XGOP4Hillary

(http://www.realclearpolitics.com/articles/2008/04/the_great_shopping_spree.html)

Samuelson is understating the problem. US consumer spending was the economic motor of the world. If the US consumes less and exports more what will the motor be? We have been avoiding facing up to this one since the 70's. World may need to find a new pattern.

Now one can make arguments that there is vast unmet consumer demand in Asia, Russia, Brazil etc. All true. Issues there are distributional. Will Russia Inc share the wealth far enough down the pyramid for a consumer boom. Will there be enough live Russians to do this? Ditto Brazil and India. China like much of East Asia seems better on distributional issues but East Asia is already starting to get old fast. Their demographic issues are totally unfunded. No one knows [including them] how this will all play out. Interesting times we will all be living in.

(http://www.ft.com/cms/s/0/2ef9698e-0fbf-11dd-8871-0000779fd2ac.html)

The saddest thing that ever happened to economics [and by derivation business reporting] was teaching the idiots algebra. They fell in love with equations and lost sight of the economic realities they were supposed to convey.

US has been living beyond its means since the late 50's. A half century of a world economy has at its base US over consumption and under production. We are now reaching the end of the cycle. The various major players are trying to find a way not to accumulate mountains of dollars while still keeping the US as the consumer of last resort. It doesn't work. The dollars have to go someplace. We have had going on two decades of rolling asset bubbles as those surplus dollars try to find a home. Japanese real estate, US dot com stocks, exotic financial instruments...at core the problem is the US balance of payments. To make this flood of hot money go away US has to be allowed to run a surplus. The problem is that no one wants to take the hit on employment and production.

Now a smarter world leadership cadre could cushion the fall. Our leader cadre worldwide is orders of magnitude dumber than the 70's when the WW2 generation [who still remembered from WW2 and the Depression just how far wrong it could all go] were running things. The current Boomer Yuppies are near clueless. We are rolling REALLY big dice here folks and the fools in charge haven't a clue. I had someone explain the current commodity boom as a peak oil thing. Uh huh. It had nothing to do with National Oil Companies, NIMBY greens in the US or two decades of lack of investment. This was an intelligent person who lives in the energy biz. Clueless.

Scott

(http://www.msnbc.msn.com/id/24129957/)

We are in for a flood of 1970's rerun stories, all claiming that we are back in the stagflation game. All it proves is that they assign to the business desk people too stupid to be wine critics. The 70's stagflation was from a different universe. Strong unions kept jacking up wages. An economy dominated by big oligopic companies then jacked by prices to compensate. It was a mad hatter's race of higher wages, higher prices, higher wages. All this was agrivated by a monetary policy that simply didn't grok what happened and attempted to provide sufficient money to maintain demand with the result of too much money chasing too few goods.

Today unions outside the public sector are weak. A globalized world is awash in excess productive capacity for near anything except base commodities. [more on that below]. Wages in the First World have been stagnant for two decades and show no sign of the sort of generalized surge that made the 70's a kidney stone of a decade. Similarly the bubble in housing prices that enabled many in the First World to treat their houses as ATM machines and live beyond their means is over. We are living in the wreckage of an asset and borrowing bubble.

So what we are seeing is a commodity boom. Partly this is driven by speculative money, the same flood of excess dollars from the US one way trade with Asia that previously fueled the stock market and housing bubbles. Partly we are seeing the effects of India and China entering the outer stages of a takeoff to being First World economies with First World level of consumption. The bulk of the populations of India and China are still dirt poor but no longer starving peasant poor. Some hundred million and going up are First World middle class if you figure their purchasing power at PPP. In reverse there has been little net investment in most commodity production in the 20th century [except for oil where the last major round of investment was the North Slope and North Sea]. As late as a few years ago the problem was low rates of return and excess capacity. So demand is now outstripping production, the more so as much of the world's productive capacity is in regions [Africa, South America, Russia etc.] where the locals don't invest and political risk / nationalization makes outside investment near insane.

So there is cost push inflation of materials, food and energy. The solution is to do precisely nothing. The higher prices will lead to lower consumption and equilibrium will be reached. People in the First World will eat, drive [somewhat less and over time smaller vehicles - it takes over a decade to turn over national auto fleets] and heat their buildings. They will do this at the expense of buying 'stuff'. Retailing will decline and this will hit Asia which makes most of the 'stuff'. As the Asian 'miracles' are driven by exports this will moderate their demand. Price signals are supposed to move people to change behavior. Given stagnant incomes plus ever growing expenditures for government, medicine and social transfers this is all quite natural and inevitable.

Enter the usual idiots who propose raising interest rates to fight inflation. How do higher interest rates slow down the commodity price rises? Getting people to borrow less is fine except no one is borrowing in a major way anyway. Finance is refusing to lend, having rediscovered that risk means you may not get paid back. Most financial institutions have lost much of their capital in the implosion. The easy way out is to shrink the loans outstanding to what the remaining capital can support. Raising the price of money will accelerate this but is this what we really want? Deleveraging is tricky and has many ways to go wrong. Higher prices for credit at the same time availability is cut is the road to a real risk of a 30's type deflationary Depression. So why are the usual pundits calling for it? Because they react on tropisms. They dimly remember an undergrad lecture where they were told rising interest rates was the answer to inflation. Which it was in 1970 or even 1980 but has nothing to do with 2008. We are governed by fools. So far the Fed is ignoring them but the Fed reads the financial press as well as the election returns. Be afraid. Be VERY afraid.

