Banking

Banking / Financial / Political / The Federal Reserve — 0 Comments
30
Dec 11

The Road to Financial Nihilism

Nihilism is defined as “the total rejection of established laws and institutions.”  We are currently living through an age of financial nihilism.  Nihilism is also usually associated with radical elements that reject all authority.   I would submit that business elites and the political establishment are spawning political, legal and financial nihilism.

The Great Financial Crisis in the fall of 2008 led us on this path.  Perhaps it started with the best of intentions to save the financial system, but the unintended consequences of intended financial actions has negated any good from these efforts.  Let’s look at the particular elements of this sad condition:

  • Zero Interest Rates – When a market sets interest rates, important information is conveyed to market participants.   Interest rates in a free market environment measure risk of repayment, a fair rate of return and the potential for inflation.  When the Federal Reserve anchors interest rates at near zero for “an extended period of time,” investors can no longer make long-term rationale investment decisions. Thus, money is likely to be mal-invested in uneconomical projects or speculation increases in economically sensitive commodities such as oil, metals and grain.
  • Suspension of Mark to Market Accounting – At the start of the financial crisis, Congress leaned on the Financial Accounting Standards Board to suspend “mark to market” accounting (that is, the valuing of an asset in the most honest way, that is, taking into account its impairment or loss of value) .  In its most basic form, this is just plain dishonesty.   This dubious practice spread to banks in Europe as well.   Thus, there is no transparency in bank balance sheets; we (and even the banks themselves) simply can no longer believe the numbers on any institutional balance sheets. The result is that European banks are no longer willing to lend to one another.   Why?  These banks are now leveraged as much as 50-1, thus only a 2% drop in asset prices puts them at risk of failure.  We know that sovereign European bonds have dropped much more than 2%.   Thus, it is likely there is little or no real collateral to support a loan. See Art Cashin Exposes the Behind the Scenes Panic in Europe. With housing prices continuing in decline in the United States, I would suspect that many US banks too are hiding losses, and are in more dire straits than they or the Administration admits.
  • Stress Tests – To reassure the public, both the Federal Reserve and the European Banking Authority ran stress tests on large banks.  Dexia (Belgium’s largest company) passed the most recent round of these “stress tests,” and then failed within three months.   Irish banks failed four months after their 2010 round of these tests.  See How Did Europe’s Bank Stress Test Give Dexia a Clean Bill of Health?  Bank of America and Citigroup shares have plummeted in 2011.  The Federal Reserve performed similar stress tests on these and other major American banks.  How credible were our “stress tests?”
  • Eroding the Sanctity of Brokerage Accounts – The collapse of MF Global revealed that a brokerage firm could appropriate segregated customer accounts for its own uses.  It appears that MF Global circumvented US laws on account segregation by pledging customer accounts against a repo agreement in London.  Now, customers may never recover their monies.  See MF Global: The SERIOUS Issue Reaches Mainstream Media.  Karl Denninger points out that the standard brokerage agreement permits hypothecation and re-hypothecation, meaning that your brokerage account can be pledged to support a brokerage company or bank loan.  Since derivatives have preference over depositors, customer’s segregated accounts funds are at risk.
  • Eroding the Sanctity of Real Property – To speed securitization of mortgages, the banks created an alternative mortgage registration system which bypassed centuries-old rules of settled property law.  A recent report documents the disastrous consequences:

… “thanks to the Mortgage Electronic Registry System’s (MERS) failure to accurately complete and/or publically record property conveyances in the frenzy of banks securitizing home loans and ins subsequent foreclosure actions, neighbors of a foreclosed property (with a sequential conveyance) as well as a foreclosed property itself will have unclear boundaries and clouded/unmarketable titles making it difficult, if not impossible, for these homeowners to sell their properties and for subsequent purchasers to obtain title insurance on the property.”

The report goes on to point out that courts have criticized the MERS model as flawed and have ruled against MERS’ stance to foreclosure. MERS is described as being “wholly inaccurate and not allowing homeowners to fight foreclosures because it [MERS] shields the true owner of a mortgage in public records.” See Study Claims that MERS Destroyed the Chain of Title and Consequently, the Housing Market

And worse yet, in sorting through the avalanche of subsequent foreclosures, mortgage servicers have filed fraudulent affidavits and false documentation. See e.g., Nevada Files First Criminal Charges in Robo-Signing Case

  • Greek Credit Default Swaps – In good faith, buyers purchased credit default swaps on Greek bonds to hedge against a potential default.   The European authorities strong-armed banks and other investors to accept “voluntary” 50% haircuts on Greek bonds.  Because of this “voluntary” characterization the credit default swaps were not triggered.  With Spain, Ireland, Italy, Portugal and other countries suffering huge losses on their bonds, is it likely that investors will invest in these bonds when the hedge of a credit default swap can be negated through European financial authority fiat?   See Credit Default Swaps Useless as Hedge Against Default
  • Federal Reserve Intervention in Markets – So far, when stock markets have faltered, the Federal Reserve has come to the rescue through quantitative easing (QE1& 2) or Operation Twist.  Thus, investors cannot know the true value of any stock since the Federal Reserve will not allow it to fall to a market-determined price.   Similarly, with zero interest rates and purchase of mortgage- backed securities, the Federal Reserve will not allow house values to fall to market clearing prices.
  • Failure to Prosecute – Outside of a handful of insider trader prosecutions there has been no attempt to prosecute the malefactors of Wall Street. Excuses range from opining that the practices were legal, to the difficulty in building a case.  In the Savings and Loan crisis of the early 1990s the same difficulties existed, yet 1100 prosecutions were brought with 800 banks executives sent to jail.  See In Financial Crisis, No Prosecutions of Top Figures

Real World Consequences

We have eliminated price discovery from our markets.  We have neither permitted stocks to fall nor interest rates to rise.  Instead of prosecuting the banks that caused this problem, we shower them with interest free loans from the Federal Reserve so they can speculate or earn risk free profits by re-depositing funds with the Federal Reserve.  Thus, capital is being diverted from sound investments and used for speculative purposes or worse.

European financial authorities have destroyed the efficacy of hedging sovereign bonds in their handling of the Greek bond haircuts.  And thus another important market is being destroyed.

More ominously, Karl Denninger reports that in the wake of the MF Global failure, farmers are eschewing the hedging of crops through commodity futures and instead selling directly to food companies.  Thus, price stability will be diminished and consumers will ultimately pay higher prices.

