Politico Economic Musings

The banking and mortgage placement community is earning more than ten times the norm on new mortgages entered into today!

It works like this…

The institution grants a mortgage at a 3%-4% spread from their cost of money. Their cost of money is, more or less, zero, thanks to Fed policy. The mortgage is then purchased and ultimately sold back to the Fed at about a 3% profit (which is about a 36% per annum return to the institution — without risk). The process is then repeated and repeated and repeated.

The normal return would have been about 0.3% or a 3.6% per annum no risk return. This transfer of taxpayer money to the banks is the product of a rampant Fed policy of “a little help for our friends” known has QE1 - 2 - 3 and 4. We hope the next President surrounds himself with a new set of economic advisers who are interested in dissuading him from the continued give away of taxpayer funds to the banking community. If it was efficacious at the time of Q1, it is outrageous at the time of Q4.

CNBC Squawk Box - 16 August 2012 

On CNBC’s Squawk Box on August 16th I proposed a cancellation of the debt held by the Fed and issued by the Treasury — about $3 trillion. There was some debate, mostly in good spirit but, perhaps, not in good faith? I am pleased to see the IMF (International Monetary Fund) has endorsed my plan. Take five minutes to read the article below. We could help restart the economy and bring America back from the brink of becoming a Third World nation.

Asher Edelman

IMF’s epic plan to conjure away debt and dethrone bankers
 by Ambrose Evans-Pritchard of The Telegraph, 21 October 2012

One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.

The conjuring trick is to replace our system of private bank-created money — roughly 97pc of the money supply — with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.

Specifically, it means an assault on “fractional reserve banking”. If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.

The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles. Accounting legerdemain will do the rest. That at least is the argument.

Some readers may already have seen the IMF study, by Jaromir Benes and Michael Kumhof, which came out in August and has begun to acquire a cult following around the world.

Entitled “The Chicago Plan Revisited”, it revives the scheme first put forward by professors Henry Simons and Irving Fisher in 1936 during the ferment of creative thinking in the late Depression.

Irving Fisher thought credit cycles led to an unhealthy concentration of wealth. He saw it with his own eyes in the early 1930s as creditors foreclosed on destitute farmers, seizing their land or buying it for a pittance at the bottom of the cycle.

The farmers found a way of defending themselves in the end. They muscled together at “one dollar auctions”, buying each other’s property back for almost nothing. Any carpet-bagger who tried to bid higher was beaten to a pulp.

Benes and Kumhof argue that credit-cycle trauma - caused by private money creation - dates deep into history and lies at the root of debt jubilees in the ancient religions of Mesopotian and the Middle East.

Harvest cycles led to systemic defaults thousands of years ago, with forfeiture of collateral, and concentration of wealth in the hands of lenders. These episodes were not just caused by weather, as long thought. They were amplified by the effects of credit.

The Athenian leader Solon implemented the first known Chicago Plan/New Deal in 599 BC to relieve farmers in hock to oligarchs enjoying private coinage. He cancelled debts, restituted lands seized by creditors, set floor-prices for commodities (much like Franklin Roosevelt), and consciously flooded the money supply with state-issued “debt-free” coinage.

The Romans sent a delegation to study Solon’s reforms 150 years later and copied the ideas, setting up their own fiat money system under Lex Aternia in 454 BC.

It is a myth - innocently propagated by the great Adam Smith - that money developed as a commodity-based or gold-linked means of exchange. Gold was always highly valued, but that is another story. Metal-lovers often conflate the two issues.

Anthropological studies show that social fiat currencies began with the dawn of time. The Spartans banned gold coins, replacing them with iron disks of little intrinsic value. The early Romans used bronze tablets. Their worth was entirely determined by law - a doctrine made explicit by Aristotle in his Ethics - like the dollar, the euro, or sterling today.

Some argue that Rome began to lose its solidarity spirit when it allowed an oligarchy to develop a private silver-based coinage during the Punic Wars. Money slipped control of the Senate. You could call it Rome’s shadow banking system. Evidence suggests that it became a machine for elite wealth accumulation.

Unchallenged sovereign or Papal control over currencies persisted through the Middle Ages until England broke the mould in 1666. Benes and Kumhof say this was the start of the boom-bust era.

One might equally say that this opened the way to England’s agricultural revolution in the early 18th Century, the industrial revolution soon after, and the greatest economic and technological leap ever seen. But let us not quibble.

The original authors of the Chicago Plan were responding to the Great Depression. They believed it was possible to prevent the social havoc caused by wild swings from boom to bust, and to do so without crimping economic dynamism.

The benign side-effect of their proposals would be a switch from national debt to national surplus, as if by magic. “Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back liabilities, the government acquires a very large asset vis-à-vis banks. Our analysis finds that the government is left with a much lower, in fact negative, net debt burden.”

