greenspan suggests banking will require 14% reserves against 10% prior to banking clag-up
“The insertion, last month, of $250 billion of equity into American
banks through TARP (a two-percentage-point addition to capital-asset
ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming
modest further write-offs, simple linear extrapolation would suggest
that another $250 billion would bring the spread back to near its pre-crisis
norm. This arithmetic would imply that investors now require 14% capital
rather than the 10% of mid-2006. Such linear calculations, of course,
can only be very rough approximations. But recent data do suggest that,
while helpful, the Treasury’s $250 billion goes only partway towards
the levels required to support renewed lending.”
the web address for this article is
https://www.abelard.org/news/economics0811.php#greenspan_banking_201208
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congdon on debt deflation and bank capitalisation
2 October 2008
“That sounds trifling, hardly enough to threaten the banks' charitable
donations let alone the future of capitalism. But here comes the vicious
arithmetic. A drop in the value of assets of 2 per cent wipes out 40
per cent of the capital of an organisation such as a bank that is only
5 per cent owned by its shareholders. According to rules developed by
international financial bureaucrats in Basle over the past 20 years,
a bank that has lost a big chunk of its capital must - at least theoretically
- shrink its assets to restore the sacred capital-to-assets ratio to
its original level.”
related material
borrowing
and housing supply, us and uk style
the web address for this article is
https://www.abelard.org/news/economics0811.php#debt_deflation_051208
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greenspan on bank reserves
“Alan Greenspan, the former Fed Chairman, told The Economist
this week that banks were satisfied with capital equal to 10% of their
assets in the past. Now, to soothe depositors and investors, they will
need a much higher ratio - perhaps around 15%. Until they get there,
through a combination of raising new capital, reducing dividends and
share buybacks, and shedding assets, lending will be constrained.”
the web address for this article is
https://www.abelard.org/news/economics0811.php#bank_reserves_261108
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regulation, self-regulation and fraud in the us mortgage market
Many fail to distinguish between ‘regulation’
and fraud, between good regulation and bad regulation, and between good
regulation and sloppy regulation.
They fail even to attend to whom is being regulated
and by what.
It was widely known that the Fannies were corrupt.
Purchasers of the toxic assets generated by the Fannies failed
to exercise due diligence. Clearly, these institutions and their employees failed.
Thus, self-regulation failed in this instance.
Nobody ‘should’ buy what they don’t understand:
“Greenspan, 82, acknowledged under questioning that he had made
a "mistake" in believing that banks, operating in their own
self-interest, would do what was necessary to protect their shareholders
and institutions. Greenspan called that "a flaw in the model ...
that defines how the world works." ”[Quoted from wsvn.com]
However...
I repeat: the Fannies were known to be corrupt.
Bush and McCain and others warned of the problem and
tried to introduce proper regulation.
The ‘Democrats’ fought regulation every step of the way.
Warren
Buffet on the OFHEO
“"QUICK: If you imagine where things will go with Fannie
and Freddie, and you think about the regulators, where were the regulators
for what was happening, and can something like this be prevented from
happening again?
“Mr. BUFFETT: Well, it's really an incredible case study in regulation
because something called OFHEO was set up in 1992 by Congress, and the
sole job of OFHEO was to watch over Fannie and Freddie, someone to watch
over them. And they were there to evaluate the soundness and the accounting
and all of that. Two companies were all they had to regulate. OFHEO
has over 200 employees now. They have a budget now that's $65 million
a year, and all they have to do is look at two companies. I mean, you
know, I look at more than two companies.
“QUICK: Mm-hmm.
“Mr. BUFFETT: And they sat there, made reports to the Congress,
you can get them on the Internet, every year. And, in fact, they reported
to Sarbanes and Oxley every year. And they went--wrote 100 page reports,
and they said, 'We've looked at these people and their standards are
fine and their directors are fine and everything was fine.' And then
all of a sudden you had two of the greatest accounting misstatements
in history. You had all kinds of management malfeasance, and it all
came out. And, of course, the classic thing was that after it all came
out, OFHEO wrote a 350--340 page report examining what went wrong, and
they blamed the management, they blamed the directors, they blamed the
audit committee. They didn't have a word in there about themselves,
and they're the ones that 200 people were going to work every day with
just two companies to think about. It just shows the problems of regulation.
