Richard Fisher (Federal Reserve Bank Of Dallas): Larry Summers, The G20, And Financial Dementia

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

Richard Fisher, president of the Dallas Fed, has long been a proponent of serious financial sector reform.  As a former commercial banker, he sees quite clearly that the legislation now headed into “reconciliation” between House and Senate versions amounts to very little.  He also knows that pounding away repeatedly on this theme is the best way to influence his colleagues within the Fed and across the policy community more broadly.

He is now taking his game to a new, higher level.  Couched in the diplomatic language of senior officials, his speech on June 3 to the SW Graduate School of Banking was both a carefully calibrated assault on the administration’s general “softly, softly” approach to the big banks and a direct refutation of arguments put forward by Larry Summers in particular. 

As the title of Mr. Fisher’s speech implies, if the legislation is not real financial reform (and it is not, according to him), then our current policy trajectory amounts to facilitating further rounds of financial dementia.

As a statement of our true problems – dismissing the red herrings and focusing on the core issues – Mr. Fisher’s speech is a succinct classic.  Cutting to the chase:

“Regulators have, for the most part, tiptoed around these larger institutions [big banks]. Despite the damage they did, failing big banks were allowed to lumber on, with government support. It should come as no surprise that the industry is unfortunately evolving toward larger and larger bank size with financial resources concentrated in fewer and fewer hands.”

This is most definitely not a market outcome.

“Based on these considerations, coupled with studies suggesting severe limits to economies of scale in banking, it seems that mostly as a result of public policy—and not the competitive marketplace—ever larger banks have come to dominate the financial landscape. And, absent fundamental reform, they will continue to do so. As a result of public policy, big banks have become indestructible. And as a result of public policy, the industrial organization of banking is slanted toward bigness.”

This is an unfair, nontransparent, and dangerous taxpayer subsidy at work.

“Big banks that took on high risks and generated unsustainable losses received a public benefit: TBTF [“too big to fail”] support. As a result, more conservative banks were denied the market share that would have been theirs if mismanaged big banks had been allowed to go out of business. In essence, conservative banks faced publicly backed competition.”

Mr. Fisher is agreeing with arguments sometimes heard from the left of the political spectrum, but he is most definitely coming at this more from what is traditionally – and accurately – regarded as the right (like Gene Fama of Chicago or Tom Hoenig of the Kansas City Fed).

“It is my view that, by propping up deeply troubled big banks, authorities have eroded market discipline in the financial system.”

In this context, attempts to regulate big banks more effectively will fail because the underlying political economy dynamic (i.e., how the creditors understand government policy towards big banks) encourages excessive risk-taking and greater leverage one way or another.

“The system has become slanted not only toward bigness but also high risk.  Consider regulators’ efforts to impose capital requirements on big banks.  Clearly, if the central bank and regulators view any losses to big bank creditors as systemically disruptive, big bank debt will effectively reign on high in the capital structure.  Big banks would love leverage even more, making regulatory attempts to mandate lower leverage in boom times all the more difficult. In this manner, high risk taking by big banks has been rewarded, and conservatism at smaller institutions has been penalized.  Indeed, large banks have been so bold as to claim that the complex constructs used to avoid capital requirements are just an example of the free market’s invisible hand at work.  Left unmentioned is the fact that the banking market is not at all free when big banks are not free to fail.”

Add to this the deference of the US Treasury to the international negotiations on capital requirements, and the manifest problems of the G20 in this regard – held to the lowest common denominator again over the weekend (i.e., no mention of capital requirements or other substantive re-regulation in the communiqué).  Fisher’s assessment is right on target: relying on regulation alone is unwise and most definitely the triumph of hope over experience.

“Regulatory reform discussions portray the need to control systemic risk as a new game in town—as if it were a new responsibility that need only be assigned. This is not the case: Bank regulators have long viewed the containment of systemic risk as a primary rationale for capital requirements. The problem is that capital regulation has rarely been truly successful.”

“’… While we do not have many examples of effective regulation of large, complex banks operating in competitive markets, we have numerous examples of regulatory failure with large, complex banks. “

And just saying, “let ‘em fail”, is also quite unrealistic as policy for megabanks – because this has been proven, time and again, not to be “time consistent”, i.e., you can promise to do this all you want, but:

“We know from intuition and experience that any financial institution deemed TBTF will not be allowed to fail in the traditional sense. When such an institution becomes troubled, its creditors are protected in the name of market stability. The TBTF problem is exacerbated if the central bank and regulators view wiping out big bank shareholders as too disruptive, extending this measure of protection to ordinary equity holders.”

“… Even a combination of enhanced regulation and resolution would likely be inadequate. The temptation to use regulatory discretion to avoid disruptions is just too great.”

But Mr. Fisher is most devastating when it takes on the arguments developed by Larry Summers (and used by many Senators) against imposing binding size caps on the largest banks.

Larry Summers, you may recall, argued that “most observers” agree that breaking up big banks would actually make the financial system more risky.  It turns out that “most observers” are actually just a few commentators – with what Fisher assesses as “hollow” arguments.  For example, on the idea that smaller banks would all copy each other and follow identical high-risk strategies,

“… going by what we see today, there is considerable diversity in strategy and performance among banks that are not TBTF. Looking at commercial banks with assets under $10 billion, over 200 failed in the past few years, and as we have seen, failures in the hundreds make the news. Less appreciated, though, is the fact that while 200 banks failed, some 7,000 community banks did not. Banks that are not TBTF appear to have succumbed less to the herd-like mentality that brought their larger peers to their knees.”

And reference to the banking problems of the 1930s is simply not relevant.

