Showing posts with label Great Depression 2.0. Show all posts
Showing posts with label Great Depression 2.0. Show all posts

Thursday, August 31, 2017

Wall St "repos". Legitimate financing or just plain gambling?

It's a very short term lending scheme.  The borrower sells some financial paper (often US T-bills) to raise money, but promises the buyer that they will buy the paper back shortly, at a small profit.  The deal is actually a short term loan, but on paper it looks like a sale. 
   Question:  what useful purpose is served by short term loans?  Legitimate reasons for borrowing are to build or buy plant and equipment, buy inventory for later sale, finance real estate (buying, building, whatever) finance research and development, in short to finance useful economic activity.  All of this stuff takes time, years sometimes, to pay off.  Short term loans, over night loans in some cases,  don't cut it.  All I can see a short term loan doing is making your books look better (more cash on hand) for a financial report, or to finance stock trading.  I think short term loans are gambling pure and simple and ought to be taxed out of existence. 
   Used to be, J.P. Morgan handled a lot of these deals.  For undisclosed reasons J.P Morgan decided to get out of the business last year.  Perhaps they see it as dangerous and high risk. At this point 85% of the deals go thru Bank of New York.  Wall St players are worrying that if anything goes wrong (power failure, fire, flood, hacker attack, whatever) at Bank of New York, the whole repo market is toast.  A good reason not to get into repos in my book.
   Repos are widely seen as one of the triggers for Great Depression 2.0.  Fear of repos caused everyone to stop lending to Bear Stearns and Lehman Brothers, which crashed both firms in the fall of 2007.  The Federal Reserve has wanted to overhaul the repos business for nearly a decade (with little luck).  The Treasury's Office of Financial Research estimates the repo market at $3.5 trillion, which is a lot of money.  Enough to touch off another great depression if things should go wrong.  
   Sounds like a land mine waiting for someone to step on it. 

Friday, July 7, 2017

Fed Governor Urges Housing Finance Fix

Headline of a Wall St Journal piece.  Fed Reserve governor Jerome Powell wants more private investors to buy into Fanny and Freddy, so that next time Fanny and Freddy go bust, private investors will lose money rather than taxpayers.  Everyone always thought that Uncle Sam stood behind Fanny and Freddy even though the fine print in the enabling laws did not so state. This wide spread belief allowed Fanny and Freddy to borrow money on the credit of the United States, which meant they could raise money for 3-4%, really cheap.   But when Fanny and Freddy went bust in 2008, Uncle decided us taxpayers were on the hook for $140 billion to avoid besmirching the reputation of the US treasury.
    Fanny and Freddy didn't cause much trouble until the 1980's when they started buying mortgages off banks.  The real estate industry loved this, it made more mortgage money available. Sell a mortgage to Fanny or Freddy, and presto, the bank has the cash to make yet another mortgage.  Fanny and Freddy recovered the money by selling bonds on Wall St.  They said "Look, these bonds are 'backed' by real estate."  Suckers fell for this, and for a while the bonds sold like hotcakes.
   The banks, now that they could unload their mortgages started writing really bad mortgages, "sub prime" and "alt-A" to borrowers who would never be able to pay off the mortgage.  No matter, long as we dump this worthless mortgage on Fanny and Freddy we are OK.  This continued until the sucker investors wised up to the fact that "backed by real estate" meant nothing.  They didn't have the right to foreclose and repossess the real estate.  So the bonds stopped selling, and Fanny and Freddy went Chapter 11.  For $140 billion.  This touched off Great Depression 2.0.
   In actual fact, we ought to shut Fanny and Freddy down, for good.  We don't need them to "make more mortgage money available".   Mortgages are profitable and safe. We used to say "Safe as houses". If the borrower fails to pay, the lender gets the house.  Home mortgage borrowers are strongly motivated to keep up the payments, who wants to explain to a spouse that they are getting evicted?  Far more secure than the stock market.
  Shut down Fanny and Freddy.  The real estate industry (brokers, builders, appliance makers, lumber industry) will cry a lot, but  life will go on. 