“QUICK: That sounds like an argument against regulation, though.
Is that what you're saying?
“Mr. BUFFETT: It's an argument explaining--it's an argument that
managing complex financial institutions where the management wants to
deceive you can be very, very difficult."”
Very obviously the ‘Democrats’
sought to deceive.
Do you blame the deceiver, or do you blame the victims
of that deceit?
Do you blame both the deceivers and the victims in ‘equal’ measure?
related material
too
many are still confusing the banking gum-up with recession, or worse
the web address for this article is
https://www.abelard.org/news/economics0811.php#regulation_self_regulation_fraud_251108
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too
many are still confusing the banking gum-up with recession, or worse
Graph of UK gross national product 2003 - present [source: aracari]
There are several supposed ‘slowdowns’
indicated on this UK GDP graph.
I think that:
- technical recession/s is highly likely. I’m
content to use the standard definition;
- ‘recession’ will hit the UK harder;
- the banking gum-up is generating ‘the recession’.
That is, the ‘recession’ is not fundamental;
- the ‘the recession’ could well ease
without overkill through Keynesian
manipulation;
- Keynesian manipulation could well make the UK’s
situation worse over the fairly short term;
- standards of living are also falling
in the UK for other reasons;
- the stock market and housing price contractions
I regard as
a) corrections and b) bubbles deflating;
- too many people are failing to keep their heads.
My problem is deciding whether an asset is ‘over-valued’.
That is, from my position, a matter for the markets to ‘decide’.
In the UK, Brown the Clown has inflated by at least
80% since reaching no.11 as Britain’s economics minister. House
prices have risen by more like 180% in that time.
Now, were houses ‘under-valued’ in 1997 when the Clown started at no.11?
Or, is the hedging value of holding housing to offset the idiocies of
the Clown a reasonable premium on prices?
Or, was the shortage of property as house formation numbers climbed (and
large ‘illegal’ immigration continued) sufficient to explain
the surplus increase?
Or part thereof?
Or, was it merely idiots looking at lower interest payments and failing
to calculated real long term costs?
Or, was a bubble under-way, a bubble perhaps ridden by ‘speculators’.
In my view, you can never make those judgements definitively,
and certainly not in advance. Idiots have been ‘predicting’
housing price ‘collapse’ for several years. If you do that
long enough you’ll be correct some day maybe. I thought the prices
‘too high’ for more than 8 years, so I got out of the market.
The prices went up and up and up for several years after.
I remain very content ☺
now they’re going down.
No-one knows how far that will go, or how long it will
take. I advised getting out of the UK stock market more than 8 years ago.
I am risk averse. I do not ride bubbles. Most people
cling on until it’s ‘too late’.
The markets are my lodestone, not comforting fairy
tales to make people believe they understand what they do not. Markets
are the sum total of individual decisions.
Clearly, large numbers of people are less inclined to
regard stock and housing prices as optimistically as they did a few months
back. That is what ‘corrects’/changes pricing.
But are ‘people’ correct? Was the high
of house pricing about right for the socialist mess in the UK?
Will the house prices just take a breather and then start rising again?
I don’t know. Among other matters, it will be government meddling
that will answer that.
Assessing government meddling is a major part of (my
approach to) pricing.
There is plenty of speculation that a good slice of
the USA stock price meltdown is based on a fear of socialistic increases
in capital gains taxes now that there is a
crazy due in the White House.
related material
fanny
mae and freddie mac - a history
the web address for this article is
https://www.abelard.org/news/economics0811.php#recession_confusion_231108
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why
chapter 11 bankruptcy is good for business, good for the economy and good
for jobs [2nd
link] - the auroran sunset
Solid and interesting primer:
“Over the past decade, the capital destruction by GM has been
breathtaking, on a greater scale than documented by Mr. Jensen for the
1980s. GM has invested $310 billion in its business between 1998 and
2007. The total depreciation of GM's physical plant during this period
was $128 billion, meaning that a net $182 billion of society's capital
has been pumped into GM over the past decade -- a waste of about $1.5
billion per month of national savings. The story at Ford has not been
as adverse but is still disheartening, as Ford has invested $155 billion
and consumed $8 billion net of depreciation since 1998.