“Such a liquidity crisis among small banks would be unlikely today, as we now have federal deposit insurance, which protects deposits for funding. And, I might add, the Federal Reserve has demonstrated quite effectively over the past two years that we not only have the capacity to deal with liquidity disruptions but also the ability to unwind emergency liquidity facilities when they are no longer needed.”

Overall, Fisher is blunt.

“…sufficient or not, ending the existence of TBTF institutions is certainly a necessary part of any regulatory reform effort that could succeed in creating a stable financial system.  It is the most sound response of all.  The dangers posed by institutions deemed TBTF far exceed any purported benefits.  Their existence creates incentives that will eventually undermine financial stability.  If we are to neutralize the problem, we must force these institutions to reduce their size.”

This is most definitely not a retreat to some financial stone age.

“A globalized, interconnected marketplace needs large financial institutions. What it does not need, in my view, are a few gargantuan institutions capable of bringing down the very system they claim to serve.”

And, he points out, if his fellow regulators could only think clearly about this issue, there is hope.

“…the financial regulatory reform bill has left regulators (specifically, the Board of Governors and the Federal Deposit Insurance Corp.) with the authority to impose greater restrictions on firms whose living wills are not credible. That authority, as I mentioned previously, could include “[divesting] certain assets or operations … to facilitate an orderly resolution.”  I would argue that regulators should freely use this broad authority to commit credibly to resolution with creditor losses by reducing big banks’ size and interconnectedness.”

Sadly, the indications are that too few officials are likely to agree with Mr. Fisher any time soon.

63 responses to “Richard Fisher (Federal Reserve Bank Of Dallas): Larry Summers, The G20, And Financial Dementia

  1. I hear Summers fell asleep halfway through reading this.

    I wonder what it will take to wake him up again.

  2. Summers is the poster boy for how to screw up and get ahead. Who else could get the job as Director of the WH National Economic Advisory Council after tanking Harvard’s endowment?

  3. yes, Summers did ok for his regular screw-ups or maybe he did achieve his objectives as dictated by his masters. But no one is a better screw-up than Bush Jnr or Dick Cheney, yet both rose to the highest office of the land, says tons about the great democracy of the US of A. Read Johnson and Kwak’s 13 bankers, insightful.

  4. I do not come from the left or the right, but from the radical middle in November 1999 I wrote:

    “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the only bank in the world) or the financial dinosaur that survives at that moment.

    Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

    You can read my whole article here: http://subprimeregulations.blogspot.com/1999/11/about-sec-human-factor-and-laughing.html

    And so of course I would agree with what is written here, most specially with the comment of “Add to this the deference of the US Treasury to the international negotiations on capital requirements”. On this please read http://subprimeregulations.blogspot.com/2010/04/please-explain.html

  5. Good points!

    Summers for President!*

    *But only if he gets credit for putting the US in the next Great Depression.

  6. Per Kurowski

    I make no pretense of understanding Basil II. The little I get from Wikipedia is that it tries to limit credit, operational, and market risk. I assume you find it ineffective, useless?

    You seem to be groaning that Basil II is completely ineffective;

    (from your link) “Don’t they know that if there is anything that has guided the evolution of the current financial regulations, those that I have for so long sustained doomed the world to exactly the type of crisis we now have, that is the Basel Committee. “

    And that Basil II is not mentioned in either the Senate or House financial bills,
    and yet (Basil II) is the basis of the bill?

    I’m confused. What you are trying to say? You sound depressed. That, I can understand.

    It is evident to me that the current versions of the financial bills under negotiation between the Senate and House committees are so watered down that nothing effectual will come of them.
    No Volcker rule
    No reinstatement of Glass Steagall
    No clear statutory laws on derivatives; no transparency and deleveraging
    No break up of Too Big To Fail banks
    No independent Consumer agency
    No return of Mark to Market rules
    No clear statutory regulation of big banks
    No clear separation of the Rating Agencies from the Financial Institutions they rate

    The Financial industry has bought the US Congress. Neither Dodd or Shelby or Frank stand for the real necessary reforms.

  7. Bruce E. Woych

    Some contemporary version of ICARUS no doubt, escaping Greek Finance Syndrome; flying too close to the sun with waxed wings and no landing but the great big ocean (off shore; I imagine…).

    Regulation, Regulation, Regulation,…
    creeps in this petty pace from day to day,
    to the last syllable of recorded time,
    and all our yesterdays have lighted fools’
    The way to moral hazzard and denials,
    Out Out brief Capture;
    Life’s but a Market Jester, a poor CEO
    That struts and Frets his hour upon the Stage,
    And then is paid some more; It is a tale
    told by an idiot, full of sound and fury,
    Signifying Nothing to worry About…,
    Trust Me: I’m Golden.

    Perhaps the real world is not going to work without direct incentive. Perhaps the banks should not be broken up. But perhaps the larger banks should be divided into Banking Shares that are traded only by Corporate Banking interests. Then the shareholders in the tier 2 stockholder meetings would be all bankers from middle level institutions with a serius interest in knowing what and how their stakes were being managed; and with a direct interest in making sure the capital flow moved in a productive liquidity that sustained the middle banking interests in the infrastructure as well…

    But geeze…no one is even talking about real substantial ideas about change…just how do we get back to 1930. To-morrow and To-morrow and To-morrow,
    history will record these moments; truly a tale told by an idiot.

  8. Fisher is a partisan hack. He is also a very very weak fed banker. The only thing he has been right about is the euro.

    He could have spoke up on bush’s watch, but was more about carrying wAter for their admin. Now the democrats are in power, he wants them to make the sacrifices and lose the oligarchy money.

