I have a bunch of Italian rap cassettes from the mid 90s in which the (not yet then) Prime Minister's name gets dropped a lot. He's been dominating Italian politics for a very long time.
He's also a criminal and a joke, and Italy will be well rid of him, maybe soon:
Reporting from Rome— Italy's beleaguered prime minister, Silvio Berlusconi, has survived more than 50 no-confidence votes and multiple accusations of criminal and sexual impropriety, including charges he paid for sex with a 17-year-old girl. But the 75-year-old billionaire may have finally met his match in the bond market.
With dwindling confidence in Berlusconi's ability to manage Italy's affairs — and the Eurozone's debt crisis hanging in the balance — investors Monday pushed up Italian bond yields to a euro-era high of 6.63%. That means higher borrowing costs, and takes the yield ever closer to a point that tipped Greece, Ireland and Portugal over the edge and seeking financial rescue.
… Indeed, the reaction from financial markets adds to "strong pressure for Berlusconi to resign," said Sergio Fabbrini, political science professor at the LUISS Guido Carli university in Rome.
In once sense, this the ultimate referendum on his performance. The bond rates represent the utter failure of the country to right itself.
On the other hand, as much as I would like to see Berlusconi out, there's something unseemly about the bond market* having this much power over a sovereign, democratic country. It reminds me of the rating agencies trying to dictate the size of our own budget cuts during the summer.
Capitalism should be a tool in service of democracy, not the other way around.
It's completely natural. When a particular process within a business expands rapidly, the business tries to reduce or eliminate the most human-resource-intensive aspects of that expanding business. Because if a process takes individual attention from smart, well trained humans, that shit be way expensive, yo.
So, businesses cut corners. They replace individual attention with standardized processes that can be handled more quickly, handled by computers, or outsourced to Mumbai.
Sometimes it works. Sometimes it's my job to make it work, and I'm not too bad at my job.
But more often it fails, and things just don't run as well as they ought to.
If the business is, say, a huge computer and mobile device manufacturer, failure to scale just isn't that bad. Maybe some customers are upset. Maybe the bottom line loses a couple percents of a percent of a percent from last quarter's billions.
But if the business in question is a bank, and the process in question is signing a legal affidavit about a foreclosure, failure can equal a miscarriage of justice. And if it's as widespread as this MoJo article suggests, it could also be another blow to our fragile economy.
The financialization of the American economy has been a disaster. Forget all that stuff about the hollowing out of our manufacturing base or increased global competition or waves of immigrants taking away our jobs. Those are all legitimate issues of one stripe or another, but the far bigger issue is that a gigantic chunk of our productive capacity — Wall Street — is deployed almost solely to make money for one sector of our economy: Wall Street. Until that changes, until the financial industry is focused primarily on providing capital and services toother people, we're always going to suffer from either (a) underperformance in the real economy or (b) an endless boom and bust cycle. Take your pick.
There's one key metric that will tell us whether financial reform is working: the size and profitability of the FIRE sector. (That's Finance, Insurance, and Real Estate.) If it shrinks considerably, it means financial reform, despite all the watering down, has basically done its job. But if the FIRE sector remains enormous, it hasn't. We'll know in a few years. | Drum, emphasis mine |
It is an enduring mystery to me how we have sufficiently abstracted our economy to the point that a huge segment of our economy is devoted to producing exactly nothing. "Services" are a legitimate segment of the economy, but "services" are there to serve people, not rob them.
Fact the first: In recent years, the U.S. economy has grown at slower than historical rates, even in boom times.
Fact the second: In recent years, much of the growth in the U.S. economy has come from the financial sector.
Possibility the first: The slow rates of growth were caused by financialization, and the U.S. can return to real growth by reining in the financial sector.
Possibility the second: The growth of the last several decades was a mirage produced by financialization; in reality, the modern U.S. economy is only capable of a very modest rate of year over year growth.
