by Asher B. Edelman
April 8, 2008
I said the financial system would need at least 100 times the $30 billion advertised by the Fed as the ultimate need to save the system. I was wrong. Three trillion dollars was not sufficient to save the banks; it took somewhere between $13 trillion (AE estimate) and $24 trillion (Government Accounting Office estimate) to give the appearance of having saved the banking system. Yet on April 17, 2012 the financial system remains at the edge of bankruptcy. In fact, in much of the world, the banks are over the edge!
April 8, 2008
I proposed a program whereby mortgage paper would change hands to financially strong purchasers at market prices. The perpetrators of the mess would have to take their losses. Rates to homeowners would be substantially reduced with government money made available to the new owner or owners of the mortgage paper. The defrauded would keep their homes. The defrauders would eat their losses.
April 17, 2012
No change from April 8, 2012 to April 17, 2012. The defrauders sit on the paper – carried at face value on their books. The defrauded continue to lose their homes! There has been no serious shift in ownership of the mortgage paper nor have many mortgages been adjusted in interest costs.
October 10, 2008
AE: “Let’s stop the favoritism and cronyism instantly.” (Halliburton moves offshore, $100 billion spent to save Goldman Sachs, etc.)
April 17, 2012
Favoritism and cronyism remain the rule. The derivatives position of the banks exceeds the pre-Lehman days, Dodd Frank is gutted. Consumer protection is jettisoned. The banks continue to borrow from taxpayers at zero percent while offering little or no credit to anyone other than large corporate clients. The Fed continues to purchase debt issued by the Treasury, to create profits (where otherwise there are few) for the financial community. Real inflation begins to take hold in a negative growth environment. Real unemployment continues to soar. The middle, upper middle, and poor classes remain devastated throughout the Western world.
January 7, 2009
I talked about the risks of commodities and debt derivatives, the risk of clients of banks, brokers, and commodities exchanges who “guarantee” counterparty responsibility and protect customer funds; the risk of default and systemic failure and the risk of “segregated” funds not surviving default.
April 17, 2012
We have seen the beginning of this scenario in MF Global. “Not so easy to guarantee customer segregation in default,” has become the cry of the guarantors. Watch for more of the same. No new safeguards in place to protect anyone from the raiders. Wall Street influences the Obama team as much as it influences the Tea Party when it comes to putting the customer on safe ground. The administration’s first and foremost priority remains the preservation of their “relationships” with donors and lobbyists.
May 18, 2009
“How the Frost Came By and Ate the Green Shoots”
I said, “Until the focus of restoration of the economy becomes one of serious aid to the middle and lower income groups there will be no significant recovery. In fact, rampant inflation which will follow from the actions already put in place will further cripple the backbone of the most important economic engine – the Middle Income Consumer.”
April 17, 2012
NY Times: “… Workers’ earnings fell 0.4 percent in March…” Consumer prices are up 2.7% in March year on year while workers’ wages have declined, an impossible situation which has been, more or less, the case from 2008 to date. The economy is floundering; its only support comes from the spending of the wealthy class, fueled by stock and luxury goods markets, all fine for those of us who can; but what about the broader economy and the workers? Can markets continue to perform without an increase in employment, consumer spending and fiscal stimulation? Probably not! We said in 2009 and say today, “There are no green shoots that can survive the current frost. New economic actions, departures from cronyism must commence.”
June 22, 2009
“Spanking Banking” – Our most applauded title.
What we are offered as a regulatory scenario is, once again, cronyism! We are presented with a plan that will be unmanageable and permit the same abuses as those that brought on the crisis guided and managed by the same folks who were in control before the crisis and remain in place now. Saving the banks while accompanied by the same set of managers and businesses is an exercise in futility. It adds nothing to the economy that the government is not already funding except undue risk. A solution is clear; though, I imagine, abhorrent to the bankers.
1) Commercial banks should be restricted to those functions which have to do with the gathering of deposits and lending in a prudent manner. A Trust (that means TRUST) department could well fit in. Trading for their own accounts, except as it relates to gathering deposits and lending must become a NO NO. The divestiture of all other business must begin now while the government is still funding and there is the spirit in Congress and among the American people to reform the system.
2) Insurance companies need to go back to good old underwriting and investing. An open book on what is insured, even through derivative transactions, needs looking after by a central regulatory agency.