  9. Bruce E. Woych

    I don’t think the balanceact has any confusion whatsoever. In fact, this following list you gave is the most clearest and concise statement of pure assessment and accountability I have seen to date. It bares repeating …here’s balanceact again:

    “It is evident to me that the current versions of the financial bills under negotiation between the Senate and House committees are so watered down that nothing effectual will come of them.
    No Volcker rule
    No reinstatement of Glass Steagall
    No clear statutory laws on derivatives; no transparency and deleveraging
    No break up of Too Big To Fail banks
    No independent Consumer agency
    No return of Mark to Market rules
    No clear statutory regulation of big banks
    No clear separation of the Rating Agencies from the Financial Institutions they rate

    The Financial industry has bought the US Congress. Neither Dodd or Shelby or Frank stand for the real necessary reforms”

    WOW! NICE JOB!!!

  10. Obama gave a longish speech at Carnegie Mellon University in Pittsburgh last week blaming most of the problems in the US on the Republicans and a few greedy banks, extolling the reforms in health care and the financial system that he has been able to push through despite the minority opposition, and recalcitrant leftish supporters, after he saved the country by the unfortunate but unavoidably necessary bank bailouts.

    His speech sounded good. And if you do not look too closely at what is going on, and how things are being run, and the lack of actual reform, you might have had a feel good moment. It was about as effectively staged as the case that George W made to the American people for the invasion of Iraq. And it was probably just as phony and self-serving.

    I come away feeling that Lincoln had it exactly right. There will be a die hard group who will never lose faith in their party, or any of their chosen leaders, and will find desperate comfort in partisan blindness.

    “If you once forfeit the confidence of your fellow citizens, you can never regain their respect and esteem. It is true that you may fool all of the people some of the time; you can even fool some of the people all of the time; but you can’t fool all of the people all of the time.” Abraham Lincoln

    But the great majority of the American people are waking up, and that spells trouble in the November elections for most incumbent politicians. So the pace and velocity of the spin will have to be adjusted. Hence the speech last week, and the outlook for the tortured American economic system, and the official descriptions of it.

    For a refresher,read Matt Taibbi’s caustic expose of the financial reform process. Wall Street’s War.

  11. Bruce E. Woych

    http://www.imf.org/external/pubs/cat/longres.cfm?sk=23907.0

    This link is to a current IMF study that appears to demonstrate that the Big Banks operated only in their own interest over the liquidity of finance to the rest of the nation even when the system was bailing them out. In a natioal crisis traders were traitors.

  12. So how big can a bank get and not be deemed TBTF? Are subsidiaries of these institutions in other countries, with the same infrastructure and strategies, included? Just wondering…

  13. Simon,

    Thanks for that review and summary.

    If there is another crisis (which many believe to be inevitable), the weak reforms will come back to haunt anyone that participated in their enactment.

  14. balanceact

    Appreciate your support Bruce.

    At least Sisyphus got his boulder up near the top of the hill before it rolled back down. The more we try; the less we seem to be able to accomplish. It feels like this Financial reform boulder is all covered in Gulf Goo, oily big money, and seems to keep slipping before we even get a bit up the hill. God Bless Simon and James, and Fisher (and Brown, Kaufman, Cantwell, Merkley, Krugman, Bill Black, and others) for trying. It’s hard not to become completely cynical and just give up. And as Barbara points out below, Obama is beginning to sound just as vacuous as Bush. Obama seemed to have some many right values but he’s a disappointment as a leader. Melted wings; melted dreams.

  15. Bruce E. Woych

    Well if cynical comunication is “enlightened” a bit with continuous learning networking…then let the mood flourish till we se the new morning. Obama is a short circuit indeed.

    Meanwhile, financial power grids are being orchestrated to serve themselves over national interests and much like the gulf oil spill, we are looking to the veryh same people to get us out of the mess they themselves perpetrated. I don’t think in 2010 we can simply trust the clockwork of regulation to readjust the time factors we are facing. Computer assisted mathematical models obscure manipulations and represent a “moving target” with many moving parts. Regulation is not comprehensive or critical when the system is on a chronic road of evasion and escape from responsibility. The whole process of deregulation and capture was absolutely intentional and much of the academic foundation for these tactics were formulated at Obama’s Alma Mater (with status awards from swiss clockworks aka Nobel/Banco awards).

    The government can’t be run like a corporation and the economy can’t be run like one big business. People are exploiting that mistake for great wealth and very serious power and control if not domination. The history of ideas are being cut and pasted to fit legitimation processes to secure and distract us with a false sense of authoritative promise. But much like the deep well in the gulf (and the all but forgotten offshore deep wells of finance…I might add), the technology is not as good as its self asserting myth of supremacy over constraints. For Simon’s part he has opened a different kind of deep well…open communications between stakeholders who are being systematically and systemically deprived of actual shares (or at least a fair chance for access to shares) in the structure of our future.

    Take a good serious look at Michael Hudson’s perspective on the history behind these macinations and the evolving processes for the history of ideas:

    http://michael-hudson.com/2010/05/neoliberalism-and-the-counter-enlightenment/

  16. I have come to believe that, like freewill, the notion we have a representative democracy and hope for a rational, well-ordered society is propaganda and self-delusion. Social, economic, environmental dynamics are on tracks quite independent of compasionate human reason or welfare. It’s mostly toward ever increasing chaos – just as 2nd Law of Thermodynamics suggests for the rest of the universe, relentlessly increasing entropy. So, I’m just going to set all these concerns down, turn away, and walk into the “sunset”. None of it really matters after all. Seeking in what time remains a brief moment of peace, then be gone to the elements.

