those homes.
The current foreclosure experiences across the US are not, at root, housing problems, but merely the consequences of employment problems.
You fix the latter with unemployment insurance, not mortgage relief via local court cramdowns.
Because of the looming Congressional mortgage relief, Elaine told me that delinquent homeowners and/or others wishing to sell are maintaining artificially high prices, or simply not listing yet. The result is a clogged and frozen local residential real estate market in which willing, qualified buyers are being denied the opportunity to gain access to homes that should be sold at market-clearing prices.
The mere hint of federal mortgage relief has frozen prices and is keeping the supply of homes tighter than it would be, were normal lending and market forces acting. Banks would be foreclosing, instead of halting those procedures, under TARP-related threats of Congressional penalties.
Since brokers aren't paid until homes sell, Elaine told me that she and her colleagues aren't even participating in workouts of delinquent mortgages anymore, because the owners' expectations of prices are too high to promise a sale anytime soon.
In short, the simple expression of Congressional action and interest in doing other than allowing normal market forces and the legal system operate in the instance of current residential mortgage finance, i.e., allowing lenders to handle delinquencies and foreclosures as usual, has seized up the entire residential housing market and caused existing homeowners to expect a taxpayer-financed price and interest rate reduction on their current homes, while waiting buyers are forced to subsidize this situation, while being denied their chance to finally realize their own dreams of home ownership, albeit on better-funded terms.
Things sure are upside down in the American housing market, thanks to boneheaded federal meddling.
Wednesday, February 25, 2009
Bernanke's Capitol Hill Testimony
I listened yesterday as Fed Chairman Ben Bernanke re-applied for his job.
That's pretty much how I viewed his remarks. Others may, and will differ.
But as I worked on various items throughout the morning and afternoon, I kept hearing Bernanke solidly endorsing whatever new, half-baked financial rescue scheme is coming out of the administration.
My mind went back to Bernanke's testimony only last year, when Democrats were querying him on the need to cut spending. At the time, anxious to clip a Republican administration's wings and raise taxes, Congressional Democrats were nearly tripping over themselves to ask Bernanke to agree with them that deficits should be closed.
Now, in the wake of a $1T spending bill, Ben was silent on the matter. As were his Congressional inquisitors.
Instead, it was all about propping up famously-named US banks, rather than let them go through the natural process of insolvency, closure and seizure by the FDIC, and the next steps that all failed banks experience.
For example, where was Bernanke's defense of his own staff's bank examinations? Why defer to some new 'stress test' by Geithner's people, when the Fed was presumably stress testing and examining federally-chartered banks all along?
How could Geithner's purportedly "new" idea add anything that hasn't already been, or should have been done?
If anything, following in the footsteps of Volcker and Greenspan, Bernanke seems to cut a decidedly smaller, less confident and powerful figure. With a Congress controlled by the same party as the President who would renominate him in 2010, it's no surprise that Bernanke is appearing as eager and compliant as possible with anything the administration wants to do.
Nationalize a bank, but not call it that? Fine by Ben.
Spend a trillion dollars, but say you'll also cut the deficit? Totally believable, says Ben.
Keep interest rates low and demand more lending by already-crippled banks? Done, says Ben.
I suspect we are in for a very, very dangerous next few years, due to the recent, more acutely-politicized nature of Bernanke's position at the Fed.
That's pretty much how I viewed his remarks. Others may, and will differ.
But as I worked on various items throughout the morning and afternoon, I kept hearing Bernanke solidly endorsing whatever new, half-baked financial rescue scheme is coming out of the administration.
My mind went back to Bernanke's testimony only last year, when Democrats were querying him on the need to cut spending. At the time, anxious to clip a Republican administration's wings and raise taxes, Congressional Democrats were nearly tripping over themselves to ask Bernanke to agree with them that deficits should be closed.
Now, in the wake of a $1T spending bill, Ben was silent on the matter. As were his Congressional inquisitors.
Instead, it was all about propping up famously-named US banks, rather than let them go through the natural process of insolvency, closure and seizure by the FDIC, and the next steps that all failed banks experience.