The IMF paper says total liabilities of the US financial system - including shadow banking - are about 200pc of GDP. The new reserve rule would create a windfall. This would be used for a “potentially a very large, buy-back of private debt”, perhaps 100pc of GDP.

While Washington would issue much more fiat money, this would not be redeemable. It would be an equity of the commonwealth, not debt.

The key of the Chicago Plan was to separate the “monetary and credit functions” of the banking system. “The quantity of money and the quantity of credit would become completely independent of each other.”

Private lenders would no longer be able to create new deposits “ex nihilo”. New bank credit would have to be financed by retained earnings.

"The control of credit growth would become much more straightforward because banks would no longer be able, as they are today, to generate their own funding, deposits, in the act of lending, an extraordinary privilege that is not enjoyed by any other type of business," says the IMF paper.

"Rather, banks would become what many erroneously believe them to be today, pure intermediaries that depend on obtaining outside funding before being able to lend."

The US Federal Reserve would take real control over the money supply for the first time, making it easier to manage inflation. It was precisely for this reason that Milton Friedman called for 100pc reserve backing in 1967. Even the great free marketeer implicitly favoured a clamp-down on private money.

The switch would engender a 10pc boost to long-arm economic output. “None of these benefits come at the expense of diminishing the core useful functions of a private financial system.”

Simons and Fisher were flying blind in the 1930s. They lacked the modern instruments needed to crunch the numbers, so the IMF team has now done it for them — using the `DSGE’ stochastic model now de rigueur in high economics, loved and hated in equal measure.

The finding is startling. Simons and Fisher understated their claims. It is perhaps possible to confront the banking plutocracy head without endangering the economy.

Benes and Kumhof make large claims. They leave me baffled, to be honest. Readers who want the technical details can make their own judgement by studying the text here.

The IMF duo have supporters. Professor Richard Werner from Southampton University - who coined the term quantitative easing (QE) in the 1990s — testified to Britain’s Vickers Commission that a switch to state-money would have major welfare gains. He was backed by the campaign group Positive Money and the New Economics Foundation.

The theory also has strong critics. Tim Congdon from International Monetary Research says banks are in a sense already being forced to increase reserves by EU rules, Basel III rules, and gold-plated variants in the UK. The effect has been to choke lending to the private sector.

He argues that is the chief reason why the world economy remains stuck in near-slump, and why central banks are having to cushion the shock with QE.

"If you enacted this plan, it would devastate bank profits and cause a massive deflationary disaster. There would have to do `QE squared’ to offset it," he said.

The result would be a huge shift in bank balance sheets from private lending to government securities. This happened during World War Two, but that was the anomalous cost of defeating Fascism.

To do this on a permanent basis in peace-time would be to change in the nature of western capitalism. “People wouldn’t be able to get money from banks. There would be huge damage to the efficiency of the economy,” he said.

Arguably, it would smother freedom and enthrone a Leviathan state. It might be even more irksome in the long run than rule by bankers.

Personally, I am a long way from reaching an conclusion in this extraordinary debate. Let it run, and let us all fight until we flush out the arguments.

One thing is sure. The City of London will have great trouble earning its keep if any variant of the Chicago Plan ever gains wide support.

It’s Been a While

Yes, it’s been too long, in my view at least, since I’ve last put a pen to paper, so:

ArtAssure Ltd. News

Moss: Dialogues Between Art & Design, the auction organized , curated, and executed by Murray Moss and ArtAssure was a resounding success. With all results in and counted the sales rate by value exceeded 83%. Records were set in Pre-War Giacometti sculpture, Robert Wilson drawings, Doug Argue paintings, and design works by Maarten Baas, Studio Job, Hella Jongerius, and Patricia Urquiola. The exhibition in Phillips de Pury’s 57th Street space and the catalogue written by Murray Moss drew accolades from the normally skeptical auction press. Thank you Franklin Getchell, the ArtAssure team, the Phillips catalogue, installation, and PR teams, Patty Hambrecht and Simon de Pury for backing up Murray in this extraordinarily creative sale.

ArtAssure Financing Innovation

ArtAssure has instituted a first in the world of art finance. We are now able to advance funds to borrowers who intend to dispose of art within ten business days of the loan request.

Art Market and the Like

We have noted of late that a substantial supply of some importantly priced art is beginning to flow to the market from none other than collectors, investors, and dealers who had been on the buy side of those same artists for the past four years or so and through last May. Some names worth watching in this category are Gursky, Hirst, Kapoor, Oehlen, Richter, Warhol, and Wool. At the same time it appears likely that new records will be set in November for such classics as Franz Kline and Henry Moore.

On the whole we are seeing a pretty even balance of eager sellers and willing buyers at the top of the market. Below the top layer we continue to see undeniably more sell than buy interest.