  17. A view from Europe:

    Apparently, the G20 has once again ‘kicked the can’
    and according to some comments this side of the pond wants to rely on the Basel Committee.
    While we are left evaluation the size of the elephant in the room ( Debtor’s prism; http://www.nytimes.com/2010/06/06/business/global/06toxic.html?src=me&ref=general ), following a series of comments appearing
    after the publishing of the ECB’S Financial Stability Report and insights form the B.I.S that reaching the
    Basel requirements will likely result in the contraction of credit, one is left to wonder: what is the worth of ‘capital regulations’ if there is no regulatory agency, no scrutiny, absence of a European-level regulation framework ? ( http://voxeu.org/index.php?q=node/5121 )
    Faced with the blindness of our financial ‘authorities’, I am now coming to understand the
    wide-ranging implications of your ‘doom loop’ expression

  18. Think you’ve got that Lincoln quote wrong. Isn’t it,

    “It is true that you may fool all of the people some of the time; you can even fool some of the people all of the time; but you can’t fool all of the people in the Summertime.

  19. Kliment Voroshilov

    Think you’ve got that Lincoln quote wrong. Isn’t it

    “It is true that you may fool all of the people some of the time; you can even fool some of the people all of the time; but you can’t fool all of the people in the Summertime.”

    :-)

  20. Bayard Waterbury

    My vote for Fisher or Koenig to replace the out of date Bernanke. Fisher is cogent and accurate. And we still live in a plutocracy in which big everything rules because the Bigs of America own our government. It is high time for revolution. We are all sick and tired of the “erudite” Summers and co. arguing in favor of their best buds. It’s sick. It’s France in 1772. It’s time for action. The serfdom is growing by leaps and bounds. Real unemployment now stands at nearly 19%. That is a lot of tax revenue not coming in for both the states and the US Treasury. We are being sucked dry. When will it all stop. Where are Andrew, Teddy and FDR when we need them. I can’t wait to hear what the bipartisan commission on the national debt suggests. The only ones left to pay serious taxes are the ones who control the writing of the tax code.

  21. fresno dan

    “Big banks would love leverage even more, making regulatory attempts to mandate lower leverage in boom times all the more difficult. In this manner, high risk taking by big banks has been rewarded, and conservatism at smaller institutions has been penalized. ”

    Its a profit and LOSS system – we will get the same crises over and over because we have instituted affirmative action for the most venal and most stupid.

  22. Thank you Richard Fisher, and Thank you Tom Hoenig, for showing courage and forethought amongst your obviously deaf, dumb, and blind Fed Reserve colleagues.

  23. Really terrific post Simon.

    By the way, most people can see the book in the upper right portion of the blog. It’s quite clear to anyone visiting the site.

  24. Let me state this…. in a slow prodding way…. just like Summers would…. in a speech or interview…. Larry summers is…. a jack_ss. But worse than that…. he is…. a jack_ss…. with horrible policy ideas…. and horrible policy initiatives…. Of course I am speaking…. within the framework…. of his incredibly arrogant…. outlook.

  25. Unfortunately, the TBTFs are effectively running the economic/financial side of the economy. Rationality, sensibility, and well-being for the nation will not win out until there is virtually nothing left to pillage.

  26. I recently read a good question. If someone raised a two headed dragon and it grew to monstrous size, killing all in site, who would you ask to kill it? Would you ask the people who raised it? Sometimes solutions people propose are that obvious.

    Larry Summer, Geithner to fix our financial problems?

    We are headed into another downturn in the economy because we are wasting opportunities each day.

    http://qedrealestate.wordpress.com/2010/06/07/goodbye-v-shaped-recovery/

  27. Didactic, but one need only fool enough of the people at appropriate times to get two terms in office and execute an agenda. Fooling all of the people all of the time is unnecessary and beyond the aspirations of just about any God-fearing sociopath.

  28. Re: @ BlaZa____The president of the NYFRB monitors the fiscal conversation, and directional dialogue regarding policy,and is the footstool for Sir Bernanke, period! Your correct prognosis of “Fisher” being a political hack is spot-on – but, its ambiguous to say that he was,”right about the euro”? The guys a bonafide inflation hawk which is disastrous now for america too even dare mention intervention! I equate this man’s inteligence to a “Broken Clock”…correct twice a day, but with one caveat, being that his questionable, yet timely caution – “Invisionary Not” ,has one hand of the broken clock tied behind his back! PS. Who cares about the Oligarchy’s money – they certainly don’t care about yours.

  29. Trying to regulate TBTF seems a lot like what’s happening in the Gulf right now…TLTL (too little, too late). And the limp-wristed financial reform bill stinks about as badly as the Louisiana marshlands about now. Just sayin’

  30. Right on Dana, and the TBTF’s are drooling over the business model of Pay Day Lenders.

  31. A Good Crisis, Wasted

    06/06/2010 – Fed Watch – excerpts

    “It is official. The rest of the world assumes the economy can pick up were we left off in 2006, with the US as the driver of global demand. And it is apparent there is little US policymakers can or will do to counter the trend. Once again, crisis – and along with it the opportunity to rebalance global growth – is wasted….

    When it all shakes out, the US will actually be asked to do more, not less. Lower interest rates will discourage saving and diffuse a political barrier to enhance fiscal stimulus in the US. Goodness, as I write this, the yield on the 10 year is again below 3.20%. Clearly, the world is looking for more, not less AAA debt, and the US will eventually be the last nation willing to issue it. Moreover, eventually the persistent unemployment problem will weigh on politicians such that while they might bluster on about deficit spending, they will forced to do just that.

    Again, the jobs problem. A problem that will magically receive more attention as Wall Street flails. After all, an unemployed high school dropout won’t be writing checks for $10,000 a plate campaign fundraisers, not like that nice man from the hedge fund.