For example, where was Bernanke's defense of his own staff's bank examinations? Why defer to some new 'stress test' by Geithner's people, when the Fed was presumably stress testing and examining federally-chartered banks all along?
How could Geithner's purportedly "new" idea add anything that hasn't already been, or should have been done?
If anything, following in the footsteps of Volcker and Greenspan, Bernanke seems to cut a decidedly smaller, less confident and powerful figure. With a Congress controlled by the same party as the President who would renominate him in 2010, it's no surprise that Bernanke is appearing as eager and compliant as possible with anything the administration wants to do.
Nationalize a bank, but not call it that? Fine by Ben.
Spend a trillion dollars, but say you'll also cut the deficit? Totally believable, says Ben.
Keep interest rates low and demand more lending by already-crippled banks? Done, says Ben.
I suspect we are in for a very, very dangerous next few years, due to the recent, more acutely-politicized nature of Bernanke's position at the Fed.
Sunday, February 15, 2009
CNBC's "House of Cards" Program On Financial Excess- Part 2
Friday's post on David Faber's CNBC special program dealing with the global effects of securitization of subprime mortgages drew record views- over 300. And almost 200 more yesterday. As I watched the first half of the program this morning, I noticed that Faber was credited with 'reporting' on the story, but someone else wrote and directed the piece.
The names of two key figures appearing in the program are Kyle Bass, the Texas-based hedge fund manager whose fund earned approximately 600% in 18 months by betting against the mortgage/housing industry, and Ira Wagner, the head of structured product development at Bear Stearns.
Bass bought credit default swaps on various companies involved in the mortgage industry, which, of course, turned out to be a highly profitable bet. He related chilling conversations with various executives at financial houses and rating agencies involved in the evolving mess.
For me, as, I'm sure, for other viewers and observers of the industry in the past few years, two particular exchanges stood out.
First, Bass learned from rating agency personnel that their ratings were based on assumptions of constant 6-8% rising home values in perpetuity. This, of course, is totally unreasonable and unsustainable. Thus, Bass realized that the CDOs were literally overrated. And somehow shorting or betting on a decline in their value would be a reasonably safe move.
Second, Bass reported that a managing director at one of the investment banks involved in mortgage-backed security origination, and head of whole loan trading, was so young that he had been in graduate business school during the last financial market downturn. I believe Bass was referring to the 2001-03 bear market, so he implied that the MD had only about five years' experience. This MD stated, in reply to a question from Bass about the nature of cyclicality in the volumes of CDOs being originated, that the volumes would not end, and the company was pumping out questionably-valued, unseasoned CDOs with AAA ratings to European and Asian investors as fast as possible, leaving none on the investment bank's balance sheet.
Again, Bass knew this, too, would end sooner or later.
But, in re-viewing the program, perhaps the most interesting scene, for me, was Faber's questioning of former Fed Chief Alan Greenspan on his ability to have halted this merry-go-round of securitization of subprime mortgages.
When I first saw the program, I felt that Greenspan was covering his ass by alleging that there was nothing he could have done.
However, upon a second viewing, I feel differently, as I mentioned to my business partner this morning while discussing the interview.
What Greenspan implied by his answer was that his independence as Fed Chairman and, in fact, of the Fed in general, would have been at risk, had he stepped in to halt the origination of subprime mortgage origination.
To fully understand this, one has to go back to Paul Volcker's tenure to understand that Congress routinely has threatened the independence of the Federal Reserve System, which it created as a populist alternative to a single central bank, when and if it does not seem to be sufficiently lubricating national finance with the growth of the money supply.
Thanks to William Jennings Bryant's advocacy of American farmers' cry for coinage of silver, to devalue dollar-denominated debts by inflating the money supply at the turn of the century, the Fed system was designed to give each of the country's regions a Reserve bank, and, thus, a say in money supply management. It was a populist solution which would lessen the chances of another J. Pierpont Morgan-led rescue of the US financial system as occurred in the Panic of 1907.
Much later, in the waning days of Hubert Humphrey's life, the hapless liberal Democrat's misguided Humphrey-Hawkins Full Employment Bill was passed, mandating that the Fed maintain equal focus on two objectives: appropriate money supply growth consistent with low inflation, and full employment. The former, of course, is often at odds with the latter.