(http://www.ft.com/cms/s/0/f84c9b80-057e-11dd-a9e0-0000779fd2ac.html)

Perhaps, over time, it will occur to Mr Schwartz that having equity capital well in excess of the statutory requirements would have been one very important thing that might have made a difference.

////

Read the above quote and then read my title. We have spent three decades telling people to 'wring the fat out of the system'. Everyone is supposed to maximize return on assets which means capital not used is 'wasted'. Spare parts are waste - do just in time. Put the capital burden on someone else. Leverage to the hilt. Never mention that when the wheels start to run in reverse the absence of liquidity is a killer. Never mention that 33-1 leverage means it takes next to nothing to wipe out your capital. The MBA's and masters of the universe live in the short term. The fools at the WSJ live in theoryland. They may kill us all. We are creeping to the point of nationalizing the entire banking industry to cover the systemic downsides of their bad bets. Greed is good may sound cool in a movie. However we have socialized the losses while keeping the profits private. remind me again why this is smart. And the sad part is how many otherwise smart people still don't get it, still live in theoryland.

(http://en.wikipedia.org/wiki/Community_Reinvestment_Act)

I can quibble with the wiki. As with most wiki’s it is from my POV incomplete and somewhat establishment liberal. It is good enough. The essential critique for your article is the endpoint. Some critics say…blah, blah, blah. Key things to watch for on finance industry articles from partisan sources are dates and numbers. Absence of both usually means ideological axes to grind. Your article had neither. Wiki has dates but no numbers. So let us begin.

1. CRA is passed in 1977. The big changes towards more permissive lending under it are 1995 and 2002. The 2005 change is actually a belated attempt towards stricter / saner standards. So ask yourself a simple question – if changes from 1977, 1997, 2002 are the cause of the problem why did it happen 2007-8? Why were these loans accepted into the market without major default rates until 2005-8? Why were most of these defaults fairly new loans?
2. Why were these things passed? Industry regulation is rarely a static exercise and often involves quid pro quo trades. To shorten a long involved multidecade political rap US banking industry was divided up into little boxes after 1929-34. These boxes made less and less sense by the 70’s and deregulation started. As in many such processes horse trades / political log rolls were made. CRA was one such trade.
3. Red lining and racial discrimination was real. So were credit standards geared towards middle class whites as opposed to working class minorities. This is well before credit bureau scores and the like were common and easily pulled up. For example many banks wouldn’t count payment history from small merchants [usually the only ones who operated in ghettos] or utility companies as a credit history. The actual CRA was a negotiated safe harbor for the banks. If they met CRA standards they were deemed not to be engaging in red lining or racial discrimination. There is still no consensus that credit standards were noticeably lowered in a provable manner – i.e. that more of these loans failed than under the old system. If so it was minor and this is over decades. YMMV.
4. In return banks were able to get Federal help around the state laws against multi-state and multi-unit banking. They were able to get easing [and eventual elimination] of Federal restrictions on banks getting into other types of finances. This was all done piecemeal but look at 1977 and 2008. We went from little corner banks who had passbook accounts for regulated interest rates to national chains that sell everything except insurance [and often backdoor that].
5. (http://en.wikipedia.org/wiki/Subprime_lending) - this is not a new industry. So ask yourself why is it a problem only in the last few years. There have always been merchants and credit card companies that work with bad credit people. I was offered my first new credit card within a few months of my bankruptcy finalizing. High interest and an annual fee but I had plastic again. Initial limit was near pathetic and I had to give them a balance as collateral but one has to start someplace…
6. Indeed both the CRA and subprime real estate lending existed during the last major financial implosion [S+L debacle]. Why wasn’t it a problem then?
7. The dog that didn’t bark in the night is the combination of securitization, phony ratings and absence of proper regulation / supervision. People were sold toilet paper and told by supposedly reputable investment banks, brokers and ratings agencies that it was AAA gold. THIS is the problem. The open press was full of endless ads for no document refinancings [referred to openly as ‘liar loans’]. There was a TV show on how to become a millionaire flipping houses. There is no problem with some marginal ‘social engineering’ lending. Big system can take mosquito bites. There is no way the system can cope with AAA ratings being fantasy on a massive scale. The problem was never the CRA or securitization or sub-prime lending or any of that. It was a regulatory environment which allowed Wall Street to buy high ratings for junk and peddle it as safe. When the lie became obvious the system froze because no one knew how to price the risk. If all the public information is deemed lies it is not safe to trade. No one knew what the real risks they were buying are. No one knew how deeply committed the major players were [many had complex guarantees as underwiters etc.]. Very hard to trade if you don’t have a clue as to whether the other party is solvent. It was these basic regulatory issues that were blown. The debate was public and the smoke and mirrors financial engineers were allowed to overwhelm those of us who argued that because of the catastrophic costs of letting the big boys fail we were letting people take ever wilder gambles with an implied put on the losses to be borne by the public purse.

Is this any clearer or anyone want more detail?