    In the end, why continue to hold the Euro on what is increasingly the myth of global rebalancing? It is clear European policymakers want a weaker Euro, and US policymakers are powerless to prevent a stronger dollar. At least we are getting cheaper oil as a result.

    Where does this all leave us? The rest of the world is intent on pursuing a begger thy neighbor strategy, with the US being the neighbor. I suspect US policymakers will eventually relent; it will be the only choice left.

    All we can do now is sit back and wait for the inevitable explosion in the US trade deficit, waiting idly by for the next crisis and the “chance” to bring some sanity to the global financial architecture.”

    http://economistsview.typepad.com/timduy/2010/06/a-good-crisis-wasted.html

  32. Re: @ Kyle____We are all swimming in a “Fixed Solar Fishbowl” (planet earth), whether it be land or sea. The elements of air are toxic – the elements of water are polluted, thus extinquishing mankinds fire from above? The metaphor being: Can a fish drown – Can a human suffocate, or Can a fire not burn, in their element? Paradoxically…yes to all! Money (anything seen as value to barter) makes the world-go-round. Assuming I’m halfway correct (being a realist,I am), let us swap-out money for “Oxygen”, the radical (perhaps, dynamic is a better word?) component for life in this “Eco-Fishbowl”, we all swim-in. Ironically, without it – all creatures great or small perish. Thus it is beneficiary to all that we evolve – co-existing for the survival of the whole. Sound familiar? Is it prudent to exhaust all our oxygen in the water, and air, thus becoming a, “Fish-out-of-Water”?

  33. I think Bernie Madoff and the banks are reading from the same page.

    Bernie Madoff wrote 06- 7-10:

    “F–k My Victims”

    http://tinyurl.com/27l5htj

  34. The article epitomizes economic idealism, putting the ideal (policy) cart before the real (economic) horse, as when Fisher claims,”. . . it seems that mostly as a result of public policy—and not the competitive marketplace—ever larger banks have come to dominate the financial landscape.” In fact, the empirically documented economic tendency of mature capitalism is to evolve into oligopolistic giantism; and since politics is corrupted by money, the political tail naturally follows the economic dog. (K. Marx provided a theory of the economic tendency–in the concentration and centralization of capital–but there are plenty of lesser, later minds to cite for those who fear being tarnished as radicals.) –I don’t think that Johnson believes his/Fisher’s spiel wholeheartedly, as he concludes with the dejected admission, “Sadly, the indications are that too few officials are likely to agree with Mr. Fisher any time soon.” Yes, the officials are corrupt, but the economic point that frustrates the idealists is the economic provenance of the corruption, i.e., why some financial institutions (the biggest) just happen to be more equal than others when it comes time to regulate the regulators.

  35. Bruce E. Woych

    http://seekingalpha.com/article/208689-another-reason-for-states-to-own-their-own-banks

    Ellen Brown presents her argument for an alternative state run bnking system…what might be called a “public option” for banking.
    while:

    http://www.un.org/esa/socdev/egms/docs/2009/cooperatives/eacb.pdf
    Herve Guider h.guider@eurocoopbanks.coop (General Manager)
    EACB secretariat
    presents a model of Co-Op banking in Europe that was very healthy before “trickle down” economic monetarism rained down on their stability.

    Shouldn’t we be opening discussion and dialogue along the lines of restructuring the entire financial service sector rather than simply looking to dilute it down to a less damaging level of concentrated greed?

  36. I am thankful for the ever-clearer warnings from people who are truly expert, who seem to love America and its people–including the smallest now just born, who will see the fallout from the tragedy now unfolding–more than the comfort accord their usual reserve and restraint.

    What worries me more than anything is that the final chain against those who would ruin whatever is left of our democracy–the federal criminal codes–apparently never will be put upon the hands of those who fill their numbered accounts with the future of what America would have been.

    I would wish, I would pray, that someone with enough love for this country and its peoples would understand that the only thing the truly wicked understand is punishment. And the truly wicked will not be restrained except by the severest punishments.

    We are lost. Throughout our history money nearly always, with a few exceptions, has purchased freedom for the guilty in the highest places. We have no Washington. We have no Lincoln We apparently have a man who believes tyrants respond to reason or public pressure. How delusional and naive, particularly given the facts.

    We are lost.

  37. You state, “In fact, the empirically documented economic tendency of mature capitalism is to evolve into oligopolistic giantism; and since politics is corrupted by money, the political tail naturally follows the economic dog. ”

    Exactly. Though I would add it is obvious theoretically as well.

    As I have said 100s of times over the past 2-3 decades: The primary economic role of government in a Capitalistic economy MUST be to ensure competition in the marketplace.

    Without that – you get exactly what we’ve got.

    Instead of creating value (the best products and services for the best prices), we have monopolistic practices and TBTFs that absolutely undermine Capitalism.

  38. Kyle did not take the comfort offered Hamlet – “…we are all passing through nature…” any better than Hamlet did :-)

    From wiki, “The second law of thermodynamics is an expression of the universal principle of decay observable in nature. It is measured and expressed in terms of a property called entropy, stating that the entropy of an isolated system which is not in equilibrium will tend to increase over time, approaching a maximum value at equilibrium…”

    Key point is “isolated system”…which is NOT what operate in. The sun does not exist in an “isolated system”, the chemicals created in the sun that go on to become a tulip bulb and a human

    (and a human that can make stuff up about the value of the tulip bulb to the human – which is some trait of the human that can’t be explained by the sun – go figure :-))

    so LOGIC stops at a certain point.