And it was this issue to which Greenspan was referring, by implication. If he had tried to rein in subprime lending by more vigorous bank examination and quashing of these activities, Congress would have hauled him up before some committee to explain his actions, which would have dampened economic growth, particularly at the expense of home ownership by lower-income groups.
This Greenspan was unwilling to do.
One only has to read this post to see why.
Thus, while many of the actors in this sorry saga were guilty of knowingly doing inappropriate things, they were allowed to do so by the complicit consent of the Fed, bowing to Congress' desire for more homeownership among the poor.
Congress wanted this mess, and now, they look for scapegoats among the businesses they asked to execute it.
In retrospect, I think Greenspan was pretty brave being as near to explicit as he was in explaining his actions during the boom in unseasoned, unwise, low-downpayment mortgage lending and securitization.
The names of two key figures appearing in the program are Kyle Bass, the Texas-based hedge fund manager whose fund earned approximately 600% in 18 months by betting against the mortgage/housing industry, and Ira Wagner, the head of structured product development at Bear Stearns.
Bass bought credit default swaps on various companies involved in the mortgage industry, which, of course, turned out to be a highly profitable bet. He related chilling conversations with various executives at financial houses and rating agencies involved in the evolving mess.
For me, as, I'm sure, for other viewers and observers of the industry in the past few years, two particular exchanges stood out.
First, Bass learned from rating agency personnel that their ratings were based on assumptions of constant 6-8% rising home values in perpetuity. This, of course, is totally unreasonable and unsustainable. Thus, Bass realized that the CDOs were literally overrated. And somehow shorting or betting on a decline in their value would be a reasonably safe move.
Second, Bass reported that a managing director at one of the investment banks involved in mortgage-backed security origination, and head of whole loan trading, was so young that he had been in graduate business school during the last financial market downturn. I believe Bass was referring to the 2001-03 bear market, so he implied that the MD had only about five years' experience. This MD stated, in reply to a question from Bass about the nature of cyclicality in the volumes of CDOs being originated, that the volumes would not end, and the company was pumping out questionably-valued, unseasoned CDOs with AAA ratings to European and Asian investors as fast as possible, leaving none on the investment bank's balance sheet.
Again, Bass knew this, too, would end sooner or later.
But, in re-viewing the program, perhaps the most interesting scene, for me, was Faber's questioning of former Fed Chief Alan Greenspan on his ability to have halted this merry-go-round of securitization of subprime mortgages.
When I first saw the program, I felt that Greenspan was covering his ass by alleging that there was nothing he could have done.
However, upon a second viewing, I feel differently, as I mentioned to my business partner this morning while discussing the interview.
What Greenspan implied by his answer was that his independence as Fed Chairman and, in fact, of the Fed in general, would have been at risk, had he stepped in to halt the origination of subprime mortgage origination.
To fully understand this, one has to go back to Paul Volcker's tenure to understand that Congress routinely has threatened the independence of the Federal Reserve System, which it created as a populist alternative to a single central bank, when and if it does not seem to be sufficiently lubricating national finance with the growth of the money supply.
Thanks to William Jennings Bryant's advocacy of American farmers' cry for coinage of silver, to devalue dollar-denominated debts by inflating the money supply at the turn of the century, the Fed system was designed to give each of the country's regions a Reserve bank, and, thus, a say in money supply management. It was a populist solution which would lessen the chances of another J. Pierpont Morgan-led rescue of the US financial system as occurred in the Panic of 1907.
Much later, in the waning days of Hubert Humphrey's life, the hapless liberal Democrat's misguided Humphrey-Hawkins Full Employment Bill was passed, mandating that the Fed maintain equal focus on two objectives: appropriate money supply growth consistent with low inflation, and full employment. The former, of course, is often at odds with the latter.
And it was this issue to which Greenspan was referring, by implication. If he had tried to rein in subprime lending by more vigorous bank examination and quashing of these activities, Congress would have hauled him up before some committee to explain his actions, which would have dampened economic growth, particularly at the expense of home ownership by lower-income groups.