Recent Absurdities

New York Times, October 6th, “Shopping List: Tuna, Detergent, a Warhol” by Patricia Cohen

Patricia Cohen, a critic of some note, writes about Costco again selling art, having ceased selling art six years ago after being caught selling forged Picasso drawings. Now Costco has recommenced its quest into the “art” business with the same dealer of works who supplied the fake Picassos,
Greg Moors, who in his wisdom as a dealer declares:

1. “It takes time to find and frame original art…”
2. He is “driven by his vision of art for everybody…”
3. “The customer is more important than the deal.”
4. “UNSIGNED WORKS ELIMINATE THE POTENTIAL FOR FORGED SIGNATURES.”

Now what Mr. Moors is selling represents little more than copies of copies. The fact that there is no signature and, therefore, no forged signature is one of the greatest lines in art history. I pass it on to the dealer community for their clients who insist on a signature on the front of the Picasso!

Though this is all amusing it is deeply disturbing that my Costco membership is sullied by such nonsense.

Washington Post, October 12th, “Can You Destroy a Rothko Painting That is Available Everywhere?” by Kriston Capps

I don’t know what Mr. Capps is noted for, probably nothing much. Capps presents incoherent jabber for an argument about why its makes no difference that a crazy destroyed a Rothko painting. His extraordinary declarations include:

1. “What better way to point out that a paint-covered piece of canvas might by overvalued by society than by tagging it?”

2. “As his (Rothko’s) works age, they find their way into the collections of hedge-fund managers and other conspicuous consumers, negating what Rothko said his work stood for.”

Now really! Must we destroy to prove society wrong in taste? No one seems to like hedge fund managers or conspicuous consumers these days - BUT - what in the world does that have to do with the greatness of Mark Rothko?All in all what a great day it will be when art writers stop writing about themselves, their silly little prejudices, and write about art. The rest is a sad waste of time and degrades even the reader.

Some Political Musings: Romney at War

We have finally figured out the one issue on which Governor Romney is consistent: War.
  • Make economic war on China for providing goods to the world less-expensively and more efficiently than anyone else.
  • Make war in the Middle East economically and otherwise for those countries not sharing our political and religious views nor, any longer, being interested in American domination.
  • Make war on the poor and middle classes for being poor or dispossessed
  • Use congress as a warrior nation unto itself, aggressively blocking any and all legislation needed to keep America from descending to Third World status.
  • Make war on women, depriving them of their right of choice.
  • Make war on the old and infirm by depriving them of health care and Social Security, the social nets that they have paid for over their lifetimes.
  • Make war on the American taxpayer by weighting the tax obligations of the taxpayers in such a way as to have the middle class bear the brunt of the nation’s tax needs.
  • Make war on the children and young adults by preaching the degradation of our already impaired educational system.
  • Make war? Will the tanks, rockets, bombs and troops be rallied should he be elected? It would certainly serve his masters’ who paid for his election. The profits accruing to the Romney sponsors would be extraordinary. Of course, Dick Cheney’s company, Halliburton, and some other defense players are no longer American companies. The tax burdens and cost of life of such a war would again fall on the shoulders of the lower and middle classes!

Sadly, the only platform on which Governor Romney has spoken clearly is the platform of war!

BOB KERREY WANTS TO RETURN TO WASHINGTON

I chatted with Kerrey last week and the rational folks might want to know a bit about a rational political and economic leader. Some Kerrey opinions on which I think he might act:

  • End the Senate filibuster. It has become a crippling crutch for the weak and uninformed.
  • Consolidate all health care for the young, old, rich, and poor, so that all 300 million Americans receive health care in an orderly and economic manner. Kerrey’s ideas would cut health care spending while enhancing its quality and availability.
  • Grow the middle class by creating tax policies to distribute the burdens fairly.
  • Re-establish the civil rights which are meant to protect all Americans - women, gays, all financial, educational and religious classes, with a careful eye for the rights bestowed upon the nation by the Constitution.
  • Kerrey tells me he is against the continued transfer of taxpayer money to the large banking institutions. He says the bank regulations are too convoluted and need to be simplified, made stronger, and enforced. Too Big to Fail should be a failed concept, as no bank should be allowed to be that big.
  • An emphasis on education will be a Kerrey cause.
Bob Kerrey deserves our support. We need elected officials who think; who think for themselves and are not beholden to either party line. I think this guy can do it. I am linking to a contribution form. Learn more about Kerrey. Send him a contribution. Move towards a more sane government!
Asher Edelman

"The One Housing Solution Left"

April 8, 2008: “A Real Rescue Plan” by Asher Edelman

August 13, 2012: “The One Housing Solution Left: Mass Mortgage Refinancing” by Joseph E. Stiglitz and Mark Zandi

In April of 2008 we put forth a plan to improve the economy through profitable government assistance to homeowners. Today, August 13, 2012, the plan was put forward under different authorship. Regardless of authorship one or another variant of this plan needs to be instituted now.

