Jamie Dimon’s New Math

By Simon Johnson

On Tuesday, June 7, Jamie Dimon (CEO of JPMorgan Chase) pressed Fed Chair Ben Bernanke on the costs of bank regulation after the financial crisis of 2008.  Could this be what is slowing the economic recovery?  Bernanke was very polite in his response, but the question – as posed – made no sense at all.  (The full tape of his question is here,)

Most of what Jamie Dimon lists under the heading of changes are just symptoms of the crisis itself, e.g., badly run firms and crazy products disappeared.  His substantive issue appears – from his question – to be just about capital requirements. 

But the implication of Dimon’s question – that higher capital requirements will slow growth – is simply wrong.  I explain this in a column now running on Bloomberg.  Here’s the link: http://www.bloomberg.com/news/2011-06-09/the-missing-math-in-dimon-s-economic-argument-simon-johnson.html.

59 responses to “Jamie Dimon’s New Math

  1. Moses Herzog

    I cannot tell a lie (well unless under exceedingly high temptation, haha). I strongly dislike New Gingrich, and I got a bit of a sadistic charge and laugh out of reading this story. I thought since more than half of Baseline’s readers are probably Democrats, they might also enjoy this story (although my guess is, only a fraction of the amount I enjoyed it).

    http://www.latimes.com/news/nationworld/nation/la-na-gingrich-20110610,0,7916146.story

    Here’s a small snippet from the article by Tom Hamburger and Mark Barabak talking about Gingrich:

    “His effort has been troubled from the outset, when he came under fire for criticizing the House GOP’s proposal to replace Medicare with a voucher plan and for news that he had a credit line of as much as $500,000 at Tiffany & Co., the posh jewelry store. In recent weeks, as competitors scoured the early voting states, Gingrich took off for a two-week cruise in Greece.”

    A 2 week cruise to Greece during a Presidential campaign???? How does this make Newt look like a world leader….. ???
    Wait, it just came to me. Actually, this makes perfect sense. Gingrich went to Athens Greece for field research into the future look of America when Dick Shelby, Bob Corker, and the TBTF banks are through raping us.

    http://www.knoxnews.com/news/2011/jun/09/delay-of-debit-fee-cap-fails/

  2. Increased reserve requirements merely reduce leverage. And it is leverage (a.k.a. liquidity) that the banks crave. Hence the incoherent whingeing from Dimon and his ilk.

    Without the fabricated leverage they will implode:

    “Liquidity = fabricated marginally-backed leverage! It is a complete fiction. A bank acts as if it has the whole value of a fixed asset (say a mortgage on a house) at its full disposal in cash terms. Clearly in reality the cash equivalent of this asset isn’t available to it in immediate or “liquid” sense. The house hasn’t been sold to realise the cash. Therefore, the bank operates with a form of leverage that is only partially backed-up in the real world.

    Every debate or discussion commences with the assumption that a modern society needs this liquidity. Banks may need this liquidity (in order to generate scope for leveraged profit making), but the truth of the matter is that the social benefits are greatly over-exaggerated, if not harmful.”

    http://forensicstatistician.wordpress.com/2011/05/25/how-a-bank-works-modern-miracle-or-just-a-mirage/

  3. I recall Dimon, John Mack and I believe others being contrite and saying right after the crisis on 2008, perhaps in early 2009 on Charlie Rose interviews, that we need to be better regulated. I recall Dimon saying that we should be setting a floor at the pump by whatever means (tax?) to get out of energy dependency. Now he wants the Gov to get out of the way?

  4. Desi Girl - Doing God's Work

    Clearly, Simon did not understand Dimon’s question. But that is not surprising. Simon repeatedly demonstrates his lack of understanding of the banking business.

    Actually, based on Dimon’s list, the market took care of the banks, repriced them and removed the crap. Quoting Dimon, “..most of the bad actors are gone. thift thrifts, old mortgage brokers and obviously some banks. some of gone, sivs, money mar funds far more transparent. derivatives gone. transparency in — fannie mae and freddie mac in the government hospital.”