This Greenspan was unwilling to do.
One only has to read this post to see why.
Thus, while many of the actors in this sorry saga were guilty of knowingly doing inappropriate things, they were allowed to do so by the complicit consent of the Fed, bowing to Congress' desire for more homeownership among the poor.
Congress wanted this mess, and now, they look for scapegoats among the businesses they asked to execute it.
In retrospect, I think Greenspan was pretty brave being as near to explicit as he was in explaining his actions during the boom in unseasoned, unwise, low-downpayment mortgage lending and securitization.
Friday, February 06, 2009
Harry Markopolos' 15 Minutes of Fame
I caught the Congressional testimony of self-designated Madoff investigator and portfolio manager Harry Markopolos this past Wednesday. It was quite a show. In effect, Harry got his 15 minutes of Warholian fame, and, boy, did he make the most of it.
It's hard to decide which was more stomach-churning; the sight of Markopolos puffed up with self-importance, pontificating on all sorts of matters about which he has little knowledge, or; various Congressional members hanging on his every word, as if he receives Truth directly from God.
Perhaps the most chilling moment was when Markopolos, in response to a question, solemnly recommended that SEC personnel be compensated by bounties from pursuing investigations. Imagine the world which that would create. Numerous Inspector Javerts accusing many investment managers, rightly or wrongly, since they would pay no penalty for an erroneous accusation.
If SEC personnel made money by successful prosecutions, it logically follows that they would simply charge as many managers as possible, figuring that some would either pay or confess to a lesser crime, just to be rid of the investigation.
With sensibility like this, do you really want Congress listening to Markopolos?
Among other comments the manager made, he personally gave himself credit for several unnamed, large funds not having invested with Madoff. We don't know, of course, if any of that is true. Much of Markopolos' energy and verve seems to stem from being ignored by many people, including SEC regulators, for several years.
Having happened to turn his anger against Madoff into a lucky strike, Markopolos isn't about to go quietly into the night, say, like Sully Sullenberger, the skilled US Air pilot who made the safe landing of his commercial passenger jet into the Hudson River a few weeks ago, without loss of life.
No, Markopolos is going to make this Congressional appearance pay, and pay big. He served notice that he would be filing a formal accusation of another 'mini-Madoff' the next day with the SEC, in order to claim the bounty on the case.
The thrust of Markopolos' testimony, and that of the questions of the mock-shocked members of Congress in front of whom he appeared, was that every one of Madoff's 'victims' should have been better-protected by the SEC. As if the SEC can, and should, prevent every single investor from hurting themselves by throwing caution to the wind, ignoring obvious signs of deceit, and violating prudent investment principles.
We'll never have enough money or people at the SEC to personally hold the hand of every retail, or institutional investor.
The truth is, as I've written several times, here, here and here, for example, the so-called victims in the Madoff case were greedy, blind, and chose to ignore obvious signs of trouble, such as custody reports from an independent, reputable custodian. Neither the SEC, nor the government, will ever successfully protect investors from their own stupidity.
Let's hope Congress doesn't listen to carefully to this self-obsessed and self-congratulatory investment manager.
It's hard to decide which was more stomach-churning; the sight of Markopolos puffed up with self-importance, pontificating on all sorts of matters about which he has little knowledge, or; various Congressional members hanging on his every word, as if he receives Truth directly from God.
Perhaps the most chilling moment was when Markopolos, in response to a question, solemnly recommended that SEC personnel be compensated by bounties from pursuing investigations. Imagine the world which that would create. Numerous Inspector Javerts accusing many investment managers, rightly or wrongly, since they would pay no penalty for an erroneous accusation.
If SEC personnel made money by successful prosecutions, it logically follows that they would simply charge as many managers as possible, figuring that some would either pay or confess to a lesser crime, just to be rid of the investigation.
With sensibility like this, do you really want Congress listening to Markopolos?
Among other comments the manager made, he personally gave himself credit for several unnamed, large funds not having invested with Madoff. We don't know, of course, if any of that is true. Much of Markopolos' energy and verve seems to stem from being ignored by many people, including SEC regulators, for several years.
