Political Economy category archive

Not that I’m a big fan of Larry Summers or of the whole Wall Street rat pack, but the only significance of this is to illustrate what an incestuous inbred little group sits at the top of the financial hill.

Robert Reich:

This is still not the Great Depression of the 1930s, but it is a Depression.

The official numbers are in, subject to (no doubt, upward) revision at a later date:

First-time claims for state unemployment benefits rose a seasonally adjusted 12,000 in the week ended March 28, hitting the highest level since October 1982, the Labor Department reported Thursday.

These initial claims totaled 669,000, a level that is up 72% from the same period in the prior year. The four-week average of these initial claims increased 6,500 to stand at 656,750 — also the highest level since October 1982.

The four-week average is considered a better gauge of labor market conditions than the volatile weekly figures because it smoothes out one-time distortions caused by holidays, bad weather or strikes.

Why subsidize demonstrated incompetence when we can strive for mediocrity as a standard?

Darrell Delamaide at MarketWatch:

As the auto crisis comes to a head, the administration is talking explicitly about bankruptcy as an option, with details of how it would work. If the Public-Private Investment Program (PPIP) proposed last week by Treasury Secretary Timothy Geithner fails because banks won’t negotiate a price with potential private sector buyers, the government might well start talking about bank nationalization after all.

(snip)

In a new article in The Atlantic, (former IMF chief economist Simon–ed.) Johnson compares the plight in the U.S. to that in some emerging market economies that he dealt with first hand while at the IMF — a financial oligarchy pursuing its own selfish agenda has seized control of the government and blocked any effective reform. Unless the administration is willing to break up this financial oligarchy, it will fail in its effort to restore a healthy banking system, says Johnson, now a professor at MIT.

Read Mr. Johnson’s article here. The lead:

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

Afterthought:

The News Pundit explores the world of the zombie banks.

What I’ve been saying:

Many politicians and pundits blame fair value accounting rules – also often called mark-to-market rules – for worsening the current crisis. Attaching distressed market values rather than a higher historical cost or long-term recovery value to financial assets, they say, has caused financial institutions’ capital cushions, as reported to investors, to collapse – unnecessarily overstating the risk of insolvency.

But if a financial firm holds securities specifically for sale or in a liquid trading book, and funds itself partly or mainly with short-term borrowing, what do investors need to know? Pretty obviously, roughly what the securities would fetch if sold. Supporters of a fairly strict mark-to-market approach say its critics are blaming the messenger for problems of financial firms’ own making.

Now FASB appears to be caving under political pressure, at least to a point. Its proposed rules would give financial companies’ bosses and auditors more discretion to ignore actual market transactions as valuation benchmarks – instead using computer models or other methods to arrive at a value.

The Wall Street Bankers balance sheets have been fantasies for years. Now they shall be fantasies with the sanction of the accountancy profession.

Birds of a feather and all that . . . .

A clear explanation of “toxic assets”: what they are, how they work, and how they came to be (hint: illegal drugs are not the only things measured in Gramms; so to are shady deals).

From the website:

Years before the current economic crisis, law professor and former Wall Street trader Frank Partnoy was warning about the dangers of risky financial practices.

In his 1997 book FIASCO: Blood in the Water on Wall Street, Partnoy detailed how derivatives — financial instruments whose value is determined by another security — were being used and abused by big financial firms. Partnoy used his experiences as a derivatives trader at Morgan Stanley to give the book an insider’s perspective. In the preface to FIASCO, Partnoy wrote about the growing influence of derivatives:

“Derivatives have become the largest market in the world. The size of the derivatives market, estimated at $55 trillion in 1996, is double the value of all U.S. stocks and more than 10 times the entire U.S. national debt. Meanwhile, derivatives losses continue to multiply.”

Partnoy is a professor at the University of San Diego law school. In addition to FIASCO, he’s the author of Infectious Greed: How Deceit and Risk Corrupted the Financial Markets.

Partnoy joins Fresh Air to explain derivatives, credit default swaps and how they led to the current financial crisis.

I listened to the podcast on my way back from Virginia Beach yesterday; it is fascinating.

Follow the link to the website to listen to the interview.

The Republicanist hangover worsens:

While other reports showed the contraction in U.S. factory activity slowed in March, and U.S. construction spending fell at a slower-than-expected rate in February, they were not enough to take focus away from what to many is the main data point of the week, U.S. non-farm payrolls for March on Friday.

U.S. private sector job losses accelerated in March to 742,000, more than economists’ expectations, according to a report by ADP Employer Services on Wednesday. February’s number was revised up to 706,000 job losses from a previously reported 697,000.

Omni National Bank, Atlanta, Ga.

You can bank on it.

No ideas, no solutions, not even dead air.

Just charades and good haircuts.

CC comments.

Via D-Day.

