Posts tagged ‘Economists’

From PBS, An Interview with David Stockman and some Shocking Remarks

By , 6 February, 2010, 1 Comment

SAUL SOLMAN: David Stockman, former Michigan congressman and Ronald Reagan’s budget chief, who’s also toiled in the private sector at Wall Street’s Solomon Brothers, private equity firm the Blackstone Group, and his own controversial private equity fund.

Charges against him for accounting fraud there were filed and later dropped, and he settled a dispute with the SEC just last week. Stockman’s now working on a book about the financial crisis called “The Triumph of Crony Capitalism,” and has come out in favor of the president’s bank reform efforts.

David Stockman, welcome.

DAVID STOCKMAN, former Reagan administration budget director: Thank you.

PAUL SOLMAN: So, you like the Obama banking proposal. Why?

DAVID STOCKMAN: I would give the administration credit for trying to move us back to something that’s a lot saner than trillion-dollar banks being propped up by the taxpayers, which is exactly where we are today.

The fact is, Wall Street is entirely involved in capital markets activity, which is fine. But that’s free market activity. They shouldn’t be involved in it if they have got deposit insurance and if they have got the Fed window behind them. That’s for deposit banks, not for gunslingers and for hedge funds and for capital market players.

PAUL SOLMAN: But you were a gunslinger, right?

DAVID STOCKMAN: Yes. But I didn’t ask for any — I didn’t ask for any deposit insurance that the taxpayer is going to back up.

Please, Wall Street banks, don’t come and ask the taxpayer of this country who’s out in Green Bay Wisconsin, can’t pay his mortgage, can barely put food on his table, to have the safety net of the Fed and the Deposit Insurance and the Treasury of the United States. It’s an outrageous ask, and they ought to be ashamed of themselves.

PAUL SOLMAN: Listening to you, I’m struck by the fact that I can imagine critics on the left saying exactly the same thing.

DAVID STOCKMAN: I’m mortified by that thought. But, at some point, you have to ask, what’s good policy? And we have gotten into this syndrome, I think, over the last 20 years, where policy of the Treasury and of the Fed has been dictated by Wall Street, that, if Wall Street threatens to have a hissy fit, or the stock market is going to go down, the Fed has basically capitulated and is creating a very unstable and dangerous financial system in our economy.

PAUL SOLMAN: The president’s first bank proposal a few weeks ago, to tax financial institutions based on their size and risk-taking, stirred Stockman to write a New York Times op-ed.

“The baleful reality is that the big banks,” he wrote, “the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome.”

We asked the CEO of Bank of New York Mellon, Robert Kelly, to respond.

ROBERT KELLY, chief executive officer, BNY Mellon: The reality is, banks provide millions of jobs in our economy. The reality also is, is that we have had a one-in-80-year event. We also have a gigantic economy, which you can’t run with a lot of really small banks.

DAVID STOCKMAN: Well, you know, those are the talking points from Wall Street, and I take strong issue. The fact is, the heart of the bailout was AIG. That was $80 billion worth of CDS that was going to go sour.

PAUL SOLMAN: CDS meaning?

DAVID STOCKMAN: Credit default swaps, OK? And we weren’t bailing out AIG. We were bailing out the banks, because the banks had bought a lot of low-caliber or subprime loans, wrapped some insurance around it from AIG, and said, presto, we have a AAA, a security on our balance sheet.

They didn’t. They had garbage on their balance sheet. And the bailout was to make sure that they didn’t suffer multi $10 billion write-downs on that AIG-supported loan.

PAUL SOLMAN: So, if you had been in the administration after Lehman Brothers, you wouldn’t have supported bailing out AIG?

DAVID STOCKMAN: No, absolutely not. It was the single most, you know, drastic error in policy in modern history, going back to the 1930s. This was exactly the wrong thing to do.

It’s destroyed any basis for fiscal discipline in the United States. I was a member of Congress, and I know how they think. And they think by analogy. If you did it for John, you have got to do it for Bob. There is no way that any congressman is ever going to vote against farm subsidies or ethanol subsidies or housing subsidies or anything else, refrigerator subsidies, once we have made this tremendous bailout for Wall Street, and we stepped into AIG.