The failure to “mark to market” and run honest stress tests has resulted in a freezing of interbank loans (a classic credit squeeze) and resulted in a silent run on banks, as UBS reports (bold face type in original text):

European banks are making great use of the ECB’s overnight deposit facility. Last night they parked $590 billion at the ECB breaking the record they had set the night before. They are clearly unwilling to lend to other European banks, highlighting the distrust and fear in the interbank marketplace.

The distrust on the streets is said to be growing also. Barroom gossip says that safe-deposit boxes are in a demand that borders on frenzy. They allow you to take your Euros and covert them into something of value (gold, Swiss Francs, etc.) and sock it away in a safe place.

 Others are said to be buying property in London and elsewhere lest you awake one day and discover that your Euros have reverted to drachmas or lira.

 Savvy bankers are said to be setting up personal and communal trusts domiciled in places like the Bahamas, the Caymans or the Isle of Jersey. Some banks are offering depository accounts denominated (and repayable) in alternate currencies like the dollar or the yen.

 We think a Lehman-like event would most likely be triggered by a run on a bank or a series of banks. The scramble for currency (value) protection among the public could turn into that bank run in the same way that a crowd can instantly turn into a mob. Watch the money flows out of Greece and Italy very carefully. The pot continues to bubble. See Art Cashin Exposes the Behind the Scenes Panic in Europe

If the Administration, The Federal Reserve and the European Authorities had set out to destroy capitalism, free markets and the current financial system, they could not have done a better job.   Free markets and a free people are intertwined.  The road to financial nihilism is ultimately a very dangerous path.

 

 

 

 

 

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Executive Compensatio / Financial / Political / The Federal Reserve — 0 Comments
9
Dec 11

This Dimon Doesn’t Have it Rough Enough

Jamie Dimon, CEO of JP Morgan Chase, is back in the news railing against those who bash the rich:

Dimon was responding Wednesday to a question at an investor conference about the hostile political environment towards banks.

“Acting like everyone who’s been successful is bad and that everyone who is rich is bad — I just don’t get it,” said Dimon at the conference, which was organized by Goldman Sachs Group Inc.

Dimon said he’s worked on Wall Street for much of his life and contributed his fair share.

“Most of us wage earners are paying 39.6 percent in taxes and add in another 12 percent in New York state and city taxes and we’re paying 50 percent of our income in taxes,” Dimon said in defense of his fellow Wall Street bankers. See Jamie Dimon Rails Against “Rich is Bad” Talk

Are We Bashing the Rich or the Well Connected?

America is a land of opportunity.  Children of poor immigrants can grow up to be President, entrepreneurs, brilliant scientists or even CEOs of Fortune 500 companies.  Thus, Americans venerate a Steve Jobs or a Bill Gates.  Not that these individuals are without detractors, but they are admired for starting from scratch, innovating, and filling a market need.  Often these individuals single-handedly create the market for their products and services. See All Millionaires are not Created Equal

Let’s examine why Jamie Dimon and other bankers are less admired and often vilified.  Note the deft sleight of hand in Mr. Dimon’s answer to the question: the question posed concerned the hostile environment toward banks.  Mr. Dimon’s response is that he does not understand why the public thinks that everyone who is successful is bad.  He in fact never answered the question of why everyone hates banks.

At the core of the hatred of banks (and perhaps Mr. Dimon himself) is crony capitalism.  Mr. Dimon’s “success” is owed largely to the unholy alliance between the Bush and Obama Administrations and the Too Big to Fail Banks.  Let’s examine the blessings the government has bestowed on Mr. Dimon:

  • Bear Stearns – JP Morgan Chase and Mr. Dimon merged with the “failing” Bear Stearns, paying $10 per share for a company that had recently traded at $93 per share.  The Federal Reserve then made a $29b non-recourse loan to JP Morgan secured only by the mortgage backed securities of Bear Stearns.  Thus, the Federal Reserve could not seize JP Morgan Chase assets, if the Bear Stearns collateral proved insufficient to repay the loan.  See Seeking Fast Deal, JP Morgan Quintuples Bear Stearns Bid, Wikipedia
  • Secret Loans from the Federal Reserve – From 2007-2009, the Federal Reserve made $7.7 trillion of secret loans to 190 financial institutions, resulting in profits of $13b.  These loans were at below market rates, virtually free, ensuring profit for the banks. Bloomberg, which made the Freedom of Information Act request, estimated that JP Morgan profited in the amount of almost $458m.  Mr. Dimon did not disclose these loans or the banks’ need to his shareholders:

JPMorgan Chase & Co. CEO Jamie Dimon told shareholders in a March 26, 2010, letter that his bank used the Fed’s Term Auction Facility “at the request of the Federal Reserve to help motivate others to use the system.” He didn’t say that the New York-based bank’s total TAF borrowings were almost twice its cash holdings or that its peak borrowing of $48 billion on Feb. 26, 2009, came more than a year after the program’s creation. See Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress

  • Zero Interest Rates – The zero interest rate policy of the Federal Reserve continues to permit banks to borrow at below market rates, thus enhancing bank profits at the expense of savers.
  • Compensation – While being rescued by the Federal Reserve, JP Morgan Chase’s board awarded Mr. Dimon a $17m bonus for 2009. In 2010, Mr. Dimon made $20.8m.  JP Morgan partisans will argue that this was modest compared to industry peers.  Should US taxpayers, those of us who ultimately stand behind these loans, reward executives with large compensation packages?  Unlike the situations of most of the rest of us, JP Morgan Chase makes available to its top executives tax advantageous programs such as the permitting tax deferral of compensation, 401k plans, a defined benefit pension plan and use of the company plane.  If terminated without cause, Mr. Dimon would receive cash and stock awards valued at $16.7m. See Are CEOs Paid too Much: Not All of Them; JP Morgan Chase CEO Gets $17 Million N0-Cash Bonus; Elements of Executive Compensation (JPM); JP Morgan Chase 2010 proxy

Being Rich Isn’t the Problem

Yes, there is income inequality and we have heard endlessly about the elite 1% profiting at the expense of the 99% of ordinary Americans.  But the real hostility goes deeper than just these income disparities.   There is a good reason why Mr. Dimon chose not to discuss the hostile environment toward banks.  He is well aware of why it exists:  the American public has been treated to the spectacle of secret loans to banks; CEOs have been permitted to keep their jobs after nearly destroying their own banks and the US economy; too generous executive compensation practices and perquisites continue which ignore the fact that taxpayers needed to bail out these institutions (and will probably have to do so again);  banks still fail to undertake serious loan modification programs for underwater homeowners; they hoard excess reserves at the Federal Reserve rather than make loans to stimulate the real economy; they attempt to impose fees on cash withdrawals from ATMs;  and finally and disgracefully,  these banks have not been  prosecuted.