    All this happened while the new rules are still being written. Ha Ha..

    Dimon warned of the crisis even before Simon Johnson wrote his tome of conspiracy theories called 13 Bankers. in academic circles, it is called, ‘Having a Thesis and then backing into’ it. its almost funny how much Simon’s career now depends on Dimon.

    We have a huge problem in that we need a valid, resonable discussion. Simon Johnson provides negative value to that discussion.

  5. Simon understands the Banksters, all too well. The reason meaningful financial reform failed is the Bankster lobby. They own the puppet politicians. But even the regulations that we have in place are too much for the Banksters to accept. They want the casino market economy to forever run on socialised debt and free bailouts for themselves.

    “So how did President Chameleon get into this mess? Obama simply trusted his Wall Street mentors Summers, Bernanke, and Geithner, the trio that sabotaged the recovery while making sure the banks and speculators got as much liquidity (and bailouts) as they needed. Also, Fed chairman Ben Bernanke misled Obama about the stimulative effects of his experimental bond purchasing program (QE2) which neither lowered interest rates, nor increased GDP, nor boosted employment, nor sparked another credit expansion. The only thing the policy did was send gas and food prices skyrocketing which further constrained consumer spending. All told, QE2 was a bust.”

    Excerpt from:

    http://www.counterpunch.com/whitney06092011.html

  6. Actually, the problem you are trying to describe is why should all new medium of exchange be demand deposits from debt, meaning it has to be borrowed into existence.

  7. JP Morgan chase is a wholly owned subsidiary of the Rockefeller Family, therefore Dimon is just a advocate (pornographic mouthpiece) for their agenda, period! His tenure is coming to an end so he’s grasping at straws. (JMHO)

    If the “Big Six, ‘Bang’ Banks” get their way , the so-called leveraged-fulcrum as they so languish for, will certainly require a much greater amount of fiscal-energy. As the laws of relativity …money-matter, surely will be transferred [?] dictated by the laws of the “Basel Universe Dogma’s”! Thus, the equilibrium orbit regarding the gravitational pull of monetary, and fiscal funds will coalesce into the axis of monetary evil, only to bring worldwide usury misery to the “New World Order” recipients of total fiefdom. (Orwell must be rolling in his grave?)

    Here I present a fitting collage of famous quote’s that best suit my incensed temerity regarding Simon’s brilliant post:
    Quotes,….
    by Joseph Addison (1672-1719) “We are always doing says he, something for prosperity, but I would see prosperity do something for us”…”Is there not some curve , some hidden thunder in the store of heaven, red with uncommon wrath, to blast the man who owes his greatness to his countries ruin” (for all the Big Six Bankster’s)….”Men may change their climate, but they cannot change their nature. A man that goes out a fool cannot ride or sail himself into common sense” (for the Big Six Financial Wizards)….”An ostentatious man will rather relate a blunder or an absurdity he has committed, than be debarred from talking of his dear person” (a narcissistic fool)
    by Walter Bagehot (1826-1877) “Nothing is more unpleasant than a virtuous person with a mean mind” (Jamie baby)
    by Gregg Easterbrooks (1953-present ) “Torture numbers, and they’ll confess to anything” (statistic for the Almighty’s)
    by *Oswald Spengler (1880-1936 / The Hour of Decision 1933 pt.1) “Socialism is nothing but the capitalism of the lower class” (say it ain’t so comrade Dimon?)
    by Brooks Atkinson (1894-1984/ Once Around the Sun…Sept.7,1951) “There is a good deal of solemn cant about the common interests of the capital and labour. As matters stand, their only common interest is of cutting each others throat” (collateral damage?)
    by Lewis Carrol (Charles Lutwidge Dogson) The Bellman’s Switch / The Bellman’s Speech
    “What I tell you three times is true;
    He had forty-two boxes, all carefully packed, with his name painted clearly on each; But since he omitted to mention the fact, They were all left behind on the beach.
    He would answer to ‘Hi!’ or to any load cry, Such as ‘Fry me!’ or ‘Fritter-my- wig’
    His intimate friends, called him ‘Candle-ends!’ , And his enemies, ‘Toasted-cheese’ .
    Then the bowsprit got mixed with the rudder sometimes.
    But the principle failing occurred in the sailing,
    And the Bellman, perplexed and distressed,
    Said he `had` hoped, at least, when the wind blew due East,
    That the ship would not travel due West!” (classic bait and switch in the “Twilight Zone”?)