Tuesday, July 1, 2014

We need some scalps

Great Depression 2.0 started six years ago.  I know there was some malfeasance, skullduggery, and just plain stupidity in the big banks.  That crashed the world economy and threw millions out of work. But nobody has gone on trial let alone gone to jail. 
The IRS scandal.  Lois Lerner got retired, she keeps her pension.  Nobody else has been prosecuted or gone to jail.
The VA scandal.  The head of VA retired.  Nobody else has even got their name in the papers, let alone prosecuted or jailed. 
   I say Obama is going easy on this slime.  The banks, the IRS and the VA would work a lot better after jailing their top three levels of management.
   Even GM canned 8 people over the ignition switch disaster.  Are we saying that GM is more hard core than DOJ?

Sunday, February 9, 2014

When does a recession stop?

Depends who you ask.  Economists call a time of falling economic activity a recession.  They used to call it a depression, but after the great depression of the 1930's they decided to use a less scary word.  Anyhow, a recession is over when things stop getting worse.  In the case of the current great recession (or Great Depression 2.0) things stopped going down hill back in 2009.   So economists will tell you the recession is over.  The Obama administration loves this interpretation, and the newsies (Democrats all) have picked this up and spread it around.
  Trouble is, things haven't gotten much better since 2009.  Economic growth has been very low, 1 or 2 percent, less than population growth.  When the economy doesn't grow as fast as the population grows, everyone gets poorer.  You have more people and less stuff, and so people get  less stuff.  That's been the story since 2009, five years ago. 
   Ask a typical citizen when the recession is over.  He will tell you it's over when things are back to where they were before the economy went down the tubes.  When he has a job again.  By that standard, and it's a reasonable standard, we are still stuck in Great Depression 2.0.

Tuesday, November 5, 2013

It's Halloween for taxpayers.

The US House just gave the banks a big green rustling handshake.  It passed the "Swaps Regulatory Improvement Act"  HR 992 on 30 October this year by a vote of 292 to 122.  A Halloween special.  All Republicans and 70 Democrats, including my Democratic rep Annie Kuster, voted for passage.
   What's going on here?  First we have to understand what "swaps" are.  Swaps are a high stakes gambling vehicle which crashed Wall St back in 2008 and  kicked off Great Depression 2.0.  A "swap" is a deal between two banks, or a bank and a brokerage house, or an insurance company and  a brokerage house, or any mix.  Only two can play.  the deal goes thus. "If  certain bonds that you hold default, I will pay them off for you.  You are relieved of all risk.  In return you pay me a modest fee, in advance."   It amounts to bond insurance against default.  In 2008, big insurance company AIG sold credit default swaps on a whole bunch of shaky bonds.  When the market crashed, all the AIG swapped bonds defaulted.  AIG, big as it was, didn't have the money to pay off on the swaps.  It went broke and we the taxpayers paid off all of AIG's $140 billion worth of swaps.  The resulting market turmoil crashed Bear Sterns, Lehman Brothers, and others, and kicked off Great Depression 2.0, which is still with us, five years later.
   Clearly "swaps" are dangerous.  And, "swaps" do not promote any kind of economic development.  All the money goes back and forth between Wall St players, none it goes to building new factories, buying airliners, financing inventory, or other useful purposes, it all stays on the Street.  Swaps are a high stakes gambling deal.
    Anyone in their right mind wants to forbid the sale of swaps, 'cause they are so dangerous, and they don't do anything worthwhile.  Anyone, except a banker who enjoys playing bet-the-company games.  And so, the Dodd Frank Act tried to limit swaps playing by forbidding the use of  Federally guaranteed (FDIC) funds to play the swaps market.   Which is a good idea.  A better idea would be to outlaw swaps completely, but they didn't go that far.
    And so, banks and bankers, who really enjoy playing bet-the-company games,  introduced a bill to repeal all the Dodd Frank restrictions on "swaps".  Spin the roulette wheel, the casino is open.  And the House passed it last Wednesday.  One of the Republicans finest hours.   
   And another triumph for the media.  They concealed the existence of this odious bill until four days after passage.