Mr. Dimon, the focus is on you and other bankers, not necessarily “the rich.”   Perhaps we need more hard hitting articles like the Bloomberg piece on secret loans to banks, to focus the attention on the true issues, not bogus articles of class warfare.   Unfortunately, neither the press nor the Administration has been rough enough on Mr. Dimon.

 

 

GD Star Rating
loading...
  • Share/Bookmark
Banking / Economics / Financial / Real Estate / Sovereign Debt — 0 Comments
28
Sep 11

How Did We Get Here?

Karl Denninger makes a simple but telling point.  Since 1984 GDP growth has averaged 4% per year, debt growth has averaged 7% per year and government spending growth has also averaged 7% per year.  In no quarter did real economic growth exceed credit growth.   Europe Goes Enron (blog radio podcast).   Simply put, we are inflating credit faster than we are raising real economic output.  To repay debt, sufficient income must be generated to reduce this debt.  Thus, when the economy lags in a recession or depression, debt will go into default and must be either written off or restructured.

Also simply put, credit growth unsupported by income growth has distorted the economy.  In essence, the “easy money” fostered in a lax credit environment has sent the wrong signals to the real economy.  Some examples:

Real Estate

Lax bank lending and governmental programs encouraged homeowners to take on more debt.  The mantra was that house prices always rose. So bankers were eager to lend too much and borrowers were anxious to borrow too much, both believing that house price inflation would sustain the process.  Both parties ignored simple economic principles.  Incomes have been stagnating for more than ten years.  The housing boom expanded the supply of housing beyond demand.  Worse, the peripheral costs of owning a home (taxes, insurance, utilities and the like) ate into the income available to service those over-sized mortgages.   Loans were secured with little or no money down.

In the commercial real estate market, we massively overbuilt.   Again we mistakenly believed that inflation would bail out lenders and owners.   The demographic trend is for large companies to reduce use of commercial space.  Increasingly, employees work from home and technology requires fewer workers and less commercial space.  Internet shopping further lessens the need for brick and mortar retailers.  As with homes, the peripheral costs of commercial ownership kept rising.

Government

A falsely expanding, credit driven economy also sends false signals to government and their employees.   Tax receipts were on the rise from real estate transfer fees, expanding income taxes and capital gains from a rising stock market.    But these gains were bogus, a chimera.  And they did not benefit the average consumer.    Why shouldn’t the largesse of rising tax receipts be shared with employees, who also happen to be a powerful voting bloc?   Politicians were all too willing to grant pay increases, job security guarantees and costly pension and post-retirement benefits to government employees, especially those represented by powerful public unions.  Soon total compensation packages for public employees exceeded their private sector counterparts.

Sovereign Debt

And so the good times seemed to roll. What better way to finance government projects and even foreign wars than through inexpensive sovereign debt?  Dick Cheney once loudly proclaimed that “deficits don’t matter.”  Republicans and Democrats seemed to compete to see which party could run the largest deficits.  Believing that debt could be paid off through ever rising tax receipts, the government made more promises (like expanding Medicare coverage to include prescription drugs).   What were they thinking?  Borrow today and worry about repaying and credit collapse tomorrow?

Macro Trends

The credit binge occurred against a background of unfavorable macro economic trends.   First, US and European population growth, and therefore the supply of workers, slowed.  Second, free trade and free movement of capital and technology has exposed the American worker to foreign competition.  Seventy-dollar an hour (fully-loaded cost) Big Three unionized auto workers cannot compete with their Asian counterparts.   [Heritage Foundation study].  Third, technology has viciously cut into employment in the retailing, telecommunications, banking, insurance, travel and other industries.   Software programs now perform the job functions formerly executed by highly-paid skilled workers.  Fourth, zero interest policy has cut the income of savers and pension funds, impoverishing a class of consumers who supported the economy in the past.  Fifth, regulation is on the rise, increasing business operating costs.

The Debt Bubble

Thus, we have inflated a giant credit bubble without the resources to repay these debts. It is happening both here and in Europe.  Each government maneuver to save a bank (Bank of America) or a country (Greece) is merely an attempt to hide the real problem or shift it from private parties to taxpayers.  We undertook debt that we cannot repay.   We need to write off or restructure this debt, and yes, it will result in losses to the government and major financial institutions.  Restructuring could take the form of increasing the time to repay, reducing the interest rate or swapping equity for debt.  This outcome is unfortunately unpleasant but necessary.

Governments continue to conjure exotic, “cutting edge,” “outside the box” programs which merely delay the day of debt reckoning.   We borrowed too much and we now need to pay the piper.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Economics / The Federal Reserve — 0 Comments
13
Sep 11

Re-Arranging the Furniture

Rarely do I look at the myriad sale flyers that seem to be staples of our mail these days.  However, my wife called my attention to a going out of business sale.  Bograd’s Fine Furniture, a store with deep roots in Paterson, N.J., sent out an unusual closing announcement.  It was not the usual notice trumpeting the final days of the company (for the umpteenth time) and hawking goods at deep discounts for a final selling splash. Rather, the announcement seemed from the heart of the owner and his family.  Its message encapsulated what is wrong with our economy and the burdens government puts on small business.

History

On August 1, 1930, two immigrant brothers opened a furniture store in Paterson, NJ.  Five years later they built a bigger store on Main Street in that city. The store remained there for over sixty years.

In 1975, I began my clerkship for a Superior Court Judge sitting in Paterson.  I walked by Bograd’s every day on the way to the government parking lot.  At that point, my wife and I were married for three years, but we had always lived in student housing.  We had our first rental apartment, which needed furnishing, at that same time.  Bograd’s carried quality brands that we could only dream about but could not afford.   Even then, our belief was that we should save and buy quality goods rather than settle for inferior goods.  Bograd’s represented quality, albeit at higher than department store prices.  We window shopped a lot more often than we bought.

At about the same time, Paterson was becoming a dangerous city, where once had been a prosperous town.  The population declined nearly 5% in the 1970’s.  White residents fled to nearby suburbs and now make up only 13% of the population.  Poverty is rampant, with 29% of families below the poverty line.  As in many urban areas, quality stores abandoned Paterson for the suburbs of Bergen and Passaic counties.  Bograd’s, however, held out until 1996 when it moved to a warehouse showroom in a suburban area near major highways.