PAUL SOLMAN: Well, spoken like a true gunslinger, but you would have been taking an enormous risk.

DAVID STOCKMAN: It’s part of the capitalist system. You know, if an investment bank gets in trouble, it ought to fail. If a hedge fund gets in trouble, it ought to fail.

The idea that our system is so fragile that the failure of Lehman Brothers or even Goldman Sachs, which could have happened, allegedly, in the next few days, would have brought the whole system down, I think, is baloney. I think it’s an urban legend that was created by Wall Street.

PAUL SOLMAN: Almost everyone I talk to says too big to fail is a bad idea, and, yet, in Republican and Democrat administrations alike, it has been the de facto policy. Why?

DAVID STOCKMAN: I think part of the problem is that Wall Street has this tremendous army of lobbyists, who strangle in the cradle any decent idea before it can even see — see the light of day.

PAUL SOLMAN: Which sounded a lot like Stockman’s political polar opposite, Paul Krugman.

PAUL KRUGMAN, columnist, The New York Times: This is as raw an incidence of the power of money in preventing us from doing something that everybody knows we should do that I have ever seen.

PAUL SOLMAN: And now both men favor a new tax on risk-taking financial institutions, which prompted one last question for Ronald Reagan’s budget director, famous for the starve-the-beast argument, that tax cuts would force government to cut spending.

Do you still feel that way?

DAVID STOCKMAN: I think the lesson of the last 25 years is that it doesn’t work. You can keep cutting taxes until you reach the point where this year — or the year just ended, we spent $3.6 trillion, and we only collected $2.2 trillion.

So, we are now so far out of kilter that it’s irrelevant. Taxes are going to have to be raised. And the beast needs to be trimmed back. But it can’t be starved enough to even begin to cope with our fiscal problem. And this is where I think all the politicians are faking in both parties, but the Republicans especially.

The Republicans think their mission in life is to cut taxes. Sorry, game — game over. We’re now in the tax-raising business. And we’re going to be in the tax-raising business for the next decade.

PAUL SOLMAN: David Stockman, thank you very much. Thank you.

Have We Moved Out of the Recession?

By , 17 October, 2009, No Comment

Anyway, I have been thinking about this run up in equities of late and wondering just exactly is the root cause of all this stock buying euphoria? I would also note that the volume on the run up has not always been overly impressive, and further, trading in the financial stocks has been much heavier than the norm.

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Interview with Chris Whalen

By , 6 October, 2009, No Comment

The complete interview can be seen here

From Yahoo Business:

The “Real” Economy Is Dying: Q4 “Going to Be a Bloodbath,” Whalen Says

Posted Oct 05, 2009 01:49pm EDT by Aaron Task in Investing, Recession, Banking

Related: XLF, SKF, FAS, FAZ, MS, GS, HCBK
Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market’s robust rally.

“Why is liquidity going into the financial sector? It’s because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the moment,” Whalen says. “That’s not a good sign.”

The banking sector’s assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. “The real economy is shrinking because of a lack of credit.”

The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn’t yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)

“Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath,” says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.

“When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring,” Whalen says.

In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other “prophets of the apocalypse” who’ve once again been raising red flags in recent days.

Some Random Recession Thoughts

By , 27 August, 2009, No Comment

Recessions are a odd topic to read about, especially if you enjoy reading the economists take on what is actually occurring in the country at this point in time.  There are times when I believe I should just pick out one economist and follow his advice and prognostications blindly.  However, it seems that many of the great economists are having a difficult time agreeing on even the most basic of ideas about where we are in this calamity of financial errors and misjudgments we  are currently calling a recession, or a depression, or a liquidity trap…pick any term you find convenient to define our current situation.

And economists, as a whole, show a remarkable ability to rationalize away conditions that a lowly trader like myself find remarkable.  With the job market in a near free-fall,  it seems to me that fewer workers making less money would have less money to spend on consumer items.  That is just a common sense sort of explanation many economists have a difficult time swallowing.  No, I have been reading, of late, of a phenomena called the jobless recovery that is taking foothold in our economy and the wonderful green shoots that are springing up like wild flowers on a warm spring day.  Oddly enough, these green shoots are not readily apparent to the average American citizen, especially those unemployed and having a difficult time finding the most menial of work.