    Nothing in the individual specifications of hydrogen and oxygen can predict that the combination of H2O would end up

    “creating” water…

    think about it…

    Seems to me like the FACT that billions of years of IT wiz-kids programming a “system” that ends up producing flowers and conscious (sort of) human beings

    must have assumed something about what would happen when the combo started to exist together (flowers and humans)….

    Gee, I wonder what went wrong, huh?

    HATEronics…?

    Since perception is reality for some humans, why not just create the perception, in the institutions that they inhabit, that they DO HAVE all the $$$ that ever was circulated in the past 30,000 years of civilization already in their PERSONAL bank account…?

    Isn’t that the only way to deal with “crazy” – enter their delusion just long enough to secure their body’s safety and then do what is REAL in a dynamic system that has CURRENCY keeping it alive…?

    The Swiss seem very happy living in an imprisoned (by geography and a simplified materialist-only culture) and “isolated system”. The rest of the world checks in on them for a while to make sure they’re okay :-)

  39. John D. Willis, PhD wrote:

    “I am thankful for the ever-clearer warnings from people who are truly expert, who seem to love America and its people–including the smallest now just born, who will see the fallout from the tragedy now unfolding–more than the comfort accord their usual reserve and restraint…

    We are lost.”

    If dreams are not beyond ones grasp then what is heaven for?

  40. http://tinyurl.com/Wile-E-Coyote-Moment

    “As the graph above shows, rail traffic collapsed in November 2008, and now eleven months into the recovery, traffic has only recovered about half way. This is more evidence of a sluggish recovery … and the decline in May is concerning, although one month does not make a trend (and May was “a bit overstated” due to the timing of Memorial Day).”

  41. Financial Re-Regulation And Democracy

    Joseph E. Stiglitz -2010-06-04 – Project Syndicate – excerpts

    “Banks that wreaked havoc on the global economy have resisted doing what needs to be done. Worse still, they have received support from the Fed, which one might have expected to adopt a more cautious stance, given the scale of its past mistakes and the extent to which it is evident that it reflects the interests of the banks that it was supposed to regulate…

    This is important not just as a matter of history and accountability: much is being left up to regulators. And that leaves open the question: can we trust them? To me, the answer is an unambiguous no….

    As always, the “devil is in the details,” and financial-sector lobbyists have labored hard to make sure that the new regulations’ details work to their employers’ benefit. As a result, it will likely be a long time before we can assess the success of whatever law the US Congress ultimately enacts….

    The Senate bill’s provision on derivatives is a good litmus test: the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks. If effective restrictions on the derivatives business of government-insured banks (whether actually insured, or effectively insured because they are too big to fail) survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists.

    But if, as most pundits predict, these restrictions are deleted, it will be a sad day for democracy – and a sadder day for prospects for meaningful financial reform.”

    http://www.project-syndicate.org/commentary/stiglitz126/English

  42. In the short-term, the Baltic Dry Index metrics are suggesting multiple red flags – which is Bad Mojo combined with decreased rail traffic. If the boats don’t deliver, neither do the the railcars or the trucks.

  43. Re: @ Annie____We are the “Stuff of (carbon, and oxygen) Stars”, as Carl Sagan so aptly said – our “Earth’s Crust”…the most abundant element is ~49% Oxygen by mass – our atmosphere is second @ ~28% Oxygen by volume. The Solar Sytem is a closed system in which “Planet Earth” is the 3rd rock from that center – we call the “Sun”. Let us look at the composition of the air we breath – 21% Oxygen; now, let us look at the Oxygen percentage of water (eg. 66% of the Earth’s surface is water), and ironically 66% of water is in the known element we call Oxygen,…coincidence? Moving on – human being are on average ~62% water (one part hydrogen,and two parts oxygen :-) Now – “Entrophy”, which basically is Kick’s Law with a booster from Rittinger’s Law – more or less atrophy succumbing too “Darwinism”. Finally, logic is nothing more than our over-active (all gifted human ,spare none qualify) imagination too produce a thought – rationalizing that thought into creativity, thus we think we are – therefore we are – simple,eh? There is absolutely no illusion of perception predicated for our very existence, other than being? As Kyle said, I’m fine with that ;^)

  44. WARNING BY BRITISH PM

    Tue Jun 8, 2010 4:19am IST

    “British Prime Minister David Cameron said the scale of his country’s budget problems was worse than he had anticipated and cited Greece as an example of what happens when countries lose credibility or pretend difficult decisions can be avoided.”

    http://in.reuters.com/article/idINIndia-49118620100607

    * You can’t make this stuff-up.

  45. Awesome post. Absolutely infuriating. Yves has a similar ability to arouse rage.

  46. An ISOLATED system…there is no such thing in cosmic physics as an “isolated” system…

    We’re a bigger Rolex than you know – gears turning other gears…

    The introduction of the number ZERO (0) could be the only problem in a macro economic model that presumes to prove the non-existence of a “god”….if everyone’s bank account MUST go to ZERO months ahead of harvest in order to pay the WAR Lord and Drug Lord,

    well, we’ve got an oxygen problem for sure…

    Hope FBI et al are having the operations meeting working out the details of how to round’em up and lock’em up…wasn’t it always “tax evasion”?

  47. “If dreams are not beyond ones grasp then what is heaven for?” FOOLS is the nonrhetorical answer to your rhetorical question.

  48. “I can’t wait to hear what the bipartisan commission on the national debt suggests.”

    Haven’t you heard???…the Deficit Commission is out of money too…the exquisite irony of this administration is something to behold.

    “Saddled with a tight deadline and great expectations, members of President Obama’s deficit reduction commission say they may not have the resources necessary to meet their task.

    “The National Commission on Fiscal Responsibility and Reform, which the president created through an executive order in February, is charged with developing a plan by December 1 that would stabilize the budget deficit by 2015 and reduce the federal debt over the long term. The group is widely expected to consider a combination of tax reforms and spending cuts.”