The End of an Era

Instead of the traditional “going out of business sale,” the Bograd family calls their closing event “Bograd’s Last and Best Sale.”   Even though the store will no longer be operating, Mr. Bograd and his company  will  “be around after the sale is over operating out of our warehouse until every order is delivered, every customer satisfied.”

Below is a summary of the company’s decision to close.   It is a microcosm of what ails small American businesses.  I will provide commentary on each item:

  • We cannot and will not compete with stores who have lowered their standards by selling low quality merchandise.  We have always sold high end American-made furniture, often pieces signed by the craftsman while our competitors are bringing in low quality pieces from Indonesia and China. Comment – US free trade policy has permitted the importation of low quality, often shoddy, low price furniture.  How can a high quality US manufacturer expect to compete with near slave labor, foreign work conditions?  One cannot compare beautifully finished high end domestically made furniture and imports from China.
  • We will not employ a low quality, low paid sales force that cannot provide outstanding customer service.  Comment – Customers view items like furniture as disposable, so quality service is no longer factored into the price.  Only low price matters.  The US educational system produces employees without the educational background or mindset to invest years in developing expertise in high-quality furniture manufacturing or sales.
  • Given the state of the mortgage market we cannot refinance our store which we own or obtain favorable financing terms from our supplier.  Mentioning that we are in the furniture industry ends discussions with lenders.  Comment – The failure to resolve our banking crisis and forcing the banks to write off bad loans has tightened credit markets.  Tight credit has had the most impact on small businesses.  Banks would rather hold excess reserves with the Federal Reserve than take on more risky lending.
  • As a small business we receive no support from any level of government.  Comment – Complex business regulations coupled with the uncertainty of Obamacare make it almost impossible for a small business to succeed.  Government policy openly favors large enterprises, who also happen to be major campaign contributors, at the expense of the small business person.
  • Decline in trust between and among retailers, banks, and suppliers. Comment – Government policies which created the housing bubble and other speculative bubbles inevitably lead to an economic bust.  Stop-and-start economic policies destroy trust between economic parties. See Bograd’s Fine Furniture Latest Victim of Tough Economy, Eight Decades of Selling Furniture Coming to a Close, Bograd’s Historic Closing Sale – The End of an Era

Left unsaid is a major change in our culture and values.   As young adults we understood that to buy quality furniture we would need to save and defer our major purchases. When we bought a house, rooms remained empty until we could afford quality furnishings.  In a culture of instant consumer credit and shoddy goods, that ethic of saving and deferring gratification has eroded, placing a firm like Bograd’s at a disadvantage.

American Jobs Act

The much awaited announcement of President Obama’s American Jobs Act does little for the small business person. Small business is the lynchpin for both creating new jobs and for economic recovery in general.  Like Bograd’s, there are thousands of small businesses hanging on by their economic finger tips.   A large labor union (teacher, police or fire) or a large financial business (banks, insurance companies) gets the government’s attention and fiscal favor, but  if one is a small business, I guess one might  just fade into economic history, like the 81-year old Bograd’s.

Gresham’s Law says that bad money drives out good money.  In the case of Bograd’s Fine Furniture, bad furniture drove out quality furniture.  We have flawed government policy to thank, and a consequent culture which would rather spend today than invest in the future.

 

 

 

 

GD Star Rating
loading...
  • Share/Bookmark
Banking / Financial / investing — 0 Comments
26
Aug 11

Bank of America – A Cautionary Tale

Many of my friends follow the advice of Bruce Berkowitz, founder of the Fairholme Fund.  They occasionally ask for mine as well.  Mr. Berkowitz has been one of the most successful mutual fund managers over the past several market cycles.  After the 2008 financial crisis, Mr. Berkowitz invested heavily in financial stocks such as Bank of America, Citicorp, AIG and others.  I did not want to disagree with a guru such as Mr. Berkowitz, but I expressed doubt about investing in financial stocks, especially the trio he selected.  Why? Even for an expert it is difficult to get an accurate financial picture of large financial companies.   Problems are often held off the balance sheet in structured investment vehicles that are discreet and hidden.   It is impossible to examine the net exposure and counter party risks associated with their burgeoning credit derivative businesses.  In fact, the financial crisis and testimony before the Financial Crisis Inquiry Commission revealed that even executives inside these institutions did not fully appreciate the risks their companies were undertaking.  Suspension of “mark to market” accounting further clouded the true financial picture of securities and mortgages the banks held.

In March 2010, Mr. Berkowitz gave an interview to Barron’s.  He described his rationale for investing in the big three mentioned above:

The financial system in the United States doesn’t work without Citigroup and Bank of America and, hence, the government’s involvement. But what’s nice about the government is that at the end of the day, it will make a profit on all of its investments in these companies.

There are just certain institutions that are interwoven into the fabric of the United States. That’s the case with Citigroup and Bank of America, which make up a key part of our banking system. The same is true for AIG in the insurance area.  See After the Apocalypse

Mr. Berkowitz believes that these “too big to fail” financial institutions are essentially in partnership with the government and will be assured profitability and ever rising stock prices.  When I realized this, I firmly decided that he was wrong and that his strategy would ultimately fail.

On Tuesday, Bank of America closed at $6.30 down almost 2% on the day and nearly 48% for the year.  (After Thursday’s announcement of Warren Buffet taking a stake in the preferred stock of the company the price has recovered to the mid $7 range.)  Fairholme Fund is down nearly 13% this year.  While of course I am skeptical of Mr. Berkowitz’s strategy, I urge the more important point about the havoc the government has fostered, the risks of investing in any financial firm, and the folly of blind faith in guru investors.

What is Wrong with Bank of America?