Having happened to turn his anger against Madoff into a lucky strike, Markopolos isn't about to go quietly into the night, say, like Sully Sullenberger, the skilled US Air pilot who made the safe landing of his commercial passenger jet into the Hudson River a few weeks ago, without loss of life.
No, Markopolos is going to make this Congressional appearance pay, and pay big. He served notice that he would be filing a formal accusation of another 'mini-Madoff' the next day with the SEC, in order to claim the bounty on the case.
The thrust of Markopolos' testimony, and that of the questions of the mock-shocked members of Congress in front of whom he appeared, was that every one of Madoff's 'victims' should have been better-protected by the SEC. As if the SEC can, and should, prevent every single investor from hurting themselves by throwing caution to the wind, ignoring obvious signs of deceit, and violating prudent investment principles.
We'll never have enough money or people at the SEC to personally hold the hand of every retail, or institutional investor.
The truth is, as I've written several times, here, here and here, for example, the so-called victims in the Madoff case were greedy, blind, and chose to ignore obvious signs of trouble, such as custody reports from an independent, reputable custodian. Neither the SEC, nor the government, will ever successfully protect investors from their own stupidity.
Let's hope Congress doesn't listen to carefully to this self-obsessed and self-congratulatory investment manager.
Sunday, December 14, 2008
Aftermath Of The Senate's Defeat of Auto Maker Bailout Bill
On Friday of last week, with the news of the Senate's defeat of the Detroit auto maker bailout bill, a curious thing occurred.
GM prepared to file a Chapter 11 bankruptcy, as CEO Rick Wagoner declared that the company has insufficient cash with which to operate until a more assured rescue comes, after January 20.
Now, according to Forbes, Wagoner was paid $4.82MM in 2006.
Yet, for an assumedly similar amount this year and last, what did shareholders get?
A CEO so inept that he failed to file for bankruptcy, to reorganize GM, last year. So incompetent that he forced the firm to run through nearly all its cash before seeking court protection to reorganize and renegotiate any and all contracts- union, dealership, suppliers, etc.
Instead of behaving like a real CEO, and having his staff observe, then plan for contingencies stemming from the 2007 credit market troubles, Wagoner dithered on as usual.
Having now run GM almost entirely out of liquid assets, he baldly blames Republican Senators and the President for his firm's bankruptcy.
This is rich, indeed.
A better-run firm would have headed into the safe harbor of Chapter 11 last year, when the gathering clouds of financial crisis and debt market unraveling gave warning of trouble ahead.
No, not GM. Not Wagoner.
In their playbook, all troubles which GM has recently faced are due to Washington, or the credit markets, but none of their own making.
Not even from their sins of omission- failure to notice a crisis looming, and failure to seek Chapter 11 court protection, in which to sort out their mess.
GM prepared to file a Chapter 11 bankruptcy, as CEO Rick Wagoner declared that the company has insufficient cash with which to operate until a more assured rescue comes, after January 20.
Now, according to Forbes, Wagoner was paid $4.82MM in 2006.
Yet, for an assumedly similar amount this year and last, what did shareholders get?
A CEO so inept that he failed to file for bankruptcy, to reorganize GM, last year. So incompetent that he forced the firm to run through nearly all its cash before seeking court protection to reorganize and renegotiate any and all contracts- union, dealership, suppliers, etc.
Instead of behaving like a real CEO, and having his staff observe, then plan for contingencies stemming from the 2007 credit market troubles, Wagoner dithered on as usual.
Having now run GM almost entirely out of liquid assets, he baldly blames Republican Senators and the President for his firm's bankruptcy.
This is rich, indeed.
A better-run firm would have headed into the safe harbor of Chapter 11 last year, when the gathering clouds of financial crisis and debt market unraveling gave warning of trouble ahead.
No, not GM. Not Wagoner.
In their playbook, all troubles which GM has recently faced are due to Washington, or the credit markets, but none of their own making.
Not even from their sins of omission- failure to notice a crisis looming, and failure to seek Chapter 11 court protection, in which to sort out their mess.