“As a society, we have very little to show for this $465 billion.
. . . Yet one can only imagine how the $465 billion could have been
used better -- for instance, GM and Ford could have closed their own
facilities and acquired all of the shares of Honda, Toyota, Nissan and
Volkswagen.”
the web address for this article is
https://www.abelard.org/news/economics0811.php#chapter_eleven_221108
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squeeze
hits china - 67,000 factories close in 6 months
“Government statistics show that 67,000 factories of various
sizes were shuttered in China in the first half of the year, said Cao
Jianhai, an industrial economics researcher at the Chinese Academy of
Social Sciences. By year's end, he said, more than 100,000 plants will
have closed.
“As more factories in China shut down, stories of bosses running
away have become familiar, multiplying the damage of China's worst manufacturing
decline in at least a decade.
“Even before the global financial crisis, factory owners in China
were straining under soaring labor and raw-material costs, an appreciating
Chinese currency and tougher legal, tax and environmental requirements.
When the credit crunch took hold -- prompting Western businesses to
slash orders for Chinese goods and bankers to curtail loans to factories
-- many operations were pushed over the edge.”
the web address for this article is
https://www.abelard.org/news/economics0811.php#china_squeeze_041108
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greenspan and bernanke warning against systemic problems with the ‘demo’ mess at fannie mae and freddie mac
Of course, the ‘Democrats’
worked very hard to head off regulation of the GSEs [government-sponsored
enterprises], while McCain and other Republicans worked to regulate, and
thereby head off, the systemic mess.
Obama was a major
beneficiary of the Fannie Mae slush fund operated to head off regulation.
It’s amazing that anyone trusts Obama or the
‘Democrats’
with the economy!
Here’s the latest poll on Congressional approval:
9%!
Alan
Greenspan, February 2004:
“Given their history of innovation in mortgage-backed securities,
why do Fannie and Freddie now generate such substantial concern? The
unease relates mainly to the scale and growth of the mortgage-related
asset portfolios held on their balance sheets. That growth has been
facilitated, as least in part, by a perceived special advantage of these
institutions that keeps normal market restraints from being fully effective.
“The GSEs' special advantage arises because, despite the explicit
statement on the prospectus to GSE debentures that they are not backed
by the full faith and credit of the U.S. government, most investors
have apparently concluded that during a crisis the federal government
will prevent the GSEs from defaulting on their debt. An implicit guarantee
is thus created not by the Congress but by the willingness of investors
to accept a lower rate of interest on GSE debt than they would otherwise
require in the absence of federal sponsorship.
“Because Fannie and Freddie can borrow at a subsidized rate,
they have been able to pay higher prices to originators for their mortgages
than can potential competitors and to gradually but inexorably take
over the market for conforming mortgages. This process has provided
Fannie and Freddie with a powerful vehicle and incentive for achieving
extremely rapid growth of their balance sheets. The resultant scale
gives Fannie and Freddie additional advantages that potential private-sector
competitors cannot overcome. Importantly, the scale itself has reinforced
investors' perceptions that, in the event of a crisis involving Fannie
and Freddie, policymakers would have little alternative than to have
the taxpayers explicitly stand behind the GSE debt. This view is widespread
in the marketplace despite the privatization of Fannie and Freddie and
their control by private shareholders, because these institutions continue
to have government missions, a line of credit with the Treasury, and
other government benefits, which confer upon them a special status in
the eyes of many investors.”
—
“The Federal Reserve is concerned about the growth and the scale
of the GSEs' mortgage portfolios, which concentrate interest rate and
prepayment risks at these two institutions. Unlike many well-capitalized
savings and loans and commercial banks, Fannie and Freddie have chosen
not to manage that risk by holding greater capital. Instead, they have
chosen heightened leverage, which raises interest rate risk but enables
them to multiply the profitability of subsidized debt in direct proportion
to their degree of leverage. Without the expectation of government support
in a crisis, such leverage would not be possible without a significantly
higher cost of debt.”