    Thankyou Simon and James, for your time , and please never give up your “Great Digging for America’s Sake!”

  8. @earle,

    Oh, not another post from you! But it’s not without entertainment value. In fact, I quote your posts at dinner parties and get a variety of good chuckles to sniggers to loud guffaws. Never a dull moment.

    Perhaps you should be quoting Mrs. Malaprop, from The Rivals. Or are you in fact, Mrs. Malaprop, reincarnated?

    PS, keep that originality coming with your copying, pasting and plagiarizing. These are all marketable skills.

  9. @ forensicstatistician

    With the advent of securitizing mortgages many investment bank process (i.e., special miscellaneous account http://financial-dictionary.thefreedictionary.com/special+miscellaneous+account ) were adopted by commercial banks (home equity line of credit). Unfortunately something got lost in the translation such as liquid securities vs. illiquid real-estate and the margin clerks daily pricing of marginable stock market transactions vs. bank clerks pricing of comparables (see: FASB 157 http://www.fasb.org/st/summary/stsum157.shtml ).

    From Marx to today, much of the argument reduces to whether your independent variable is to create wealth (TARP) or to create jobs (QE stimulus).

  10. Mr Dimon needs to experience on the bottom-end of what he and his banking buddies did to see what the “benefits” of their financial engineering (i.e. financial malfeasance) created. And if there is any Justice, in his next life, he – and they – will.

  11. CBS from the West

    @title50

    You know, there are a lot of different styles here at baselinescenario.com. So, for most of us, there are probably a few that rub us the wrong way. Can I suggest that rather than berating earle, if you don’t like his posts, just skip over them?

  12. @CBS from the West: I imagine that if title 50 is simply ignored, he/she will fade away, kinda like a bad dream.

  13. @Simon Johnson: “– that higher capital requirements will slow growth – is simply wrong.”

    Yes, but that there are DIFFERENT capital requirements, definitely does. The most dynamic elements of any economic recovery and job generation, small businesses and entrepreneurs, the “risky”, are being arbitrarily and odiously discriminated against by the regulators, because lending to them causes higher capital requirements than lending to anything that is perceived “not-risky”.

    At this moment banks have tons of liquidity that has to be parked in “safe” areas where the capital requirements are low, because they do not possess the bank capital required to offer that liquidity to the small businesses and entrepreneurs on competitive terms, and this is of course impeding growth.

  14. @ Per: Its obvious to me that your communication skills are extremely limited. You are a tangible person, one who lives (and dies) by the golden rule, { He who has the most gold ,makes the most rules}. So until you can make more rules you hold on to the uncertainly and then introduce the “percieved” not-risky factor when refering to small business loans. Interest rates can not remain low forever. The EU is seriously considering raising rates, which the Fed can not do, this will cause the flight of capital from the US banking system, making it impossible to raise capital requirements because there is no way to raise money. In turn our TBTF institutions actually could fail on the world stage and be physicially taken over by an even larger worldly TBTF bank(s). Your problem goes back to my opening statement and the making of rules, just as Lehman employees were offered a job at Barkleys (after the funeral) they refused on the grounds that it was beneath them, they could no longer make the rules. The same thing can happen here again with our largest institutions, if when our banks can no longer make the golden rules, and all the capital is slowly removed from the banking system, it will be easier to purchase, (much like a larger fish catches and swallows a smaller fish). So hold on to your uncertainty and pray that another country doesn’t come up with your tangible golden rule before your people can swindle it by hook or by CROOK. The only way out is to get the law straight, which is a rocky road, filled with hypocritical potholes and risk on-then risk off lines that change color and dash once and a while, as you are trying to drive at nite.