    I think another speech is in order.

    Still better, yet another blue ribbon panel to explore why the current commission was not properly funded…LOL…oh wait…we have NO funds, we borrow in order to spend!!!…so scratch that…a good speech will do just fine…they always make everyone feel all warm and fuzzy, don’t cost anything and that’s all that really matters.

    Perception.

    The reality is, the wolves are still hungry.

  49. Re: @ Annie____When the “Mighty Rolex” has a spring malfunction ,or gear chafe because of attrition, the entire “Isolated System”, shuts down – throwing it out of its trajectory via orbit;-) The Galaxy is in turmoil – equilibrium must compress gravity? PS. Can you even imagine what the “Law of Large Number’s” (probability), would look like if the Aztec’s hadn’t invented the “Zero” :-? Thankyou Simon ,and James for your hard work, and “Please Never Stop Digging for America’s Sake” Mr. Earle

  50. Fireman1979

    “Big banks that took on high risks and generated unsustainable losses received a public benefit: TBTF [“too big to fail”] support. As a result, more conservative banks were denied the market share that would have been theirs if mismanaged big banks had been allowed to go out of business. In essence, conservative banks faced publicly backed competition.”

    Is there one reporter who would ask Pres.Obama at his next press conference if this is the effect that he wants for his financial reform. I think that most people can read and understand what this statement means. I would like to see the president answer to it.

  51. What I find myself wondering, is what the critical mass will be for getting the needed changes built into the financial system. There are more and more voices on both sides synchronizing their calls for just that. That’s going to make it hard to ignore. Right now, the political weight is still with the status quo. That needs to change and that can only happen when those voices break into the mainstream in a chorus too loud to push aside.

  52. Bill in berkeley

    But to be fair to George and Dick we really didn’t know how big a screw-up they were in 2000. With Larry we knew what a screw-up he was long before 2008.

  53. Bernanke: Economy “Won’t Feel Terrific”

    6/07/2010 11:30:00 PM – CalculatedRisk – excerpt

    From Sewell Chan at the NY Times: Bernanke Forecasts a Fitful Recovery

    “My best guess is that we’ll have a continued recovery, but it won’t feel terrific,” Mr. Bernanke told the broadcast journalist Sam Donaldson in a question-and-answer session at the Woodrow Wilson International Center for Scholars.

    “Even though technically we’ll be in recovery and the economy will be growing, unemployment will still be high for a while and that means that a lot of people will be under financial stress,” he said.”

    http://www.calculatedriskblog.com/

    A jobless recovery is like an omelette without eggs.

  54. Fireman1979

    I just watched an interview with the Obama and Matt Lauer on morning news in which the president defended himself for not meeting with the CEO of British Petroleum because the president’s experience in meeting with these executives is that they end up just saying what he wants to hear. My question is, does he hold the executives of the financial industry to the same skepticism? Will he or has he held meetings and conversations with these men who wrecked our economy?

  55. Losing Confidence

    Jun. 08, 2010 7:22AM – Globe & Mail

    “After last Friday’s market action, I am dumbfounded by the complete lack of understanding of bad economics, not only by investors but by many governments.

    Last week, I was asked at a client meeting what caused this next leg of the global financial crisis; again, as with the mess Wall Street got into, it’s about bad short-term decisions over good long-term ones, and these decisions are burying the world.

    People have to understand that 80 per cent or higher debt-to-GDP ratios are a new dynamic and a game changer in Europe and the United States. As a result, all of us have to stop thinking that all recoveries are the same and all selloffs are buying opportunities because of what happened in the past. If my reading is accurate, debt restructuring will be the next wave and will be extremely painful.

    At this point, the market is losing confidence in our leaders’ ability to steer the world in the right direction. There is an argument to be made that the “nanny state” is going parabolic and this is completely unsustainable.

    Tim Geithner telling Europe what to do is scary at best – to re-stimulate economies via fiscal largesse at a time of explosive debt ratios is dangerous. The rapid declines in risk asset prices to close out last week is a telltale sign that there is now a growing distrust of government spending, manipulation of information, and demagoguery.

    The only way to regain confidence is to come clean and to then do something about it. We now have a global debt problem and in order to deal with it we must understand the magnitude. The issues with the government balance sheets are not dissimilar to those of the banks. Real stress tests were needed for the financials and, for transparency sake, are needed for sovereign governments because of the lack of trust. Derivatives, especially credit derivative swaps, must be on the balance sheet so that we can have the right amount of capital. I have repeatedly made the case that Fannie and Freddie’s debt must be on the government’s balance sheet. It is never counted.

    How about AIG, the entire banking system under Federal Deposit Insurance Corp. contingent liability and the Federal Housing Administration? The same with pension liabilities of the government, social security, etc. The IMF demanded this of emerging market countries; why not of developed ones?

    “ The only way to regain confidence is to come clean and to then do something about it. We now have a global debt problem and in order to deal with it we must understand the magnitude. The issues with the government balance sheets are not dissimilar to those of the banks. ”

    It is crucial that we understand that maintaining the same policies of bailouts will push the world over the brink. In my mind, there is no doubt that there will be some significant sovereign debt restructurings. But paired with the right growth policies, confidence will come and with it a sustainable recovery.

    Let’s learn from past experience. The lesson from the emerging markets debacle of the 1980s and ’90s is that once you’ve been at the edge of the cliff, you probably won’t come back to it again. It is therefore not a coincidence that countries like Brazil, Peru, Chile and Colombia, the toxic waste of the past, aren’t in any fiscal trouble this time around. If Thomas Jefferson were alive today he would be depressed beyond belief to see what his Republicans and the Democrats have done to the U.S.