See below to read the two articles.

A Real Rescue Plan 

By Asher Edelman - April 8, 2008

The current liquidity crisis reveals the urgent need for a bold new idea to save the system. This is no time to be throwing $30 billion at the problem and hoping it will staunch the hemorrhaging, because $30 billion will seem minor when the losses add up to, perhaps, a hundred times that figure.

Here is a straightforward plan that will produce immediate results, even profits, for the federal government and the individuals caught up in the current mess. This plan will not only create liquidity, but will also eliminate financial guesswork. There will be clean balance sheets and no further worries about the hidden investment time bombs that could deepen the crisis. It will be fair and completely voluntary-no mandates, no amnesty for “evil” speculators (the principal will be paid back on most every mortgage). It will generate an income stream for the federal government, and even open a chance to reap substantial profits over time as mortgages are redeemed. People will get to keep their homes! If the present agenda is to find a fair route of stabilizing the whole nation’s finances and not just satisfy constituencies on Wall Street or in Washington, this is a broad-based plan that works from day one and promises substantial rewards well into the future.

Face it, there is no institutional liquidity under the present setup. I define institutions to include banks, insurance companies, hedge funds, investment banks and foreign institutions that do substantial business in the United States. The financial institutions who own mortgage-backed and other junior securities are stuck with them. Even if the assets have value, even if the banks were careful, they are all hedge funds, investment and commercial banks— in the same boat - sub prime paper is illiquid. Shortly, the market for prime securities will become illiquid. Bad debt often drives the future of better debt badly! The Commercial banks are not cut out to rescue this kind of mess. They are too much part of the problem. It is time to discard all concepts of what the bailout total ought to be. What is needed is a window to provide private institutions with liquidity. It is time for the government to get into this business by buying non-liquid, mortgage-backed paper for realistic discounted market prices. Private institutions get their liquidity, and live to fight another day. The speculators will have to “pay” for their bad behavior, realizing their losses, and those who over-borrowed will remain responsible for the principal of every mortgage.

Who can do this? Managed by the executive branch, a federal agency can not only buy these assets, but will also have the option of reducing individual mortgage rates to their original levels. In the end it can profit handsomely as mortgages purchased at a discount can grow to full value with nurturing. The transfer from institutional balance sheets will force the worst of the debt out of private institutions, many of which gauge borrowers with escalated rates that started at 6%, are now creeping past 10%, and, in cases of default, can top 18%. The government can use a combination of the existing institutions, FannieMae and FreddieMac, along with, perhaps, a new vehicle devised to actively move in and out of the market. It ought to be set up under the aegis of the executive branch and, instead of 30,000 Federal bureaucrats, it should be staffed by 100 efficient finance grads under one expert market-maker. Perhaps Goldman Sachs can provide us with yet another leader for this operation.

The One Housing Solution Left: Mass Mortgage Refinancing
By Joseph E. Stiglitz and Mark Zandi - August 12, 2012

More than four million Americans have lost their homes since the housing bubble began bursting six years ago. An additional 3.5 million homeowners are in the foreclosure process or are so delinquent on payments that they will be soon. With 13.5 million homeowners underwater - they owe more than their home is now worth - the odds are high that many millions more will lose their homes.

Housing remains the biggest impediment to economic recovery, yet Washington seems paralyzed. While the Obama administration’s housing policies have fallen short, Mitt Romney hasn’t offered any meaningful new proposals to aid distressed or underwater homeowners.

Late last month, the top regulator overseeing Fannie Mae and Freddie Mac blocked a plan backed by the Obama administration to let the companies forgive some of the mortgage debt owed by stressed homeowners. While half a million homeowners could be helped with a principal writedown, the regulator, Edward J. DeMarco, argued (we believe incorrectly) that helping some homeowners might cause others who are paying on their loans to stop so that they also could get their mortgages reduced.

With principal writedown no longer an option, the government needs to find a new way to facilitate mass mortgage refinancings. With rates at record lows, refinancing would allow homeowners to significantly reduce their monthly payments, freeing up money to spend on other things. A mass refinancing program would work like a potent tax cut.

Refinancing would also significantly reduce the chance of default for underwater homeowners. With fewer losses from past loans burdening their balance sheets, lenders could make more new loans, and communities plagued by mass foreclosures might see relief from blight.

Well over half of all American homeowners with mortgages are paying rates that would appear to make them excellent candidates to refinance. Many of those with stable jobs, good credit scores and even a modest amount of home equity have already done so, taking out 30-year loans at rates around 3.5 percent, some of the lowest rates since the 1950s. But many others can’t refinance because the collapse in house prices has wiped out their home equity.