  15. @ Owen Owens: Yes my “communication skills might be extremely limited since you sort of infer that I have a vested interest in the banks. I do not hold a single bank share nor do I work in one. But my skills in understanding might be at fault too because I cannot really understand what you are saying. And by the way, when talking about ours and theirs TBTF, how do you really know which are ours and which are theirs… As an example when the US tarped and queased the European banks were among the principal beneficiaries.

  16. They may have been the principal ones, during a meltdown many could use help. But the one big forgotten bank in Holland got nothing, and will rise to take revenge on those who oppose it.

  17. Whenever Jamie DImon flaps his gums, he’s lying.

  18. @Per – I thought it was just me who didn’t get OO :-)

    Not a big fan of Basel, myself – they insist on staying frozen inside their carefully constructed cuckoo clock until the Large Haldron Collider delivers the god particle to them…”…In the beginning there was ***MONEY*** and then came stupid American life…”

    Can you recommend a book that explains why Basel gets to make all these quasi-banking decisions?

  19. @ Owen Owens

    “In turn our TBTF institutions actually could fail on the world stage and be physically taken over by an even larger worldly TBTF bank(s).”

    The preoccupation with scale as in Too-Big-To-Fail (TBTF) financial institutions is a critical flaw. Many TBTF institutions are, in reality, Too-Random-To-Regulate (TRTR) because the underlying economic condition of uncertainty is omitted from the analysis.

    Noncorrelated information (risk-uncertainty conflation) leads to flawed price discovery that creates “vapor assets”. This is similar to what happened in the S&L meltdown, where the indeterminate “asset” on the books of many insolvent S&Ls was “regulatory goodwill” – the regulator’s reward for acquiring an even more insolvent thrift. Who could have foreseen the Resolution Trust Corporation’s (RTC) liquidations that occurred when minimum reserve requirements became illusory in a setting where the majority of the S&L’s capital consisted of vapor assets?

    Collateralized debt obligations (CDOs) and credit derivative swaps were the subprime boom’s vapor assets where no-money down, NINJA mortgagors were given property rights in order to enable questionable securitizations at even more questionable AAA-ratings prices to take place. But when the bubble burst, “questionable” became “improbable” as valuations and required capital vaporized.

    Unless and until capital requirements are segmented into predictable, risky, and uncertain assets, regulatory compliance is a random process at best. (see: matrix in “Parallel Paper Economy” http://taffywilliams.blogspot.com/2011/05/parallel-paper-economy-by-sa-boyko-and.html ).

  20. @Annie “Can you recommend a book that explains why Basel gets to make all these quasi-banking decisions?”

    I truly do not know… for that you must probably belong to the inner circle. But I did see some of them in action and in all respects they could be described as a small mutual admiration group with incestuous thinking processes, and who are most probably guarding their cushy jobs with all they’ve got… among that absolute silence.

  21. @n2ceco “Unless and until capital requirements are segmented into predictable, risky, and uncertain assets, regulatory compliance is a random process at best”

    And who is going to do that? The Basel Committee 2? You?

  22. @n2keco – frankly, the posts in this blog are more understandable than your cited blog. What useful information in that piece is completely obscured by obscure jargon and gratuitous alliteration. It reminds me of a lot of postmodernist research papers.