More Bushboroughs:

Showing the labor market’s considerable strain, the number of people collecting state unemployment benefits reached yet another new record, jumping 122,000 to a seasonally adjusted 5.56 million, the Labor Department reported Thursday.

The four-week average of these claims rose 123,750 to stand at 5.33 million — in itself a record high since the U.S. began compiling these statistics — also as of the week ended March 14.

In other news.

I don’t care who it is, no one provides $1,000,000,000 worth of performance in a year.

Espcially not for playing monopoly with other people’s money.

Top hedge fund managers earned 48% less on average last year, but industry chiefs James Simons, John Paulson, John Arnold and George Soros still took home more than $1 billion each, Alpha Magazine said Tuesday.

(snip)

Top 25 top-performing managers made $464 million each on average last year. That’s down from a record $892 million apiece in 2007, before the credit crisis triggered big losses and redemptions across the $1.5 trillion industry. Alpha Magazine cut its list of top earners to 25 from 50 last year.

In the Guardian, Devendra Kodwan explores the failure of the bankrupt busines bonus culture. The article sort of sputters to an unsatisfactory end, but it is still worth the two minutes it takes to read, for there is no question that bonus “pay for performance” schemes produce pay, but not performance.

Just look around.

A nugget:

First, the idea of using performance-based incentives that included bonuses, in particular share options, has clearly backfired. Recent research from US academics suggests that the link between executive incentives and firm performance is tenuous in a best-case scenario, and indeed negative in some cases. There is also disturbing evidence that when firms pay a very high level (90%) of CEO compensation in stock options, it increases the chances of questionable financial reporting in the following years.

Via Delaware Liberal.

A TPM reader wonders

who represents the taxpayers in the compensation decisions at government-controlled firms?

Terry Gross: “How did they (AIG–ed.) calculate risk when they were putting these complex instruments together?”

Guest Gretchen Morgenson: “. . . they certainly didn’t . . . .”

Listen to the interview here.

Duncan:

This story about “risk” is a pleasing one for people who imagine that the masters of the universe, or their managers, actually worry about such things. I don’t know if Timmeh does or doesn’t believe this, but it’s absurd. The current financial crisis has nothing to do with how much risk the banksters were willing to take on. They didn’t say: oh, well, I think we should tolerate a bit more risk now. They said: CA CHING CA CHING CA CHING CHING!

Bill points out in the comments to this post that corporate credit unions are going under.

Bloomberg has more. These are the first “corporate credit unions” to fail since 1995, according to the story.

I’m having difficulty finding a clear definition (that means that I’ve googled for more than 10 seconds) of a “corporate credit union” as opposed to a run-of-the-mill credit union, but Bloomberg says that corporate credit unions “make loans and provide other services for the retail credit unions that cater to the public.” It could be that

credit union:corporate credit union::insurer:reinsurer

Anyway, here’s the citation from Bloomberg.

Two corporate credit unions, with combined assets of $57 billion, were seized by the National Credit Union Administration yesterday to stabilize a system used by 90 million customers amid a worldwide financial crisis. Three U.S. banks failed, bringing this year’s total to 20.

U.S. Central Corporate Federal Credit Union, in Lenexa, Kansas, and Western Corporate Federal Credit Union in San Dimas, California, were put into conservatorship, the regulator said in a statement. The credit unions failed so-called stress tests that found an “unacceptably high concentration of risk” from mortgage-backed securities, the agency said.

I find the sentence that the “credit unions failed so-called stress tests” interesting.

Does it imply that these seizures were preemptive, or, at least, more preemptive than most seizures?

The MarketWatch story is here.

Bill Shein turns serious to consider possible outcome of the current panic. A nugget:

Most importantly, we must develop an economic model that doesn’t rely for its success on a fire hose of advertising that tells us we’re too fat, too poorly dressed, too ordinary, not having enough sex, not living glamorous-enough lives, not rich enough, not young enough, not driving the right car or using the right cell phone or living in a big house filled to capacity with gadgets and toys and fancy things.

Because if we are honest, we’ll see that modern consumer capitalism has become a cruel, manipulative, soul-destroying system that commits psychic violence on each of us – most notably our children – by nurturing self-doubt and mental confusion and unnecessary anxiety and regret. All in the name of “moving product.”

Bloomberg (emphasis added):

A credit freeze at the center of the worst financial crisis in seven decades, the highest unemployment rate since 1983, and slumps in manufacturing and housing are forcing policy makers to accelerate efforts to stabilize the economy. The Fed yesterday left its main interest rate within a record-low range and said it will buy $300 billion in Treasuries, plus more mortgage and agency debt, in a bid to end the recession.

(snip)

Initial claims for jobless benefits surged last month and through the week ended March 7, topping 600,000 each week. Today the Labor Department said the number of Americans collecting jobless benefits swelled to a record 5.47 million in the first week of March, indicating that former employees are unable to find new work as companies continue to cut costs.