Senator Jeff Merkley, an Oregon Democrat, has proposed a remedy. Under his plan, called Rebuilding American Homeownership, underwater homeowners who are current on their payments and meet other requirements would have the option to refinance to either lower their monthly payments or pay down their loans and rebuild equity.

A government-financed trust would be used to buy the mortgages of homeowners who had refinanced at an interest rate that was about 2 percentage points more than the record-low Treasury rates at which the government borrows. This would generate enough interest income to cover the costs of any defaults, administration of the trust and other expenses. Families would have three years to refinance; after that, the trust would stop buying loans and eventually wind itself down as homeowners repaid their loans.

Homeowners would see lower mortgage payments and rebuild equity more quickly. Taxpayers would get their money back, with interest, and would gain further as a stronger economy lifted tax revenues. Banks and other mortgage investors would get potentially troubled loans off their books. Some banks won’t like losing the large amounts of interest income they are earning on their current mortgages, but if the refinancing market were working properly these loans would have been refinanced long ago.

If the program was very successful, we envisage that two million outstanding loans could be placed in a Rebuilding American Homeownership trust at its peak. If the average mortgage balance was $150,000, then at the peak there would be $300 billion outstanding.

The federal government could finance the plan directly, through the Federal Housing Administration, or indirectly, through the Federal Home Loan Banks, which offer government-backed credit. Or the Federal Reserve could underwrite the plan; the central bank’s chairman, Ben S. Bernanke, recently talked about the Fed’s doing something akin to the Bank of England’s new Funding for Lending program, which offers incentives to banks to increase lending to households and nonfinancial businesses.

Opponents of additional borrowing or Fed lending will say that a program like this is an unacceptable risk, but the greater risk is to do nothing and let the housing market continue to hold back the economy.

Mr. Merkley’s plan resembles the Obama administration’s Home Affordable Refinance Plan, or HARP, which was designed to help underwater homeowners refinance loans backed by Fannie and Freddie. It has made possible 1.4 million refinancings, far fewer than the goal set in 2009 of 3 million to 4 million. The administration has made some improvements to HARP and proposed others. But the Merkley plan has the potential to go further, reaching the 20 million households with mortgages that aren’t backed by Fannie or Freddie.

The Merkley plan has a successful precedent in the Home Owners’ Loan Corporation, established in 1933. It swept more than a million Americans out of foreclosure and into the long-term, stable mortgages that would become the hallmark of the middle class during the 1950s and ’60s. It’s time to revive this idea.

Since the Great Recession began almost five years ago, housing has been at the heart of our economic woes. If we do nothing, the problem will eventually resolve itself, but only with significant pain and a long wait. Mr. Merkley’s plan would speed the healing.

REVOLT magazine: The Occupations of Asher Edelman

Asher Edelman can be described as standing, prominently, between 2 worlds. His Wall Street career, beginning in the 1960’s, in investment banking, money management and derivatives trading not only brought renown but enabled him to build significant collections of contemporary and Modern art as well as antiquities. In the same year, 1988, that he famously taught a course at Columbia called “Corporate Raiding - the Art of War,” (based upon the ancient Chinese military treatise by Sun Tzu), Edelman relocated to Switzerland and founded the FAE Musée d’Art Contemporain in Pully, where he presented the first major European retrospectives of artists including Roy Lichtenstein, Jean-Michel Basquiat, and Robert Mapplethorpe.

Currently in New York City, Edelman’s projects include Edelman Arts, which deals in Old Master through Post-War art in addition to representing contemporary artists, the art finance company ArtAssure Ltd., and the website AsherEdelman.com, where he writes about both finance and art from his unique depth of experience, enthusiasm and insight, which he also shared in conversation. His first acquisitions, Asher told us, “Were art books at Metropolitan Museum when I was 12, then some student work when I was 17. My first painting, I was 19 or 20, was from a fellow student whose name was, and is, Bill Tinker.”
Most recently, he added to his collection “A painting by Nabil Nahas who in my opinion is one of the 2 most interesting abstract painters developing a new slant on abstraction today. (Doug Argue is the other.)” What motivated his purchases then vs. now? “The motivation is the same, it’s a kind of drive that I really can’t define.”If he were to teach a class for artists about the economic realties of the business, Edelman told us, “I would certainly teach them how to get a public market for their work.” With the caveat, “This is talking money not art.” He continued, “Making sure to the extent that they can that there are successful auction records of their works. I would want them to be certain that their work was original, referential perhaps but still original, and suggest that they in their persona develop something original. I would focus on the commitment of a dealer not only to sell but to place it properly with collectors who will show and care about the art, to obtain museum representation, and to share with other dealers and not prevent the art from circulating.”

In a twist on what we usually can expect from the high-end art market and media, he emphasizes that “It troubles me to talk about art this way, it’s hard for me to mix actual art and economic realities. My brain is very divided. I am a collector and I adore art… when I am dealing with one I try to divorce my brain from the other.”