Friday, December 05, 2008
The Detroit Pigs Return To The Washington Trough
On Thursday, I wrote this post on my companion political blog discussing those aspects of the current drama being played out on Capitol Hill involving the US-based auto makers.
After I wrote that post, there was still plenty of drama occurring, both in the Congressional hearing room, and outside, as all parties rushed to appear before cameras on CNBC and Fox to attempt to add weight and urgency to their positions.
In this post, I want to address the economic aspects of what was said, and not said, yesterday in testimony and various post-hearing interviews.
Perhaps the most outrageously insidious and disingenuous 'witness' at the hearing was the UAW chief, Ron Gettelfinger.
This union chief stopped at nothing to save his hide, and, parenthetically, his union, too. To hear Ron's view of the world, filing Chapter 11 is unacceptable, because it would cause GM to cease to function.
Of course, that's a lie. But what else can Gettelfinger say? The truth is too awful for him and his union members.
Gettelfinger kept banging away on the theme that millions would become unemployed, national production capacity would be lost, and cars would be unbuilt if GM, Ford and Chrysler file for bankruptcy. And that no consumers would buy a car from a producer in Chapter 11.
Trouble is, Gettelfinger's source on that last contention was hopelessly biased and suspect.
But, listening to the UAW chief, you'd think that filing Chapter 11 was somehow less efficient than having a giant pow-wow, before a filing, in which everyone magically sits down and negotiates in good faith, once you and I have agreed, through Congress, to write checks totally some $30B to the three failed auto makers.
The truth, of course, is that Chapter 11 is crucial to force such negotiations. Gettelfinger is scrambling to hold out for pre-bankruptcy negotiations, because, in bankruptcy, his union will have its benefits and wages slashed unilaterally.
In fact, one Democratic Senator explicitly accused, but not by name, some Republicans and pundits for using Detroit's problems to break the UAW. But the UAW is doing that all on its own. It doesn't need help.
Perhaps the most sickening aspect of the presentations by Wagoner, Mulally, Nardelli and Gettelfinger were their simultaneous claims of two mutually exclusive positions:
-If GM, Ford and Chrysler are not rescued, their failure will mean untold damage to the US economy, so dire is their current predicament. And this predicament, by the way, is only the result of the recent financial crisis, not the woeful mismanagement of the three firms and the UAW for decades.
-If GM, Ford and Chrysler are bailed out, they will magically become the best-managed, most eco-friendly, well-run, successful American companies you ever saw.
Actually, both positions are probably lies.
First, Chapter 11 filings by all three firms would allow them to operate under a Federal bankruptcy referee, who would assist in the pruning of loss-making operations, reorganization of the three firms into fewer, stronger firm(s), and/or sale of attractive operations to other car makers.
Further, shuttering Ford, GM and Chrysler, as we know them now, does not preclude Federal assistance to formerly-employed UAW workers, as citizens, though, not UAW members. Shareholders and creditors may suffer, as they should, but employees need not be totally cast adrift.
Too, if GM, for example, is truly within a month of failure, then it's way too late to claim that a few billion in cash will magically solve all its ills.
Also, the three CEOs attempted to con the Senators at the hearing into believing that it is natural and acceptable to forecast 18-30 month timeframes until which these firms will show a profit again.
No private investor would stand for this. No bank would lend on these terms. But the CEOs could offer no case for rescue, in this situation, other than trying to cause a fear of massive unemployment and national economic ruin, should they fail.
Simply put, the CEOs, and Gettelfinger, all of whom are culpable in having brought the firms, and the US-based auto making sector to this point, attempted to evade responsibility for ruining the three firms, but threaten to make the nation's taxpayers pay a high price for the mistakes of these four leaders, and their predecessors.
The second contention of the four leaders, that, if bailed out, they will magically become better-managed companies, is silly on the face of it.
Without significant change in management, union contracts, and various other vendor arrangements, these companies will never survive to repay the 'loans' they claim to want.
You have to ask yourself, how will GM, Ford and Chrysler, which mismanaged themselves to this point, magically change just by the infusion of tens of billions of dollars of taxpayer money?
They won't.