The short answer is that no one knows for sure.  But there are two ominous signs: the drop by nearly half of the yearly stock price, and the soaring cost of insuring Bank of America debt in the credit derivative market (385 basis points –August 23).  Yves Smith of Naked Capitalism summarizes the distress in the stock:

  • An analyst believes that the company will need to raise $40-50b in additional equity diluting current shareholders
  • The company is having difficulty in selling assets which would improve their financial position (China Construction Bank, Merrill Lynch)
  • The company is unable to complete a broad settlement of mortgage litigation
  • The stock is susceptible to manipulation by high frequency traders
  • The company’s second liens are overvalued
  • Commercial loans are impaired, and have not been recognized as such.
  • Management has overstated good will from the Countrywide and Merrill Lynch transactions
  • There are undetermined European exposures, especially to the debt of foreign banks.  See Why is Bank America’s Stock Cratering Yet Again? It’s the Extend and Pretend Endgame

Extend and Pretend

It was governmental policy to suspend mark to market accounting policy.  Basically this permitted the banks to make their own value determinations for mortgages and other potentially impaired assets.  Ms. Smith points out how pernicious this policy is:

We are now seeing the downside to extend and pretend. Years of regulatory forbearance mean that investors know the marks on the balance sheet of a beast like Bank of America (and frankly all the other big banks) have a ton of air in them. And now that the economy is looking seriously wobbly and the odds of son of Credit Anstalt are well above zero, it means big banks are at real risk of getting seriously whacked in a major stress event. Worse, with Dodd Frank (supposedly) barring bailouts and Tea Partiers on an anti-bank, anti-Fed, anti-spending warpath, it might not be so easy for the authorities to rescue a big bank if a run started…. See Why is Bank America’s Stock Cratering Yet Again? It’s the Extend and Pretend Endgame

Credit Anstalt refers to the 1931 failure of an Austrian bank which set off a chain of European bank failures, deepening the Great Depression of the 1930’s.

Investors are wary that Bank of America could collapse just as Lehman and AIG did in 2008.

Understanding Banks

This brings us to gurus and financial analysis.   Mr. Berkowitz is not the only guru piling into Bank of America stock.  John Paulson (who worked with Goldman Sachs to short the mortgage market during the 2008 financial crisis) and David Tepper, both considered two of the best hedge fund managers, also bet heavily on Bank of America, Citicorp , AIG and other financial stocks.   But in a brilliant analysis, Steve Waldman, author of Interfluidity, points out that it is near impossible to evaluate large, complex, financial institutions:

Bank capital cannot be measured. Think about that until you really get it. “Large complex financial institutions” report leverage ratios and “tier one” capital and all kinds of aromatic stuff. But those numbers are meaningless. For any large complex financial institution levered at the House-proposed limit of 15×, a reasonable confidence interval surrounding its estimate of bank capital would be greater than 100% of the reported value. In English, we cannot distinguish “well capitalized” from insolvent banks, even in good times, and regardless of their formal statements.  See Capital Can’t Be Measured

Thus, it is hubris to posture on the investment potential of Bank of America or other financial institutions.   Thinking about Mr. Berkowitz’s comments in Barron’s, it appears that his investment was faith-based, meaning that he relied on the government bailing out Bank of America, again and again ensuring stock market profits.  Government is often an unreliable business partner.

Some Lessons

Extend and pretend accounting games are catching up with the “too big to fail” banks.   European banks are already in shambles. Distrust between and among banks is high and growing.  This can lead to a dramatic loss of liquidity when least expected. And thus could begin the next wave of financial crisis.

Investment gurus usually have one or two good ideas during their investment lives.  Investors who follow the recommendations of these gurus once the financial environment is radically different do so at their peril.   It pays to be skeptical.

Finally, reliance on government to protect investors is folly.  Remember it is the government that coaxed Bank of America into purchasing the troubled Countrywide and Merrill Lynch companies.   In the current Tea Party-dominated congressional environment will another TARP be enacted to save the banks?  With Rick Perry calling money printing by Ben Bernanke treasonous, will the Federal Reserve be able to step in and save the banks?

At the moment the market is putting much weight on the Buffet purchase of Bank of America preferred stock. Investors should think critically about this purchase.  First, it gives lie to the claim of Bank of America management that it did not need to raise additional capital.  Second, the Buffet deal came at a high price to current shareholders. It was a costly financing.  Third, it is merely a small down payment on the much larger sums of money that the company must raise to maintain appropriate capital ratios.  I wish Mr. Berkowitz and other investors much luck, but I think we have not heard the end of Bank of America’s troubles.

 

 

 

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Business / Executive Compensatio / Financial / Media / Political / The Federal Reserve — 0 Comments
5
Aug 11

The Meal Was Great…Part II

Dinner with friends included lots of discussion points that resonated and reminded us of our corporate working lives.   While these points were clear to us as working persons, our perspectives from the outside render these points just as important.  The revealing fact that hits home so closely is:  Americans are being impacted by flawed policies and assumptions whether employed or not, or impoverished or not.

  • Financial Sector Dominance – Government policy encouraged the growth of the financial sector at the expense of the “real economy.”  Glass Stegall, which separated banking operations from trading operations, was repealed by Graham-Dodd.   Devilishly complex financial instruments became Wall Street fee generating devices at the expense of traditional lending.    These firms became employers of choice for talented university graduates.
  • The Short Cut Society – Instead of saving for a house, a vacation or a new appliance we were happy to use credit cards or second mortgage lines for instant gratification.   Instead of a boring career in manufacturing, better a Wall Street trader or hedge fund manager.  CEOs expected huge compensation packages regardless of performance quality.
  • Spin vs. Truth – Shading of the truth became a national obsession.  Instead of honest reporting of inflation statistics, hedonic adjustments lowered the consumer price index, depriving social security recipients and federal pensioners of earned cost of living adjustments.   CEOs spun disappointing earnings results taking write offs, obfuscating the accounting or lowering earnings guidance so that when earnings were finally announced “they beat expectations.”   Congress is no better, promising “smoke and mirrors” debt reduction plans with little, if any, real deficit reduction.
  • Lack of Political Leadership – The debt reduction exercise is one more example of the lack of leadership at the Chief Executive and Congressional levels.  Politicians are more concerned about preening before cameras than serious statesmanship. Bipartisanship seems like a quaint relic of a bygone era.
  • Congress for Sale – Given the enormous cost of congressional races, representatives are in a constant search for dollars from corporations and other large contributors.  Thus, we have Congress captured by special interests.  Congress has long forgotten the middle class voter.  The appearance is that Congress is totally beholden to the corporate sector and that corporations appear entitled to special relief any time they are in need.
  • Complexity – Complexity pervades every part of our political and economic system.  Complexity is used to muddy rather than clarify.  The tax code, Obamacare and financial reform are the latest examples of overly complex legislation and accompanying regulation.  Only an army of lawyers can navigate through these legal minefields.  Conveniently, citizens are kept in the dark and small businesses cannot afford to compete with larger enterprises.
  • Rise of the Nanny State – We recently had New York’s ridiculous attempt to regulate kickball, dodge ball, waffle ball and Red Rover as dangerous activities needing state oversight and a permit.   See Classic Kid Games Like Kickball Deemed Unsafe by State to Increase Summer Camp Regulation.  This is emblematic of a society which demands a legislative or regulatory solution to every problem.   Businesses must be protected against failing (GM, Chrysler, Citicorp, AIG),  employees must be permitted leaves for such mundane diseases as chronic sinus infections (Family and Medical Leave Act), and the public must be protected against carcinogens such as the sun and salt.    Every aggrieved person must have a day in court.  Spill hot coffee on oneself, bring a lawsuit against McDonalds.  Play football and suffer an injury, sue the helmet manufacturer.  Somebody is always to blame and our legislative bodies are all too willing to protect us against life’s vicissitudes.
  • Free Trade– Say it fast and free trade sounds like a great idea.   Cheap foreign goods enrich our lives.   Thus, Ross Perot was ridiculed for saying that NAFTA’s giant sucking sound was American jobs heading for Mexico.   Mr. Perot sold American ingenuity short: American jobs are heading for China, India, Vietnam and a host of other low wage countries. These countries have few, if any, labor, anti- discrimination, family and medical leave, unemployment, child labor, environmental or safety laws.  American workers are being asked to compete against workers who are paid subsistence wages and afforded no protections.   Our politicians are only too willing to serve corporate interests at the expense of the American worker.
  • Immigration – Immigration is probably the purest example of selective enforcement of our laws.  It is difficult for American workers to compete against Chinese or Indian workers.  The problem is even greater as regards undocumented residents in our country.  Further, the cost of medical, education and municipal services is underwritten by the American taxpayer.  In places like Texas, Arizona and California this puts enormous strains on state and local budgets when education and medical services must be extended to undocumented residents.
  • Structural Unemployment – Technology and job outsourcing has added to shockingly high unemployment rates.  It is not clear whether any of these jobs will ever return. As we pointed out, zero interest rates lead to use of more labor saving capital equipment at the expense of hiring workers.  See The New York Times Finally Discovers Structural Unemployment. Hence, our employment problems may not be temporary but a permanent feature of the economic landscape.