But Asher Edelman defies typecasting in any role. Ubiquitously identified with Wall Street, in his writings he weighs in positively on Occupy Wall Street. ”I am optimistic for the economic and social outlook for the United States! During the next four or five years we will, once again, shift into gear. “Occupy Wall Street” will come to be thought of as “Save the Nation(s).” (1)

"I think in the short term it has focused Obama on his need to at least appear that he is interested in the common man," he told us. "He gave that impression in his 1st run — I was a very serious supporter. During his tenure in office he has evidenced much less concern for the common man, much more interest in having arrived in the establishment and a seeming wish to remain there. He has ignored many of his promises including those related to preserving what we think of as democracy in this country.

"Occupy Wall Street and other grassroots groups will certainly influence how he runs for office. They will also influence those Republicans who have longed for the right once again to be moderate Republicans. It is likely that a vote may become more important than a dollar to those running for office… I believe we are seeing the beginnings of an important economic and sociopolitical change in America." Does this mean that Asher Edelman is no longer a committed capitalist?

"The Occupy Wall Street crowd sees this as a problem with capitalism. I believe that they are correct in their target, but wrong in their diagnosis. This is not a problem of capitalism since Wall Street is a practitioner of monetarism. A real capitalist system works through real intermediation creating positive opportunities for productive enterprises…" (2).

"In a capitalist society, recoveries from recession and depression can only be brought about through a combination of fiscal and monetary stimulation," he explained. Fiscal refers to government spending, for example on projects such as schools or roads, to spur the economy, monetary stimulation works through control of interest rates. "It is not a problem of capitalism that retards the recovery of the system, it is the focus on monetary stimulation and the lack of interest in fiscal stimulation that will continue to deter a recovery. Both are needed in times of stress."

In other words, to build metaphorical bridges our economy and society need in order to recover, rather than tear down the existing system, we should well, build bridges. And what about the impact of the protest movement on art… is the street the new salon?

"Maybe," Edelman said, "It certainly was in the 60’s, in the 70’s, and to a very small extent has been when addressing the torture [of prisoners] issue in 2000’s. Whether the artists are going to focus on social issues at this time, when abstraction is such a strong movement again, is doubtful."

"The art world appears to be lost in the funhouse, and the fun is losing its fizz," reads the press release for his recent exhibition at Edelman Arts, "Abstraction: What is Real." It describe a "current shock-worn, étonné-by numbers climate…" Anyone who has attended a high-profile auction and watched the numbers on the bid board next to the mute object of the moment’s desire soar to the stratosphere can testify to how it stuns the senses and sensibilities of most mere mortals. And in that climate "Abstract art takes us totally by surprise."

Elaborating, he explained that so many of the works sold at these stunning prices, “Warhol, Damien Hirst, Richter… are kind of manufactured… Nothing is wrong with manufactured art, but those who are really into in art, as opposed to having what their friends have, what some sharp dealer sold the group, or what some museum curator was influenced to buy, are going to have art that is above all original in its execution and idea. This once again includes abstraction, especially where the artist is progressing the art of abstraction.”

When asked if abstraction was on its way to the kind of dominance it attained in (and brought to) America in the mid-20th Century, where it was embraced to the point that many considered earlier American art to be “provincial,” (3) Edelman stated firmly that from his historical perspective, the public popularity of the movement had little to do with that attitude. “Americans at that time did not grow up with the iconography necessary to understand art before abstraction. It had everything to do with the fact that they could come to art, look at an image, and they did not have to bring anything with them to enjoy the image… sometimes you did not need iconography or knowledge to look.”

The same does not apply today. “Now that we have had 60-70 years of abstraction being a force, it has its own iconography, its own references, becoming complex in the way we think of Modern (1906-45). There are quite a few very good players, I only show some of them, who have found ways to change the face of abstraction, to be original again in the world of abstraction, which is not easy. If connoisseurs tended to be the winners in an immediate way, then abstract art would dominate again,” he concluded, but as far as the public is concerned, “It is only in the long term that we will understand the importance of this present generation of abstract artists.” “Abstraction: What is Real” was conceived as “a very specific show, the idea was to put together abstract work that has no reference to any figurative or representational art… I just wanted to do a ‘purified’ exhibition.” It also features several generations of abstract artists from the latest (Nahas, Argue, James Nares), back through artists who emerged later such as Frank Stella, Britt Boutros-Ghali, and Larry Poons (all still active), and their late forebears, Ashile Gorky, Fritz Bultman, and Michael Goldberg.

Also featured was an artist of that first wave who still paints today, Mary Abbott, who Asher first learned of while putting the show together.