Finally, there is a lot of emphasis on various surveys purporting to claim that, if in bankruptcy, these firms will lose customers, because, 'nobody will buy a car from a company in bankruptcy proceedings.'
These surveys are, when you carefully evaluate them, specious. Gettelfinger and Wagoner never actually cite the details of the 'survey' on which they rely.
Today, on CNBC, economic misfit Steve Liesman cited the network's own poll as showing that 52% of those questioned would buy a car under those circumstances.
Then the economic idiot claimed he had reversed his own numbers, and the correct value was a lower number. 37%, I believe, with the balance, some 11%, were undecided.
The flaw, of course, in Liesman's figures, is that one would need to carefully consider the sample makeup. To me, the most reasonable universe for these surveys would be current buyers of each company's cars. With such a small market share now, GM is really only worried about current customers, since most car buyers wouldn't take a GM product if you gave it to them.
Thus, it's probably a good idea to totally discount these 'surveys' purporting to show that the firms can't....just can't...be in bankruptcy, or they will sell no cars.
Finally, the CEOs, and supporters, including the Governor of Michigan, would have us believe that, without GM, Ford and Chrysler, valuable non-carbon-based car technology will lapse, and we'll be at the mercy of foreign producers of alternative-fuel vehicles.
Again, this is a red herring, and nothing could be further from the truth. If these technologies are so promising, why would not either other car makers with plants in the US, or simply other companies, buy these patents, technologies, or operations, in order to continue perfecting them?
It's not the assembly of something like GM's oft-heralded, but far-off Volt, that is crucial. It's likely the battery and drive train technology. Parts that a supplier could easily buy and finish developing.
In general, any parts of these companies that are valuable will be preserved and transferred, in Chapter 11, to a better, stronger parent. So will employees needed for ongoing car operations.
In summary, the cases made by Wagoner, Mulally, Nardelli, Gettelfinger, et.al., are deeply flawed, specious, and devoid of merit.
We should all hope that Congress only extends a debtor-in-possession loan to any of the three US auto makers which choose to enter Chapter 11, and then offers focused assistance packages to displaced employees.
To do more would be folly and insanity. Throwing our good taxpayer money after bad, lost shareholder and creditor money.
After I wrote that post, there was still plenty of drama occurring, both in the Congressional hearing room, and outside, as all parties rushed to appear before cameras on CNBC and Fox to attempt to add weight and urgency to their positions.
In this post, I want to address the economic aspects of what was said, and not said, yesterday in testimony and various post-hearing interviews.
Perhaps the most outrageously insidious and disingenuous 'witness' at the hearing was the UAW chief, Ron Gettelfinger.
This union chief stopped at nothing to save his hide, and, parenthetically, his union, too. To hear Ron's view of the world, filing Chapter 11 is unacceptable, because it would cause GM to cease to function.
Of course, that's a lie. But what else can Gettelfinger say? The truth is too awful for him and his union members.
Gettelfinger kept banging away on the theme that millions would become unemployed, national production capacity would be lost, and cars would be unbuilt if GM, Ford and Chrysler file for bankruptcy. And that no consumers would buy a car from a producer in Chapter 11.
Trouble is, Gettelfinger's source on that last contention was hopelessly biased and suspect.
But, listening to the UAW chief, you'd think that filing Chapter 11 was somehow less efficient than having a giant pow-wow, before a filing, in which everyone magically sits down and negotiates in good faith, once you and I have agreed, through Congress, to write checks totally some $30B to the three failed auto makers.
The truth, of course, is that Chapter 11 is crucial to force such negotiations. Gettelfinger is scrambling to hold out for pre-bankruptcy negotiations, because, in bankruptcy, his union will have its benefits and wages slashed unilaterally.
In fact, one Democratic Senator explicitly accused, but not by name, some Republicans and pundits for using Detroit's problems to break the UAW. But the UAW is doing that all on its own. It doesn't need help.
Perhaps the most sickening aspect of the presentations by Wagoner, Mulally, Nardelli and Gettelfinger were their simultaneous claims of two mutually exclusive positions:
-If GM, Ford and Chrysler are not rescued, their failure will mean untold damage to the US economy, so dire is their current predicament. And this predicament, by the way, is only the result of the recent financial crisis, not the woeful mismanagement of the three firms and the UAW for decades.