 

All of the factors are intertwined.  In fact, they are negatively synergistic.   For example, a Congress that supports failed banks condemns savers and pensioners to miniscule return on savings, further compromising any incipient economic recovery.  A below trend economic recovery only encourages the exile of more jobs overseas so that corporations can retain profitability.

Believe it or not, dinner was pleasant and more.  But our conversational substance and concern for what is happening with our country and what is wrong with America indeed cast a cloud over all our thinking.  Along with other “ways that we were,” optimistic was also one of them, and that is much diminished.

After all this postulating about what is wrong, clearly what should come next are some hypotheses about solutions that can work.  A discussion for another blog.

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Corporate Behavior / Executive Compensatio / Financial / Foreign Policy / Management / Political / The Federal Reserve — 0 Comments
3
Aug 11

The Meal Was Great; Our Outlook, Not As Good

I had dinner the other day with two close friends, both former colleagues.  We are, in parlance, “men of a certain age:”   baby boomers, children of the sixties, sons of World War II veterans.  We all began our work lives in our twenties, worked for giant corporations, and turned jobs into long-term careers.  When first hired by our companies, we planned to stay just a couple of years and then move on to another company.  With the benefit of hindsight now, and the need for false humility ended, we can each gratefully admit that we enjoyed significant professional success, although none of us thought we would rise to the senior executive levels that we did.

We now occasionally get together for dinner and discuss our families, our current pursuits, how our former employer is doing and the general state of things.   Last time, we discussed what went wrong with America generally, why our children will not have long careers with large companies, and why they likely will not be as financially successful as we were.

We spoke about our fathers and the norms of their generation.  They fought in the War, returned and worked hard, and had few expectations about success or wealth.   They kept their noses to the grindstone and rarely complained.

We discussed the landscape of the corporations we went to work for.   When I was hired as a junior attorney, the General Counsel barely made five times my salary.  Bonuses were stingy and a modest number of stock options (in the hundreds of shares) were offered to a handful of our most senior executives.  Interestingly, it was generally a harmonious and engaging work environment. In contrast, by the time I retired, the Chairman and CEO made more than 400 times what an average employee made.  Employees were not nearly as engaged or happy.

The immediate catalyst for our wondering what has gone wrong with America was the current debate over the US debt ceiling.  I started to think back to the blogs I had written and tried to put together some hypotheses.  I caution the reader this is not a rigorous, but rather an impressionistic view of sociological, political and economic trends which shape the current state of affairs.   If it is insightful, I give tribute to good dinner conversation and fine friendship:

  • Loss of Shared Sacrifice – Perhaps it was the “Me Generation” of the 1960’s, but America has lost its sense of shared sacrifice; that is, the notion that we are all in this together and we rise or fall as one nation.   Instead we have an ethic of greed:   I want what I want and I want it now, everyone else be damned.
  • Out of Control Military Spending – Too much of America’s resources are spent in our defense budget.  Compounding this problem is a series of seemingly endless wars.  While we deploy hundreds of thousands of troops to Iraq and Afghanistan, our allies deploy hundreds.  Note that the German, Canadian, and Australian economies boomed, while ours stagnated.
  • The Volunteer Army – A volunteer army allows wars to be fought by other people’s children.  Thus, the popular outcry against wars or military spending is diminished because our own (privileged) sons and daughters are less likely to be involved.
  • Too Many Laws – The Wall Street Journal highlighted the growth in federal criminal law.  We over-criminalize too many areas of society.  One commentator archly noted that someone violates some law each day, often unaware of his lawbreaking conduct. See As Criminal Laws Proliferate, More are Ensnared
  • Unequal Enforcement of the Law – Perhaps since the OJ Simpson trial, our citizens cynically believe that if one hires a good enough lawyer, one literally can get away with murder.  This carries over to the belief if a corporation is big enough, especially a “too big to fail” financial institution, it will never be prosecuted.
  • Socialism for the Rich, Capitalism for the Poor – When the “too big to fail” institutions became insolvent, the Bush Administration, Congress and the Federal Reserve rushed in with a comprehensive program of TARP and zero interest rate lending.  The Obama Administration has continued these policies from the beginning.  Insolvent homeowners have been evicted from their homes, and many unemployed workers have exhausted their unemployment benefits.
  • Reckless Lending and Borrowing – The Federal Reserve was a major culprit in the growth of both public and private credit.  Instead of accepting the economic consequences of the internet bubble crash, Alan Greenspan reduced interest rates to below market levels to encourage real estate lending.   Subprime lending further inflated the housing bubble. Based on an inflated residential and commercial real estate market the economy boomed.  Assuming that this was permanent prosperity, debt was taken on at all levels: states and municipalities, corporations, homeowners and the federal government.  Now we cannot repay that debt.