    To take this back to some reality here – how does your assertion that we must segment capital requirements according to risk square with Per Kerkowski’s rather clearly stated thesis that capital requirements regulations must not take into account perceived risk, as that is double counting and creates a destabilizing feedback loop?

    and @Owen Owen, what are you saying? Per is talking about the unfairness and non-resilience of the Basel I, II, III process; he is directly critizing the global bankers and regulators that you appear to accuse him of protecting. Search elsewhere on this website for a video he produced explaining his position – fairly clearly.

  23. Higher Capital Requirements:
    Good premise, bad conclusion. Bankers think that money they slosh around creates growth. Not necessarily so. What Dimon is really bitching about is that he will have less money to loan out. And that means he can’t EARN.

  24. Uncertain securities are established by definition using cash flow and mark valuations for brightlines. They have established accounting precedents—i.e., FASB 157 establishes guidelines for fair value accounting to assure objective, arms-length pricing. Look at any regulatory rule proposal, the first section is dedicated to definitions. This is especially true with regard to capital requirements.

    For example, I argue investments with unknown demand (mark-to-model) and unknown cash flow are uncertain. No-money down, NINJA (No Income, No Job or Assets) Mortgage Backed Securities (MBSs) that are marked-to-model are examples of uncertain investments. Their products have unmeasurable and unforeseeable consequences resulting in randomness that is made up of unknowable unknowns.

    OSFA deterministic metrics enabled securitized NINJA MBSs to be rated AAA. If properly defined as uncertain, could NINJA MBSs have been rated AAA?

    It is illogical to advocate change, but want to support the deterministic legacy system.

  25. @n2ceco “OSFA deterministic metrics enabled securitized NINJA MBSs to be rated AAA. If properly defined as uncertain, could NINJA MBSs have been rated AAA?”

    So what are you telling us? That your AAA ratings will be so much correct? So that instead of just a 1.6 percent capital requirements perhaps only .08 percent would do?

    A regulators role is NOT to believe n2ceco is correct as a credit rater but to think about the possibility he is wrong.

  26. @ Oregano “how does your assertion that we must segment capital requirements according to risk ”

    It doesn’t ! It discusses randomness–the range of variabllity of a complex adaptive system.

    Primary factors for forming policy to deal with complex economic and financial problems created by change are the measurement and management of: predictability as to known knowns, risk as to knowns and unknowns, and uncertainty as to unknown unknowns. Uncertainty is quite different from predictability and risk as we shall see. Serious errors stem from treating them as the same. A rarely identified factor that stands as a constant obstacle to the effective and efficient management of change is the relationship of the component parts – predictability, risk, and uncertainty – to the connective concept of randomness.

    Question: if there is complexity, there is uncertainty. How does the legacy OSFA deterministic metrics deal with uncertainty?

  27. @ Per Kurowski

    Answer the question yes-or-no, not with another question. Could NINJA MBSs have been rated AAA?” If no, then segmented regulatory randomness advances the ball relative to legacy OSFA. And it is accomplished by definition, not by bureaucratic relativism. You can argue the terminology not the methodology.

  28. One of the great things about Mssrs. Johnson and Kwak is that they explain complex financial concepts in plain language so that non-economists can understand and participate in the discussion. OSFA? Brightlines? mark-to-model? Deterministic metrics? Isn’t the entire business of risk assessment statistical ( and therefore non-deterministic? ) Wasn’t the misrating of the NINJA MBSs the result of presuming that mortage default events were essentially independent / random and the market center-seeking rather than inherently unstable, correlated, and limits-trending as any historical analyst could tell you? Ignoring clear deterministic relationships in the economy would have debunked the theory underlying the creation of CDOs; Forcing their transaction on an open exchange rather than as private contracts would also have had a regulating effect; wink-wink, nudge-nudge would have been replaced with healthy skepticism. Perhaps.

  29. @n2kecon: If we are talking about the knowability of non-linear, complex, adaptive systems (such as a market), conventional statistics and concepts of variability and confidence are inadequate to be sure. And my head hurts.