The odd thing about the position Brzezinski stakes out here is his avowed ignorance of the uses to which vast fortunes might be put. He can't really be ignorant of the fact that wealth is a form of power, can he? Surely not. Which I take to indicate that he has some agenda which he thinks is served by not acknowledging that fact. In most contexts I'd assume that the unspoken agenda is to preserve the privileges of the owning class, but that interpretation doesn't seem plausible here.
Adding: Perhaps Brzezinski's agenda has been revealed here:
...the left’s agenda goes considerably beyond a black helicopter-based global monetary system. The ultimate aim is to establish a Star Trek-style post-capitalist society in which there’s no currency whatsoever. |Yglesias|
It depends on what you mean by work. As Krugman noted on his blog today, the official administration line is that the Geitner put is just one piece of a larger strategy. A problem, according to Krugman, is that nobody knows what the other pieces are.
But let's back up for a second. What does the Geitner plan do, why does Krugman think that it won't work?
Geitner's plan, basically, is to create investment groups with government backing to purchase toxic assets from distressed banks. The downside risk of those investments will be guaranteed by the government, which means that buyers will have an incentive to overpay compared to current market prices. The idea is that this will get the toxic assets off of the banks' books at a price which will restore the banks to liquidity.
Krugman's critique of the plan is a little difficult to suss out. In his column this week, he wrote:
But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact. |Krugman|
On his blog, Krugman gives a more complete diagnosis:
Start with the question: how do banks fail? A bank, broadly defined, is any institution that borrows short and lends long. Like any leveraged investor, a bank can fail if it has made bad investments — if the value of its assets falls below the value of its liabilities, bye bye bank.
But banks can also fail even if they haven’t been bad investors: if, for some reason, many of those they’ve borrowed from (e.g., but not only, depositors) demand their money back at once, the bank can be forced to sell assets at fire sale prices, so that assets that would have been worth more than liabilities in normal conditions end up not being enough to cover the bank’s debts. And this opens up the possibility of a self-fulfilling panic: people may demand their money back, not because they think the bank has made bad investments, but simply because they think other people will demand their money back.
Bank runs can be contagious; partly that’s for psychological reasons, partly because banks tend to invest in similar assets, so one bank’s fire sale depresses another bank’s net worth.
So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?
If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.
But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls. |Krugman|
One of Krugman's points is that the housing bubble really was a bubble and that this means that the banks investments in mortgage securities really were bad investments. And what this means is that government can't arrest the fall in the price of those securities merely by buying some of them. They can't, in other words, put a stop to the panic because there isn't a panic to put a stop to.
It follows from this that the banks are, as things stand at the moment, insolvent. This is because the asset side of their balance sheets are heavily loaded with these mortgage securities, and those securities have very little value. The banks have managed to stumble along by pretending that the securities are worth more than they are, but nobody really believes that. If those assets were fairly valued, then the banks would obviously be insolvent and would fail.
As an aside, this is the context in which to understand the Congressional GOP's push to return to "mark to market" accounting rules. The idea is to change the laws to let the banks put mortgage securities on the balance sheet for the value they expect to sell them for in the future, rather than for the value that they could earn today. This would make the balance sheets look healthy, sure, but is ostrich accounting of the worst sort. Pretending that these securities are worth something would allow current managers to justify their bonuses, but it wouldn't solve the underlying problem.
Returning to Geitner's plan, the idea is to pull the troubled assets off the books. Why won't that work? This segment from last night's NewsHour may shed some light:
Krugman's argument, I think, is this. Banks, the troubled ones at any rate, have more bad assets on their books than the Geitner plan will purchase. If the plan is to work, it must do so by establishing a price floor for those assets which is sufficient to ensure solvency. But, given the incentives of the Geitner plan, the price paid for assets is likely to be higher than the market would otherwise bear. At the same time, the plan will give us information about what those assets are worth. But once we know what those assets are worth, then banks will be forced to honestly report their value on their balance sheets. The banks are currently reporting those assets as being worth something like sixty cents on the dollar, even though the market price is more likely to be something like thirty cents. But then bob's your uncle, because at those prices many banks will turn out to be insolvent.