3) Investment banks and brokers should be limited mostly to securities transactions as agent and the underwriting of equities and debt as principal. Derivatives and principal transactions should be completely transparent and “on the books”. Requiring Exchange trading of most or all derivatives will go a long way towards disclosure, fairness and safety.
4) Interest rates for credit cards, consumer finance and the lot should be capped at 3% over cost of money, at least over the next two years. Defaults, late payments and the like should not carry penalties other than the cancellation of the financing, should such action seem prudent.
5) Small and medium size businesses should be able to borrow with government guarantees-the monies currently guaranteeing bank debt would do better in stimulating the economy as guarantees for productive enterprises than as subsidies for banks who either don’t utilize the monies at all or do so at egregious profit margins thus delaying any real recovery in the business cycle. Of course, there must be some risk on the part of the lenders, but that could be, perhaps, 20% of the loan principal left without guarantee.
All financial institutions must be required to maintain adequate reserves and no financial institutions, including hedge funds, should be permitted to utilize more than three times leverage. Should these programs be put in place now there must be a mechanism to review the results and amend the plans as we go with a total review after a five year hiatus from the fumbling foolishness we are presented with currently.
None, I repeat, none, of “Spanking Banking’s” ideas, despite being professed by the administration on many occasions, have been instituted. All of the ills of pre-2008 are carried on in even more exaggerated fashion than before.
April 13, 2010
“Myths of Today”
I said that a commitment to Greece (then said to be necessary) of 30 billion Euros would not save the Greek system. By April 17, 2012, hundreds of billions of Euros have been committed to Greece with the problems unsolved and becoming untenable to both the Greeks and the Eurozone. I predicted a default. We have had one and will certainly have another; both are short term band-aids. We suggest the best solution for Greece, not for Germany, will be a Greek withdrawal from the Euro currency zone. This will most certainly be Greece’s ultimate course; restricting growth in Greece and other weak nations will result in revolution. Allowing sufficient spending of Euros for the troubled countries to continue to grow again will result in mass inflation equal to that of Weimar. Only exiting can work.
May 19, 2010
WHO WILL SAVE THE COUNTRIES?
WHO WILL SAVE THE CURRENCIES?
The banks seemed a problem (actually most still are) but there were countries, governments and tax payers who gave the banks access to unlimited cash in a multitude of packages. It almost worked!
Who will save the countries? Who will save the system?
There is no world government, world Fed or world taxation system to help the countries – let alone the economic blocs. Most currencies – certainly the most circulated ones are in a competition to become worthless in terms of each other – in fact they are quickly becoming worth less in terms of what they can buy, a frightening precursor to inflation without growth. (Stagflation)
It is all becoming evident as the Euro currency zone falls into disarray. Not only the “Southern” countries are in trouble but also the Northern countries; France is at the most risk (well obfuscated as only the French can do). Germany is not exactly healthy other than savings rates (internal financing) and some advantage (short lived) to its exports. The Euro currency zone will experience a series of sovereign and corporate defaults. If the Euro currency zone is to stay intact there is no choice but selective default! In the interim the Euro will be under pressure as to goods, at least, and perhaps as to other currencies. The perhaps is only because there are other currency zones in similar or worse situations – the dollar, for example – which are in the currency devaluation competition.
Only emerging countries and perhaps Norway and Switzerland will maintain some semblance of consistent buying power of their currencies. The European cycle will take time. Europe will look more like a combination of the 30’s and/or the Weimar Republic rather than like Japan of the last 15 years. Probably we will experience an extreme resemblance to the 70’s in most of the rest of the developed world.
There is no SUPREME DONOR to save the economic blocs, or the sovereign nations. Medium term stagnation with product price inflation will be the result.
April 17, 2012
Of interest in this letter we suggested that in the European world only Norway and Switzerland would maintain some semblance of consistent buying power. Since, the Norwegian Kroner and the Swiss Franc have outperformed the Euro and the world’s currencies while keeping inflation (as defined by the buying power of its workers) at bay. It is impossible for us to conceive of the European financial system, as we know it today, surviving the defaults and exits of about half of its currency bloc.
October 18, 2010
“Another Banking Crisis”
We looked at the banks’ foreclosure techniques and misbehavior. Our conclusion, “The liabilities of these institutions to shareholders, bondholders, holders of bundled mortgages, new homeowners, title companies, foreclosed homeowners, etc., is huge.” The potential writedowns are horrendous.