—
“As always, concerns about systemic risk are appropriately focused
on large, highly leveraged financial institutions such as the GSEs that
play substantial roles in the functioning of financial markets. I should
emphasize that Fannie and Freddie, to date, appear to have managed these
risks well and that we see nothing on the immediate horizon that is
likely to create a systemic problem. But to fend off possible future
systemic difficulties, which we assess as likely if GSE expansion continues
unabated, preventive actions are required sooner rather than later.”
Ben
Bernanke, March 2007
“Financial crises are extremely difficult to anticipate, and
each episode of financial instability seems to have unique aspects,
but two conditions are common to most such events. First, major crises
usually involve financial institutions or markets that are either very
large or play some critical role in the financial system. Second, the
origins of most financial crises (excluding, perhaps, those attributable
to natural disasters, war, and other nonfinancial events) can be traced
to failures of due diligence or "market discipline" by an
important group of market participants.
“Both of these conditions apply to the current
situation of Fannie Mae and Freddie Mac…”
—
Measures to Reduce the Systemic Risk of GSE Portfolios...
“I have argued today that the size and the potentially rapid
growth of GSE portfolios, combined with the lack of market discipline
faced by GSEs, raise substantial systemic risk concerns. How should
this issue be addressed? In recent years, the Federal Reserve Board
has laid out three essential elements for the effective regulation of
the GSEs that we believe would mitigate those concerns while promoting
more effectively the important public purposes that they serve (Greenspan
2004; 2005b; 2006). First, the GSE regulator should have the broad authority
necessary to set and adjust GSE capital requirements in line with the
risks posed by the GSEs. Second, the GSEs should be subject to a clear
and credible receivership process, a process that would establish that
both shareholders and debt holders of a failed GSE would suffer financial
losses. Third, the GSEs’ portfolios should be anchored firmly
to a well-understood public purpose approved by the Congress.
“The concentrated and potentially volatile nature of the GSEs’
portfolios, together with the lack of market discipline on GSE activities,
makes ensuring adequate capital--the first element--especially important.
To ensure the safety and soundness ofthe GSEs and to reduce systemic
risks, the GSE regulator should have capital authority that is on a
par with that of the bank regulators. For example, the GSE regulator
should have clear authority to establish and modify both the minimum
and the risk-based capital standards for the GSEs. Moreover, the GSE
regulator should be able to adjust capital requirements quickly and
as needed to address developing or foreseeable concerns, rather than
being required by cumbersome procedures to wait until after the damage
has been done. A strong capital base would significantly reduce the
implicit subsidy and incentive problems that now distort GSE investment
decisions (Lucas and McDonald, 2006), while also increasing their safety
and soundness.
“The establishment of a clear and credible GSE receivership process,
the second element, is needed to create market discipline for these
companies. Reform legislation should establish (1) a well-defined and
mandatory process for placing a GSE in receivership and (2) a method
for resolving a GSE once it is placed in receivership. Both parts are
necessary for the receivership process to be meaningful and credible.
Market participants should clearly understand that, once certain conditions
arise, regulatory forbearance will be impermissible and a GSE receivership
will be established. Importantly, the GSE receivership process should
include a mechanism for ensuring that both the shareholders and creditors
of a failed GSE will bear financial losses. Only if GSE debt holders
are persuaded that the failure of a GSE will subject them to losses
will they have an incentive to exert market discipline.
“Third, the GSE portfolios should be anchored to a clear and
well-defined public purpose. Tying the portfolios to a purpose that
provides measurable benefits to the public would help to ensure that
society in general--not just GSE shareholders--receives a meaningful
return in exchange for accepting the risks inherent in the portfolios.
Moreover, defining the scope and purpose of the portfolios in this way
would reduce the potential for unbridled growth in those portfolios
while avoiding the imposition of arbitrary limits or caps.”
For much more detail on the ‘Democrats’
corruption machine that was Fannie Mae.
[Ben Bernanke is the current Chairman of the Federal Reserve Bank - the
Fed. He took over from Alan Greenspan.]
the web address for this article is
https://www.abelard.org/news/economics0811.php#greenspan_bernanke_warnings_031108
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