Mary Abbott’s strong personal and professional relationship with de Kooning influenced his output to an astonishing degree. Abbott had experimented with abstract landscapes from her Southampton home for nearly five years by the time de Kooning began his own landscape series… As Abbott and de Kooning’s lives were intertwined, so too were their works which seem to share subject, technique, and even color palette…When it comes to Abstract Expressionism, the same auspicious names dominate: Pollock, de Kooning, Rothko, Motherwell, Gorky … Imagine a largely overlooked protagonist in this narrative, a crucial figure in the New York Post-war art scene whose story is only now surfacing. This new story is emerging and with it the understanding of the profound influence Mary Abbott had on the Abstract Expressionist movement and especially on her lover, Willem de Kooning.” (4)

Back to the present, would current events influence Edelman’s own behavior as a dealer or collector? “The sociopolitical climate does not have anything to do with my acquisitions or the gallery,” he said, “Though the artist in our next exhibition, Chris Winter, is about sociopolitical climates, sometimes past, sometimes present.”

In the spirit of “the 99%,” we asked Asher how he would advise a would-be collector with $1500 or less to spend. He replied that he would give the same advice to a collector with a budget of $1500 or $15 Million: “Spend 2 days a week looking at art until he is confident that he can identify what is original, which is not possible without looking at art. Then come back to me and I will tell him what I think he should buy.”

Sources:

(1) “Optimistic” © Asher Edelman, 2011: http://asheredelman.com/?p=234
(2) “A less than equitable arrangement” © Asher Edelman, 2011: http://asheredelman.com/?p=241
(3) “Art Wars” by Linda DiGusta (c) Cognoscenti Magazine 2011
(4) “Mary Abbott: A Wake Up Call” © Asher Edelman, 2012: http://asheredelman.com/?p=269

EU, The Truth of the Matter

Of the €400 billion plus in rescue funds loaned to Greece all but €15 billion went to assist the banks. Almost all of what was received by the banks was recirculated to the sovereign coffers. The emergency loan pledged to Spain of up to €120 billion is earmarked to aid the banks who, in turn, will re-lend most of it to the Spanish government. The same will hold for Italy and the myriad of nations both within and outside the Eurozone including the internal fiddling of the U.S. Fed.

The only notable conclusion of yesterday’s EU marathon was that, rather than keeping the loans to Spain as senior to the banks, their shareholders, bondholders, and managements, the loans would now become pari-pasu with those of the banking interests. This, in effect, transfers the risk of the euro aid from those who receive it to those who give it, the taxpayers of the lending nations. My, how the world has learned from years of US Federal Reserve behavior. It is now de rigueur to sanctify the banks while devastating the taxpayer. Yes, it is true, the world needs an operating financial system to function commercially and otherwise. It does not need taxpayers and depositors to finance and guarantee speculative roulette - wheel behavior. The banking system is integral to our society but it is not the only factor that keeps the society functioning. Yet, globally the banks have received more than 95% of all funds meant to save and turn around the current economic crisis. A better balance is needed - a much better one, if we are to survive and grow from the current crisis.

The only tangible result of yesterday’s EU conference was to have transferred the risk of Spain’s bailout from the bailed out banks to the bailers - the taxpayers. Not exactly a heroic stand nor of much consequence, except morally.

The Edelman Shock Market Index

There is no Edelman Shock Market Index, only a bit of intuition and experience. My intuition and experience say, “never predict markets,” but the Emperor’s Clothing, or lack thereof, are about to be noticed.

In different ways, but surely , the conditions in the U.S. are as equally threatening as they are in other “developed” nations, but…

Lehman et. al., the banking fiasco et. al., did not come from left field if one was watching. Time to be watching, and by the way, to check out of your vast array of stocks and bonds (Treasury’s included). The Emperor’s Strip Tease is coming to this side of the two oceans soon.

Asher Edelman

Musing on Derivatives

I read with interest in the Financial Times today about “Morgan Stanley’s plan to shift a large chunk of its $57 trillion derivatives portfolio into the part of the group backed by customer deposits…” In the same article, a “looming Moody’s cut could cost Morgan Stanley $9.6 billion…”

J.P. Morgan must be restive in his heavenly retreat, or at least turning in his grave.

I would guess that a small hedging error could cost 1% or so — say $500 billion — certainly possible. Imagine a broken counter-party of note and the systemic inability to cash in the “hedges.”

Moody’s downgrade costing $9.6 billion seems a mere bagatelle.

Whence Dodd-Frank, Volcker, or even a return to Glass-Steagall?

Most banks carry their massive derivatives positions in the group backed by customer accounts. Discomforting indeed with $875 trillion estimated as the total derivatives positions carried by these same banks.

The idea that Morgan Stanley’s derivatives position is more than three times the total U.S. debt and that the total derivatives position backed by banks exceeds by multiples the entire world’s sovereign debt is, indeed, worthy of note.

Musings on the US Deficit and Debt

I read today in the New York Times that between 2008 and 2012 government (taxpayer) subsidies to the banks equaled $1.3 trillion. As those of you who read my missives know, my estimate was considerably lower.