While my dinner with friends continued all in one evening, Part Two will continue this discussion.

 

GD Star Rating
loading...
  • Share/Bookmark
Banking / Economics / Financial / Political — 0 Comments
28
Jul 11

It Isn’t That Easy to Avoid a Crisis

David Goldman continues to insist that all is under control.  See my previous discussion in Random Observations.  That is, he insists that current debt and especially sovereign debt problems will not cause another crisis like that of 2008:

More drivel has been written about the probability of financial crisis during the past month than at any time during my lifetime. There’s no crisis–not when all of the problems are transparent, on the table, and subject to negotiation. Instead, there is a change in lifestyle underway for Greek railway conductors, Minnesota firemen, New York City teachers, and a great many other people. Folk who only a few years ago expected to retire at sixty and spend their golden years on cruises will work until seventy and be thankful for a roof over their heads. See Not a Crisis, But a Negotiation

Goldman’s crisis avoidance stands on the following pillars:

  • The problems are known.
  • Because the problems are known they can be negotiated away.
  • Since the financial system has reduced its leverage, a crash cannot occur.  Why?   Because leveraging leads to sales of assets at distressed prices in a crisis.
  • If the US suffers a downgrade, the Federal Reserve and Treasury can easily implement financial maneuvers to work around the downgrade.
  • Finally, we have reduced complex, structured investment vehicles.

Risks We Knew, and Ignored, in the Last Decade

We knew about the overheating housing market and reckless subprime lending for several years before the crash of 2008.  We knew about the problem of excess leverage in the system. (In fact, the Federal Reserve relaxed leverage requirements, allowing firms like Lehman, Bear Stearns and Goldman Sachs to leverage 30-1 to 40-1).  Ben Bernanke claimed that the subprime crisis was “well contained” and would not affect the overall residential housing market.

None of these known problems could be “negotiated away.”  The financial system indeed seized up and nearly ended in total system breakdown.

What are the Current Risks?

Do we really know the current problems?  Last week, Bank of America wrote off $19.2b in bad loans.   Besieged by lawsuits and an unrecovered housing market, Bank of America can no longer hide behind “extend and pretend” fictional accounting.

…the bank appears to be in denial:

The crucial question today is whether Bank of America needs fresh capital to strengthen its balance sheet. Moynihan emphatically says it doesn’t, pointing to regulatory-capital measures that would have us believe it’s doing fine. The market is screaming otherwise, judging by the mammoth discount to book value. Then again, for all we know, the equity markets might not be receptive to a massive offering of new shares anyway, even if the bank’s executives were inclined to try for one.

Weil correctly depicts BofA as a systemic risk.  See Is Bank America at Risk of a Death Spiral?

And Bank of America is not the only “too big to fail” American bank:

And let us tell you a dirty secret: while Bank of America, thanks to Countrywide, is patient zero of the housing mess, Wells is next in line. Residential real estate is proportionately even bigger relative to the bank’s earnings and balance sheet, its accounting has been somewhere between aggressive and misleading, and despite its pious claims otherwise, it is no better than any of the other big banks. Stay tuned. See Is Bank America at Risk of a Death Spiral?

Both Wells Fargo and Bank of America are large, publicly held corporations subject to scrupulous reporting requirements. Nevertheless, large, unpleasant surprises appear seemingly out of nowhere.  Goldman misses the point, that future financial crises are in plain sight and we seem incapable of dealing with them.  The interconnectedness of credit default swaps makes these banks even riskier.  How can we gauge the effect on these banks of a crisis in Greek, Italian or other sovereign debt?

Being dismissive of the plight of highly paid Minnesota firemen and New York City teachers incorrectly trivializes their key role in any future financial crisis.   The fireman and teacher are both current and future homeowners.   They are also consumers.   The financial world ultimately comes down to discounted future cash flows.  Cut the income of enough highly paid workers and suddenly future corporate, governmental and individual cash flows do not look so rosy.  Moreover, this scenario keeps the housing market under pressure assuring future damage to bank balance sheets.

We need to stop denying our financially interconnected world.  Goldman’s analysis makes two mistakes: it skips over the effect financial austerity will have on housing, banks and tax revenues, and it believes our government and financial leaders can solve crises, even crises that are well understood and “transparent.”   The quagmire of our current debt level discussions only proves my point.

 

 

 

 

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Economics / Financial / International Finance — 0 Comments
19
Jul 11

Random Observations

What an exceedingly strange period in our economic and financial history!  Amidst a non-recovery economic recovery we have below par growth and high unemployment.  Coupled with economic weakness we have above trend inflation.  Let us consider some of the odder stories from last week:

Ben Bernanke and QE3

The first two exercises in quantitative easing have had mixed to negative consequences.   While the stock market has almost doubled from its low, the “real economy” has languished.   We can further document the relationship between QE and poor economic performance with a look at price hikes in key commodities such as food and energy.

Yet here is Dr. Ben Bernanke before Congress, once again selling us a product repair that simply does not work. On Wednesday, he made it clear that QE3 was part of his thinking. And even he is not altogether sure. On Wednesday, he backed away from an immediate move to start a third round of Fed money printing and bond buying.  See QE3 Guaranteed to Fail

Is there any reason that Dr. Bernanke still holds his job?  While his supporters point to a rise in stocks, the “real economy” has suffered.  Aren’t there better candidates for his job, who will try some new ideas? Are money printing and market manipulation the only ideas that any of our leaders can come up with? And to further the irritation with our Princeton economic guru, note that stocks used to rise and fall on company earnings and the economic outlook, not on which side of the bed the Fed chairman woke up on.

Don’t Worry Be Happy: Just Disregard Europe’s Problems  

David Goldman in Inner Workings points out that the financial crisis in Europe will not be a rerun of Lehman’s 2008 meltdown:

Under the headline “A Fate Worse Than Banking Crisis” my friend John Dizard at the Financial Times points out that any run on Europe’s banks would be instantly countered by swap lines from the Fed and ECB. His point (one I have been making for some time) is that the scope of the European banking problem is well known and that mechanisms have long been in place to deal with the worst-case scenario. Not so with Lehman, where a sort of China syndrome applied: no-one knew the amount of contingent liabilities that might be affected. See Once Again: It’s Not Lehman II

Mr. Goldman continues to calmly assure us that European problems will not create another financial meltdown:

My conclusion: there is no reason to panic over the present kerfluffle, but there is no reason to own any exposure to southern Europe. Ever again.  See Hopeless, But Not Serious: Once Again.