April 17, 2012
The administration and the legislature continue to support the banks in the obfuscation of the liability issues and settle for small penalties, but as the facts continue to emerge a groundswell of public opinion and disgust will surface more of the bad behavior and will seriously impair the cronyism so well protected in this election year.
April 13, 2010
We talked about the likelihood of Portugal, Spain, Ireland, Italy, and France needing to face the same decisions as in Greece.
April 17, 2012
Each of these countries is on the brink of similar decisions – yes, France as well!
May 3, 2011
We talked about the “hard asset” derivatives markets as the source of the next economic emergency.
April 17, 2012
We have seen MF’s collapse. Is MF the tip of the iceberg?
October 19, 2011
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).” The present Administration is moving, and will move quickly, away from the “cow tow” to its previous campaign finance supporters, its paralyzed group of economic advisors (where advice is the banking establishment program of “save the banks, be damned with the rest”) towards advisors who understand the wants and needs of the nation(s). Moderate Republicans, a concept of the past, will reappear. Supply-side economics, a failure from its inception, will be shelved; the Goldman designed dangerous derivatives – Geithner and Bernanke – will be replaced. Fiscal spending, infrastructure rebuilding, leadership in educating our youth, fairness in protecting the health of the populace will resurface. Banking and investment law will be reset to the rules in place prior to the Reagan Administration. Yes, all of this can happen in a peaceful environment if government pays attention. There is a serious shift in the political environment of the U.S. taking place. “Occupy Wall Street” is simply a symptom of the need of the people to express their frustrations. We hope it will not lead to violence, either internally generated or from the outside. But wherever it leads the world is about to begin a transition, a transition for the good. Those of us who pay attention will benefit as human beings and in all ways economic. I am optimistic for the future though fearful much serious economic and social pain will be experienced getting there.
In 1961 (50 years ago) I did a paper entitled “The Economic Consequences of the Great Crash.” I am attaching it. Though a bit sophomoric and pedantic, I think most of it is relevant to where we are now and where we must go. I was twenty years old. If you have the patience, give it a read.
April 17, 2012
That the people of the world are forcing change is evident. We must hope and push for this transition. If peaceful protest in this country is denied we will see less peaceful protest, civil disobedience and further economic pain.
December 7, 2011
In “Deutschland Über Alles” we wrote of the present German bid to central Europe, this time through financial dominance. The idea of Germany sponsoring short term loans to troubled sovereigns in order to maintain its export strength and infiltrate financially these distressed nations is not a new one, as it has long been practiced by the United States. What is innovative is the German plan to drive these nations to such economic desperation, through fiscal shrinkage, so as to overpower and control the politics and economics of Europe. It won’t work! Already we see political revolution in Greece, Spain, and Italy. The Irish came, once again, to emigration mode. Though distressed sovereigns have signed surrender documents mortgaging their peoples’ standard of living to the Axis, the citizenry is and will continue to revolt. We learned from the past World War I economic debacle that to cripple a nation leads to economic Hell. Witness the Weimar Republic, the Great Depression, and World War II, all the results of post-World War I economic policy much in tune with Germany’s today.
April 17, 2012
The people of Europe will actually pursue their economic needs; they will not be pushed into the morass of long term poverty without a fight. Germany can’t control the rest of Europe economically, its third attempt at controlling Europe in only one hundred years. Again, it will fail – the only question is what devastation will be wrought this time?
The past four years should have taught us economic manners, fairness, and the understanding that economies don’t grow or even survive only through the hope of the wealthy class’s spending trickling down to help the rest. Noblesse oblige, still in style, just doesn’t cut it. Monetary stimulation, without its partner, fiscal support, only helps financial institutions and markets but does little for the workers (or unemployed.)
Will there be a wake up call? Yes, sooner or later. It will take a popular movement to reduce or end cronyism, reverse the foolish methods of campaign funding, repopulate congress with rational cooperating humans, and depoliticize the Supreme Court. These and other structural reforms remain the hope for the world’s economic future. Only the people by voting or insisting, or voting and insisting, can influence the future. The voter must become more important than the campaign dollar.
Without such changes we will have more of the same, economic devastation of the middle and lower income world. War is the usual consequence of this kind of economic plight. The course we are on must be reversed.
Asher B. Edelman