  30. @n2kecon “Answer the question yes-or-no. Could NINJA MBSs have been rated AAA?” If no, then segmented regulatory randomness advances the ball relative to legacy OSFA. And it is accomplished by definition, not by bureaucratic relativism.”

    You just don’t get it. If I accept that you are completely right and that the NINJA MBS would not have been rated AAA, that still does not mean that regulators should use these ratings… since the market already does use them.

    Set up you credit rating company, and sell your ratings in the market, but do not think regulations would be better using your ratings… if you were really good then combustible material would just accumulate more until the day the Great n2ceco also goes wrong.

    I am not that concern with capital requirements for banks while Great n2ceco is right I want them to be there for when he might not be right.

    And yes I agree with Oregano, you should try to express yourself less so-sophisticated… this is not a place where we are overly impressed by geek talk.

  31. I especially liked Mr Johnson’s comparison of the TBTF banks as GSEs on Bloomberg.

    That point deserves repeating on-air as often as possible. How Jamie Dimon (or any other TBTF bank executive) can delude himself into believing he is a capitalist when all he and his company are, are welfare Socialists, should be asked at him at the first opportunity. Somehow I don’t think Charlie Rose will get to it.

    These TBTF banks get the money of taxpayers and savers diverted to them when they fail, and then do nothing to aid in the economic recovery. All whiners like Dimon do is complain that they might be restricted from causing another failure.

    If Dimon says that all that will happen is that costs will be passed-on to the customers – he is de facto admitting that the big banks DO NOT HAVE ENOUGH COMPETITION, allowing them to stiff their customer base. Indirectly, he is saying that the solution is to break them up to increase that competitiveness so that customers can receive better service and better deals.

    When Keynes coined the term “Animal Spirits”, he forgot to mention that a chicken is an animal – and that’s what all these “captains of industry” are.

  32. @ Oregano

    I ask you a question, “how does the legacy OSFA deterministic metrics deal with uncertainty?” and rather than answer, you dodge by giving me a monologue. So let’s address your issues to avoid the one-way street problem.

    1. One of the great things about Mssrs. Johnson and Kwak is that they explain complex financial concepts in plain language so that non-economists can understand and participate in the discussion.

    Agreed, they provide a nice platform for progressive financial tutorials, but the devil is in the detail. For example, is the legacy system broke (ineffective, needing restructuring) or is it merely in need of repair (inefficient, needing reform). I would welcome to hear from Mssrs. Johnson and Kwak on that subject.

    Also, agreed is that I am the 40+ year prisoner of a jargon industry. My apologies. To illustrate your point in “We’re all screwed,” I provided the subparagraph text of the undue-concentration haircut, it is virtually unintelligible and I was party to its formulation. It has lasted over 35 years. Maybe like me it is too old to change, sorry.

    2. Ignoring clear deterministic relationships in the economy would have debunked the theory underlying the creation of CDOs.

    You are correct! Surprised? I argue it was done in error due to non-correlative information from OSFA metrics conflating risk and uncertainty. Managing risk and managing uncertainty are conceptually different and require different approaches. With risk, one can insure (i.e. buying put options for portfolio insurance) and one can hedge (i.e., Ford and Exxon stocks in a portfolio). With uncertainty, one can insure against natural disasters, but cannot hedge (Ford and commodities). Uncertainty is unbounded.

    Why? Determinate and indeterminate assets react to information differently (see above table). Earlier in this section we defined change as the reflexive exchange between risk and uncertainty. But what happens when there is lack of accuracy, in that measurements tend to be systematically biased relative to the true or correct result; or when there is lack of precision from results that are spread apart (i.e., dispersion) too far? BTW that is why Taleb says “correlation is charlatanism” and I say “regulatory protection is a racket.”

    Back to the question of the legacy system being broke (ineffective, needing restructuring) or is it merely in need of repair (inefficient, needing reform)?