    I continue to get asked: when will I pull the trigger and turn bullish. Well, we are in an extraordinary period of economic and financial history and I doubt very much we have truly seen the lows in the stock market for the cycle.

    As I have said before, 80 per cent rallies in a 12-month span last happened in the early 1930s and were followed by gut-wrenching spasms to the downside. For any investment team out there, return of capital is yet again re-emerging as a very important theme.”

    http://tinyurl.com/28xe6eo

  56. Rosenberg is excellend. Thanks for the post.

  57. In regard to fools, that is why I said only severe federal penalties would have made any difference in where we are headed. And considering heaven was mentioned by the commentator, I think where we are headed is a less-than-metaphorical economic hell.

    I have been studying some of these trends since 1985–at that time, the deterioration of the American social contract [translated that: 'moral conscience for the neighbor']–and we are DESTINED to times that will parallel the B/W photos and movies from the 1930s.

    As I’ve been saying now for some time, when the average person–who worked hard for decades, never called in sick, never abused privileges, always stayed on task and was loyal to his/her company–finally is stripped of everything except the 30.06 sitting in the corner, plan on a response.

    This is why I have complete impatience with all the chatter. Criminal prosecutions, jail time, stripped-out assets (including those in Swiss and other accounts), are the ONLY things that will stop the trend. Excuse me, “would have stopped” the trend.

    And while I DEEPLY appreciate the work presented in “13 Bankers” and the “History of Money” and others, it is so odd to me that people fail to understand (1) the U.S. Congress generally does not understand our democracy is becoming economic quicksand; (2) there is no will in Washington to punish one’s own allies, and this is in both parties.

    So as far as I can tell, we are DOOMED.

    I voted Republican from Reagan to GBII (the first time), worked to get Obama elected, was shocked when he was, celebrated that he was, basically an ‘outsider’ and then was UTTERLY SHOCKED by the group he assembled for financial advice.

    And he does not have the brass to do what ought to be done with the DOJ. If we EVER needed a witch hunt, or some kind of stretching of the U.S. Constitution, it is now. I never thought I’d see myself write THAT! But it is true. We do not need “moderation and careful dialogue” while the Vandals siege, pillage, and plunder, and rape the innocent. We need a fully-armed barrage by the DOJ–wiretaps, subpoenas, and the toughest prosecutions in our history.

    Enough raning, and I half-apologize.

    http://leadingethicallyonly.blogspot.com/2010/04/crooked-bankers-and-financiers.html

  58. Re: @ John D. Willis, PhD____President Obama’s problems: #1) Total Inexperience – #2) Total Disengagement – #3) Totally Insecure___the latter is of great concern. I wish him well?

  59. Was that you? Really good. But I wonder if;”We now have a global debt problem and in order to deal with it we must understand the magnitude.” is enough. The transparency of who the players are would also be helpful. I keep think that the “Invisible Hand” in the free market philosophy is the “back room deal and closed door negotiations.

  60. Fitch Warns Britain About Deficit

    Tuesday, Jun. 08, 2010 – AP – excerpt

    “Fitch Ratings agency warned Tuesday that Britain faces a “formidable” fiscal challenge and must cut its budget deficit faster to maintain its top credit rating. In a special report ahead of an emergency budget planned by the new coalition government, Fitch noted that the rise in public debt ratios since 2008 is faster than any other AAA-rated country. It added that the primary deficit is almost twice as large as during previous economic downturns in the 1970s and early 1990s.

    Britain’s budget deficit is forecast to reach 10.4 per cent of gross domestic product this year, while debt as a percentage of GDP was 62 per cent in 2009/10…

    Prime Minister David Cameron has pledged drastic spending cuts, noting on Monday that annual interest payments alone would rise to around £70-billion a year, from £42-billion currently, within five years if action is not taken.”

    http://tinyurl.com/2uf7734

  61. Europe Update: Strikes In Spain, UK Austerity, ECB Bond Purchases

    6/08/2010 06:57:00 PM – CalculatedRisk

    Form the NY Times: Spain Hit by Strike Over Austerity Measures

    “Spanish public workers went on strike on Tuesday against a cut in their wages in what could be the first of several union-led protests against the government’s latest austerity measures.

    From The Times: Osborne’s four-year austerity programme
    George Osborne braced the country for cuts in government spending of up to 20 per cent as he laid the ground for an austerity programme to last the whole parliament.

    From Der Spiegel (a week ago): ECB Buying Up Greek Bonds

    Bonds worth about €3 billion are now being purchased on every trading day, with €2 billion of the bonds coming from Athens.

    From Bloomberg: Greek Default Seen by Almost 75% in Poll Doubtful About Trichet

    Global investors have little confidence in Europe’s efforts to contain its debt crisis or in European Central Bank President Jean-Claude Trichet, with 73 percent calling a default by Greece likely.

    From the NY Times: E.U. Finance Ministers Agree on Tighter Oversight

    Despite continuing tensions over economic policy, European Union finance ministers agreed Tuesday on far-reaching steps to tighten oversight of national governments’ budgets and crack down on falsification of economic data, in a concerted effort to avert a further loss of confidence in the euro.”

    http://www.calculatedriskblog.com/

  62. I guess I’m not the only one losing my religion.

    “The phrase “losing my religion” is an expression from the southern region of the United States that means losing one’s temper or civility, or “being at the end of one’s rope.”

    http://en.wikipedia.org/wiki/Losing_My_Religion

  63. Would that presidential candidates announced their appoints prior to election day rather than after election day. Maybe Summers appointment is the ultimate “switch and bait”