Which brings us full circle to the seemingly unknown other parts of the plan. The total losses on mortgage securities in the U.S. is estimated to be something like $4 trillion. The Geitner plan will cover something like $1 trillion of those losses. The Fed's announcement of quantitative easing means that they'll buy up another trillion or so of mortgage paper. Some losses have already been addressed by capital infusions. But all of that still leaves something close to $2 trillion in losses for the banks to absorb. Can they do it? I guess we'll find out.
Adding: Yes, I know that I spelled Geithner's name wrong.
Via Talking Points Memo I've been reading Joseph St. Denis's response to congressional inquiries about the shenanigans in A.I.G.'s financial products division. Joseph St. Denis was the chief accountant of the division, and resigned in September 2007 because he had been denied access to the process by which the firm's super credit default swaps were valuated. TPM is all over this story, but here's a snippet from the letter that jumped out at me:
This was the first time Mr. Cassano had expressed criticism of any of my close working relationships with FSD or OAP. As previously noted, during my evaluation with Mi. Cassano in June of 2007 two months earlier, Mr. Cassano had told me that I was "doing a great job," and that I should "work closely with [AIG]." He also volunteered during this meeting in June 2007,which was also attended by William Kolbert, that he had "no desire to be promoted, because it would separate [him] from the money," and that AIG's corporate management was "scared to death" of him'
The Teacher Retirement System of Texas, the seventh-largest public pension fund in the U.S., reports each year that its expected rate of return is 8 percent. Public records show the fund has had an average return of 2.6 percent during the past 10 years.
The nation’s largest public pension fund, California Public Employees’ Retirement System, has been reporting an expected rate of return of 7.75 percent for the past eight years, and 8 percent before that, according to Calpers spokesman Clark McKinley.
Its annual return during the decade from Dec. 31, 1998, to Dec. 31, 2008, has been 3.32 percent, and last year, when markets tanked, it lost 27 percent. |Bloomberg|
In the here and now, the Dow has dropped 52.5 percent since its high of 14,279.96 on Oct. 11, 2007, to its low point of 6,779.62 during intraday trading on Monday. And in taking a similar 1 year-and-five-month period in the late 1920s, it's a case of deja vu.
The rate of decline is mimicking that of the Dow during the Great Depression. Back on Sept. 3, 1929, the Dow hit a high mark of 381.17. And over a similar 1-year-and-four -month period, it fell 54.7 percent to 172.36 on Jan. 2, 1931. "It's very troubling if you have a mirror image," said Phil Dow, market strategist for RBC Dain Rauscher & James. |source|
Nicholas Beaudrot points to some interesting stuff in Warren Buffet's annual letter to shareholders of Berkshire Hathaway (PDF). The short short version is that the housing bubble happened first in the mobile home sector, a sector in which Buffet was heavily invested but managed not to lose his shirt. What was his magical formula? He issued loans only after establishing that the borrower had sufficient income to meet the payments.
Smart guy, that Buffet.
Nevertheless, the outlook for 2009 is dim:
[Our] lending operation, though not damaged by the performance of its borrowers, is nevertheless threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.
This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.
Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one. |2009 Buffet Shareholder Letter, p. 12|
Given what we've learned about economic reality over the last six months, maybe it no longer makes sense to assume during contract negotiations that it is management rather than labor which is most concerned with the long term health of a firm.
Jesus Fucking Christ. That's how much cash the U.S. Treasury has proffered in loan guarantees to the finance industry. That's about six months worth of GNP. Probably some of the debt will turn out good, but in the absence of any plan to help the people who owe money to the banks, the prospects look dim.
It's tempting to focus on the injustice. The owning class made this mess and now their plan seems to be to insulate themselves from the consequences by taking advantage of the fact that free market ideologues will control the White House for another two months. This situation is, as Jason said in comments, disgusting.