It’s too early to blow the “all clear” whistle on capital markets, but today’s recovery in the major US stock indices reassures me that this is not another financial crisis on the September 2008 scale, just a particularly nasty negotiation after which Italians, Greeks and Spaniards will end up poorer (along with Minnesota teachers, Wisconsin firemen and New Jersey policemen). It was amusing to see the usual suspects among the Street strategists issue dire warnings about increased tail risk just as markets turned around. See Ken Lewis, George Soros and Other Hedgehogs

So Mr. Goldman is assuring us of financial recovery based on one day of a US stock market rally?  His prognostications eerily remind me of 2007 and the assurances from Ben Bernanke, Hank Paulson and other financial luminaries that the subprime crisis was well contained.  Stock markets rallied then too, only to decline disastrously a year later.

Yesterday was a stark reminder of how unsafe Europe really is:

Greece 2 year interest rate on sovereign date: 34.5%
Portugal 2 year:  21.2%
Ireland 2 year : 23.3%
Italy 2 year : 4.65%
Spain 2 year:  4.55%

America is only marginally safer than Europe.   American research firm Egan-Jones recently also downgraded US Treasury debt.  See Europe is *Not* “Safe”

Are We Better Off Now Than In 2008?

We live in a financially interconnected world, and I am not at all reassured by Mr. Goldman.  I doubt that anyone knows what the effect of a bankruptcy in Portugal or Italy would have on world financial markets.   Could anyone have predicted that the 2008 financial crisis would take down AIG and Lehman and send US banks scurrying to the Treasury for TARP funds?  Do we think the world and the major financial institutions can better weather a storm now than in 2008?  While I may not know, I am more fearful that Bernanke, Goldman, Dimon and Blankfein do not know either, and they are out there making predictions and advocating policy.

Europe, China and the US have spent trillions of dollars trying to bolster their economies.  What if we have used all our money-printing ammunition and the next crisis is even worse?

 

 

 

 

 

GD Star Rating
loading...
  • Share/Bookmark
American Society / Banking / Financial / Political / The Federal Reserve — 0 Comments
7
Jun 11

Unemployment and the Fall of Labor

U.S. Government and private statistics, reported last week, reinforced our dismal unemployment trend:

  • The unemployment rate rose to 9.1%.
  • Only 54,000 jobs were added in May with numbers revised downward for April as well.  This number especially alarms when compared to the projections of 150,000 to 175,000 new hires.
  • Employment in states, counties, and municipalities fell to their lowest levels since 2006, as governments were forced to reduce their workforces to meet budget targets.
  • New unemployment claims continue to average more than 400,000 per week.
  • 13.9 million individuals are unemployed. 8.5 million people work only part time.
  • 4 million individuals have given up looking for a job.
  • 6.2 million have been unemployed for more than six months. See Dismal Payroll Data

Economic experts, an oxymoronic term and group if ever there was one, offer a number of explanations: over regulation, the costs of complying with Obamacare, illegal immigration, free trade, an anti-business administration and other excuses.   Prophet without Profit has consistently argued that structural change has happened in the American work force.  This economy, recession and “recovery” is neither your father’s nor grandfather’s, and we are kidding ourselves to think we can treat it as such.  See, e.g., Why this May be Worse than the Great Depression and The New Reality: Permanent Job Loss.

The Fall of Labor

In Game Over, Mark Lapolla, managing director of Knight Capital Americas rationally explains our high unemployment:

  • We have created a worldwide economic system where we swap American intellectual property for cheap foreign labor from countries like China or Vietnam.
  • Enterprises based on intellectual property need less capital, commodities and most importantly, less labor.
  • The amount of human labor to produce an economic value has become “de minimis.”
  • Productivity for each newly added worker added has soared, approximately $80,000 per worker compared to a national average of $14,000.
  • Technology has supplanted labor in our enterprises.
  • Evidence of the problem is in high unemployment, duration of unemployment, and little or no wage growth.
  • The housing boom was a temporary salve to workers to permit extraction of wealth from homes.  That band aid policy is now over.
  • The few new highly skilled jobs that appear are being filled by over qualified employees.  They earn much less than they earned in their last jobs.  They do not contribute to a healthy level of economic consumption.

Implications

The implications are quite stark.   A society built on consumption must become a society of savers.  Unemployment will remain high for much longer than may be politically palatable.  Good jobs in the work force are going to require a high level of scientific, computer and mathematical skills.   Finance, retailing and other service jobs will be in a long decline.  Similarly, high unemployment will equal slow growth.  The housing market will continue to stagnate.

In the same vein Charles Hugh Smith recognizes these structural labor force problems.  America has focused too long on the quick fix of creating instant wealth through financial schemes or social media like Facebook and Twitter. We are now paying for our long term neglect of manufacturing job creation, and our failure to pursue a rationale industrial policy:

The U.S. has a distinct industrial policy: benign neglect, ignorance, favoritism towards real estate development and financialization, and a fanatic devotion to short-term profits and cost-cutting. Productive vs. Unproductive: Manufacturing vs. Financialization

To bring America back we are going to need to de-emphasize getting an MBA, and to focus on technical skills:

The U.S. culture denigrates skilled labor and glorifies the C.E.O. and innovator as god-like heroes. Other nations, notably Germany, maintain a value and education system which recognizes and nurtures technical skills. In the U.S., we fawn over social media companies that generate billions in new wealth for Wall Street and a handful of founders and venture capitalists, and drill into every student’s head the value not of tradecraft skills but of a four-year business degree. Productive vs. Unproductive: Manufacturing vs. Financialization

Smith concludes that in the winner take all, extraction economy, we get a small number of wealthy winners and the remaining 90% are relegated to living in a corporate-colonial economy ruled by financial oligarchs.

Our Next Steps

The first step is to recognize that our industrial and employment policies are deeply and structurally flawed.  We are applying outmoded policies to a vastly changed economic situation.  The second step is to stop wasteful and ultimately fruitless government efforts like boosting the stock market or housing market through quantitative easing or zero interest rates.   The third step is to reorient economic policy to encourage a return to manufacturing, to re-train the labor force in technical areas, and to create incentives to save and invest.  Otherwise, last week’s headlines will become even scarier.

 

 

 

GD Star Rating
loading...
  • Share/Bookmark