At the same time, we are informed that the Fed has expanded its balance sheet by $4 trillion in its quest to assist the financial community through Q1, Q2, Twist, and perhaps, “Twist Again!”

Now let’s imagine that we had sane representation in the White House, House and Senate.

Would it not make sense to:

1) Reduce the Federal deficit by $400+ billion per year by damming the waterfall of bank subsidies?

2) Eliminate the $4 trillion on the Fed balance sheet; essentially the result of buying US government paper from the banks which the banks bought from the Treasury and marked up for sale to the Fed?

Now, for arguments sake, the Fed owns $4 trillion of Treasury paper. The Treasury pays the Fed interest on that paper, adding to the Federal deficit by at least $60 billion per year. The same $4 trillion appears as government debt on the US balance sheet — part of what pushes us beyond planned debt ceilings. To simplify the situation, the US is lending to the US, distorting both its income statement and balance sheet. What if the $4 trillion owed by the borrower to the lender were to be cancelled? We would reduce the US debt by $4 trillion and the deficit by at least $60 billion a year. We will have also achieved a step towards honesty in Federal accounting, a long lost responsibility.

Yes, a mere stroke of the pen in a rational, uncorrupted government can reduce the Federal deficit by about $460 billion per year and reduce the Federal debt by about $4 trillion. Try it — we will like it.

Asher Edelman

Please visit ArtAssure.com or email info@artassure.com for more information.

Musings on the Art Market

The May auction performances gleaned countless viewers, gawkers, critics and some buyers; indeed a sufficient number of buyers to drive the prices of a small number of pictures to new records. The rotation within the small pyramid at the top continued.  Munch entered, a Viking. Prince exited, a bad joke too many. Basquiat trumped Hirst. Wool went back and forth between big prices and no prices.  The classics made records; some missed completely. The nights soared with genius marketing. A torn Picasso brought a record price – more than even intact Picassos of the period. Lackluster works of name provenance soared beyond prices that great works usually bring. Buyers were not fearful of competing with guarantors. The swansong of, perhaps, the best auctioneer of the last three decades, was a song of great spirit, encouraged by vigorous bidding. All and all the future seems evident. Or does it?

At the same time, the remains of the night sales, pretty good to even great works of art, less in the focus by the small cadre of “hype” buyers, did not do as well. Those which sold often sold for far below the low estimates. The top of the popular (with these few buyers) pyramid is getting smaller. Some artists are falling out!  Their replacements are not so much new artists coming in but rather more the works of art from the small group of artists viewed as great and HOT. Clearly this means more spectacle – fewer names for the buyers in the pyramid leads to higher prices for their names! Richter, Calder, Warhol, Rothko, et al. We read and believe the art market is rising. It is spectacular. It is the greatest alternative investment. It is where we should have a portion of our investments. ALL OF THIS IS TRUE, but like all other markets, the art market goes up and even goes down once in a while – all markets correct regardless of long-term trends. No market can be measured in total by a less than 1% sample.

In fact, observing the recent auctions, the gallery business, the art fairs, the private dealers, even if anecdotal, might yield a view that the larger art market has become top-heavy, and though the “popular” artists’ works are experiencing increased prices, the rest is, at best, in the doldrums. Less popular works in the night sales barely survived the evenings. The day sales spoke huge numbers to the world, but once again these numbers were achieved as a tail to the “popular” artists, not as a spreading out of interest to other art that is both good and available. The less hyped works failed to achieve prices in any way related to the “big boys’ art.” Recent auctioning of “people’s art,” such as prints and young artists, have seriously disappointed most sellers. The average gallerists (not the few at the top) are struggling, some on the verge of closing or reducing their spaces and staff. Some, having decided to close, leave the business. Art fairs, I read all the time: “We did very well. We broke even and made great contacts for the future.” As art dealers are prone to optimism, I think that means, “We didn’t do well at the art fair.” Private dealers call each other daily to complain that the auction houses and art fairs are taking their business away.

Is it possible that these anecdotes have a meaning? Well, if they do we are about to repeat periods of market history that these same anecdotes might have predicted. The two that ring most vividly to me are November, 1989 and May, 2008, the high auctions before the corrections. I think we are soon due for a correction. This does not change my view that art is a most interesting asset to hold. The market is developing with increased transparency and liquidity. It has, by most measurements, outperformed ALL other markets for the last fifteen years and probably for decades. However, one needs to proceed carefully. Rebounding from corrections in the art market generally leave much of the previous hype behind for the new trip to the moon.

PS:  A must see: The Calzolari exhibition at Marian Boesky in Chelsea. The under known master of Arte Povera outpaces almost all else in the neighborhood. Also, Frank Stella at Ann Freedman on E. 73rd Street – stunning, joyful, insightful work.