Paul Krugman, my favorite economist to read and the one economist I seem to relate to the most, wrote a nice piece the other day concerning the national debt.  His point was something to the effect that a nine trillion (yes, trillion) deficit is really not such a large number.  This one had me scratching my head as nine trillion is, well, nine trillion dollars, and that is a whole lot of green stuff, anyway you cut it.   Krugman made comparisons to different times in our history of debt to GDP ratios.  Our current GDP stands at around 14.9 trillion, so anyway you cut it 9 trillion is a healthy cut when compared with our current GDP…but Krugman points out that by the time we reach the 9 trillion figure the GDP will probably stand at closer to 22 trillion, so it’s really not all that bad.  Funny thing, though, it still sounds like an awful lot of money, any way you cut it.  Of course, we have to pay interest on all that money, which makes it essentially a non-negotiable part of our federal budget.  Add that to the massive entitlements we already have and the non-negotiable segment of our budget might well reach 70%, with only 30% of our budget discretionary.

Going back to that darn employment problem, though, would seem to be an important component of any recovery.  In order for the country to recover, it would seem that we ought to have some money to spend, which in terms causes manufacturing firms to produce more, and, in turn, buy more raw materials…well, you can see how the supply chain works.  But Dennis Lockhart, the Atlanta Fed President stated yesterday:

“Some of these adjustments, however, are more “structural” in nature. By this, I mean that the economy that emerges from this recession may not fully resemble the prerecession economy. In my view, it is unlikely that we will see a return of jobs lost in certain sectors, such as manufacturing. In a similar vein, the recession has been so deep in construction that a reallocation of workers is likely to happen—even if not permanent. …”

Did he say permanent? I think he did.  That is not a great word to see coming from a gifted individual who is an important component in our economic decision making process.  Thankfully, he implied that the loss of jobs in construction may not be permanent, but his prognosis on the employment front certainly doesn’t make one do somersaults of jubilation.

One of the few bloggers, and probably the knowledgeable, is the writer at Calculated Risk, and his prognosis for matters in the Commercial Real Estate economy are downright negative.  I am not a complicated guy, and I also am not a real avid mall dweller, so I went to the local mall and found myself shocked at the number of shuttered storefronts.  Obviously, people are not spending as much money as they once were or these stores would be thriving, as they were the last time I went to mall.  ( I have to admit it has been a year or so since I’ve been to a mall, I try to avoid mall shopping at all costs.  Perhaps I am a bit phobic about malls, but they are just to antiseptic for my taste).

Joe Stiglitz, another Nobel Prize winnner like Paul Krugman, is leaning on the pessimistic side of economic recovery and there is the “‘world is ending” cabal (ie-Financial Armageddon) who see nothing of great value occurring in the economy.   Then, on the far right conspiracy side, sites like Prison Planet have claimed massive government conspiracies in nearly every aspect of our society.  I must admit, though, I get a great chuckle out of Prison Planet, even though it seems to have a wide readership because I believe people are just plain frustrated with our current economic malaise.

But it’s this unemployment thing that is really bothering me, and I don’t see how a country can stage a major recovery if we don’t have a healthy, employed population spending money.  Credit cards companies (don’t even get me started on those parasitic worms) have cut back credit card debt drastically to lessen their risk exposure…so where is this spending going to come from other than the government?

I think we need to get some people to work and fast, then again, what do I know?   I am just a trader.

A little change from emini contracts: Let’s look at oil

By , 23 July, 2009, No Comment

People don’t look much at supply and demand these days, and they talk about it even less, but it is good ol’ supply and demand that determines the price of all material in a capitalist society. Oil is no exception, and demand has been off for quite some time, hence, the unusually large amount of surplus in our current supply. To combat this, several oil company economists have issued a few reports that indicate the supply is not nearly as large as is being reported, but my gut instinct is to not trust oil company economists.

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