But, as with many of the policies of the Bush Administration, focusing on the injustice threatens to distract attention from the catastrophic stupidity. We're all in deep water here, but the financiers think that they can stay afloat by standing on the rest of our shoulders. What they don't see is that when the rest of us drown, they'll be stuck treading water with no shoreline in sight.
This far into the Bush Administration I had thought that my capacity for outrage had been exhausted. Guess not.
Just to throw in something constructive: Josh Marshall has the right idea about how we ought to be setting our priorities:
The bottom line, I think, is that the money has to go toward building real stuff -- primarily infrastructure -- and pumped into the hands of people who will immediately spend it, i.e., middle and lower-income people who will spend it on necessities. |TPM|
Also: By my calculations, the guv'mint has promised 300 times as much to the financial industry as the auto industry was asking for.
I absolutely, positively have to step away from the internet, but:
Citi is not only too big to fail, it’s too big to rescue with any of the half-measures that have been tried so far. Only outright nationalization is feasible, and that will probably require joint action by a number of governments; Citigroup’s global operations are too big for the US to handle alone. After that, the kinds of tinkering discussed at the G20 last week will be irrelevant. It’s now unsurprising to read (on CNBC!) predictions that all US financial institutions will be nationalized within a year. That’s probably an overstatement: as long as the economy doesn’t really crash, there are plenty of small banks and credit unions that will survive, but few of the big names will be among them. |CT: Quiggen|
Obama: The news coming out of the auto industry this week reminds us of the hardship it faces, hardship that goes far beyond individual auto companies to the countless suppliers, small businesses and communities throughout our nation who depend on a vibrant American auto industry.
The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil.
I would like to see the administration do everything it can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America. |CNN|
While we're at it, let's replace our broken farm subsidy program with one that subsidizes producers who are small, green and integrated into local and regional distribution networks.
It was a stunning rejection of reality. This nation is mired in two wars it does not know how to end. It is struggling to escape the worst economic crisis since the Great Depression. The federal government is staring at record deficits, with no plausible plan for financing the retirement and health-care needs of a giant generation of retirees. Our transportation and education systems need help, and we are dependent on other countries for the energy we use.
In the face of all this, Obama and McCain are stubbornly repeating promises they made in happier times -- broad tax cuts, new health benefits, big government-financed projects.
To govern is to choose, and next year, the trade-offs will be much tougher than usual because of the mess the Bush administration is leaving behind. At a moment when few Americans can muster much confidence in the leaders in Congress or the White House, McCain and Obama have used two of their three debates -- three hours when they had the attention of millions of voters -- to conceal more than they revealed about their agendas. |Broder|
...you hear all the time from people making an argument against deficits a line about how your family needs to live within its means and so the federal government should, too. Now as it happens, I think there definitely are situations in which deficit reduction is the right policy. But no matter what, that analogy is never right. The United States of America is effectively immortal, it can coerce people into giving it money, it can print currency, and it is in a million other highly relevant ways not remotely analogous to an ordinary family or even an ordinary business enterprise. |Yglesias|
If I'm understanding the debate in the British House of Commons correctly, Britain's Chancellor of the Exchequer doesn't believe Iceland's attempt to bail out its banks -- they call it 'the Icelandic scheme' -- can be capitalized. He has therefore, for the purpose of insuring British depositors in Icelandic banks, moved to freeze Icelandic bank assets in Britain.
In related news:
Iceland may ask for money from the IMF after failing to get ``the response that we felt that we should be able to get'' from European governments and central banks, Haarde said.
The central bank ditched a currency peg equivalent to 131 krona per euro after failing to convince investors it could maintain it. Earlier, the government said it canceled the purchase of a 75 percent stake in Glitnir and handed the lender over to regulators, saying it was in bigger trouble than previously estimated. |Bloomberg|
"Just the place for a Snark!" the Bellman cried,
As he landed his crew with care;
Supporting each man on the top of the tide
By a finger entwined in his hair.
"Just the place for a Snark! I have said it twice:
That alone should encourage the crew.
Just the place for a Snark! I have said it thrice:
What I tell you three times is true."