-If GM, Ford and Chrysler are bailed out, they will magically become the best-managed, most eco-friendly, well-run, successful American companies you ever saw.
Actually, both positions are probably lies.
First, Chapter 11 filings by all three firms would allow them to operate under a Federal bankruptcy referee, who would assist in the pruning of loss-making operations, reorganization of the three firms into fewer, stronger firm(s), and/or sale of attractive operations to other car makers.
Further, shuttering Ford, GM and Chrysler, as we know them now, does not preclude Federal assistance to formerly-employed UAW workers, as citizens, though, not UAW members. Shareholders and creditors may suffer, as they should, but employees need not be totally cast adrift.
Too, if GM, for example, is truly within a month of failure, then it's way too late to claim that a few billion in cash will magically solve all its ills.
Also, the three CEOs attempted to con the Senators at the hearing into believing that it is natural and acceptable to forecast 18-30 month timeframes until which these firms will show a profit again.
No private investor would stand for this. No bank would lend on these terms. But the CEOs could offer no case for rescue, in this situation, other than trying to cause a fear of massive unemployment and national economic ruin, should they fail.
Simply put, the CEOs, and Gettelfinger, all of whom are culpable in having brought the firms, and the US-based auto making sector to this point, attempted to evade responsibility for ruining the three firms, but threaten to make the nation's taxpayers pay a high price for the mistakes of these four leaders, and their predecessors.
The second contention of the four leaders, that, if bailed out, they will magically become better-managed companies, is silly on the face of it.
Without significant change in management, union contracts, and various other vendor arrangements, these companies will never survive to repay the 'loans' they claim to want.
You have to ask yourself, how will GM, Ford and Chrysler, which mismanaged themselves to this point, magically change just by the infusion of tens of billions of dollars of taxpayer money?
They won't.
Finally, there is a lot of emphasis on various surveys purporting to claim that, if in bankruptcy, these firms will lose customers, because, 'nobody will buy a car from a company in bankruptcy proceedings.'
These surveys are, when you carefully evaluate them, specious. Gettelfinger and Wagoner never actually cite the details of the 'survey' on which they rely.
Today, on CNBC, economic misfit Steve Liesman cited the network's own poll as showing that 52% of those questioned would buy a car under those circumstances.
Then the economic idiot claimed he had reversed his own numbers, and the correct value was a lower number. 37%, I believe, with the balance, some 11%, were undecided.
The flaw, of course, in Liesman's figures, is that one would need to carefully consider the sample makeup. To me, the most reasonable universe for these surveys would be current buyers of each company's cars. With such a small market share now, GM is really only worried about current customers, since most car buyers wouldn't take a GM product if you gave it to them.
Thus, it's probably a good idea to totally discount these 'surveys' purporting to show that the firms can't....just can't...be in bankruptcy, or they will sell no cars.
Finally, the CEOs, and supporters, including the Governor of Michigan, would have us believe that, without GM, Ford and Chrysler, valuable non-carbon-based car technology will lapse, and we'll be at the mercy of foreign producers of alternative-fuel vehicles.
Again, this is a red herring, and nothing could be further from the truth. If these technologies are so promising, why would not either other car makers with plants in the US, or simply other companies, buy these patents, technologies, or operations, in order to continue perfecting them?
It's not the assembly of something like GM's oft-heralded, but far-off Volt, that is crucial. It's likely the battery and drive train technology. Parts that a supplier could easily buy and finish developing.
In general, any parts of these companies that are valuable will be preserved and transferred, in Chapter 11, to a better, stronger parent. So will employees needed for ongoing car operations.
In summary, the cases made by Wagoner, Mulally, Nardelli, Gettelfinger, et.al., are deeply flawed, specious, and devoid of merit.
We should all hope that Congress only extends a debtor-in-possession loan to any of the three US auto makers which choose to enter Chapter 11, and then offers focused assistance packages to displaced employees.
To do more would be folly and insanity. Throwing our good taxpayer money after bad, lost shareholder and creditor money.
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