    If the former, then it is randomness that needs to be addressed as in Too-random-to regulate (TRTR) and not TBTF.

    If the latter, then you can reform by deterministically addressing scale as in TBTF. Most of the readers of this blog would welcome reform that changes a comma into a semicolon. If you want change, be prepared for real change. But tell me; given this tack, how do you dismiss the Einstein critique to explain the larger and more frequent boom-bust crashes.

  33. @ Per Kurowski

    “I am not that concern with capital requirements for banks while Great n2ceco is right I want them to be there for when he might not be right.”

    Unless you segment the OSFA deterministic structure (i.e. predictable, risky, and uncertain), your mischaracterization of assets leads to a capital miscalculation (NINJA MBSs vapor assets as real). Why has there been the troubling trend of larger and more frequent crashes? The system is broke. I propose change in the form of segmentation. What is your suggestion? Define your terms, put forth your regulatory metrics.

  34. @n2keco: You misunderstand my lack of answer to your challenge. I simply don’t know what “legacy OSFA metrics” are or how they are defined. I don’t even know what OSFA stands for. So all that I can do is try to grasp what you’re talking about by context and the record of your and others’ postings on this forum. And so what I offer in response is a narrative integrating what points I think you’re trying to make in my own opinions on the matter. I invite you to enlighten me.
    Now, as to your question about the present OSFA regulatory mechanisms: I suspect that they are deeply flawed, but I cannot say whether they are broken or in need of repair. I do agree that they have been demonstrated to not take into account structural nonlinearities in our economy that prevent the estimation of risk to the level that would make derivative financial instruments prudent investments.
    Take pity on me, I’m just a simple engineer with a basic background in engineering statistics, not the esoteric stuff that pervades the social sciences. If this were an engineering problem and I were told that the variation of a process was subject to wild swings, I would first try to find a way to alter the design of products using that process so that they were less sensitive to those swings, then to understand the process more deeply, and if that proved too tedious, replace that process altogether. If that were not possible, I would kill the product.
    You’ll have to familiarize me with the Einstein critique, sorry. But it sounds like you’re describing a non-linear positive feedback system. Small perturbations result in ever wider swings until the system crashes or the stimulus is removed.

  35. Many of you seem to be misdirected with so many different tangents that understanding regulations itself if a full time endevor. The real estate mkt is severely proped up as is the stock mkt. By those who have an interest in it, that in turn makes banking risky because people can borrow money on the equity of thier proped up investments. The supply greatly outstrips the demand and onced balanced the loss of principal would create another crisis. Interests rates would then drop again because of the lack of need for a 30 year mortage, who can’t pay off a $150,000 loan in 10 years at todays 3% rate with todays wages beside eternal renters. The uncertainty lies on the demand side (customers) and confidence in the economy. The easy energy resources have dwindled and the old guard keeps repeteing the same message that worked in the past, and in their minds still works today, but in reality is flawed in many ways. The desire to keep up with the Jones’s soon becomes frustration with inefficiencys as the old guard made things to break and then constantly cost money to fix, thus adding much needed American and European jobs. The finannce industry had to invent ways (new casino games) to gamble with interest free loans and derivatives around the world that can not deliver, the tax system itself is strained at the local, and State levels which can only suppress the consumers wallet. Not until more pain with unemployed lawyers, accountants, advisors, dentists, soldiers and the like, will we see a well oiled machine that never needs ( or very rarely) repair and does everything you ask of it. So you can divert resources to other areas and share and educate your way to prosperty rather than this cut throat system we are living with today. And we are a long way away from that day, so until then its the have mores and have lesses which will recycle their thoughts and hope for more or recieve less, that we shall have to live with until we see the light of day.

  36. @n2keco “Why has there been the troubling trend of larger and more frequent crashes? The system is broke. I propose change in the form of segmentation. What is your suggestion? Define your terms, put forth your regulatory metrics.”

    Regulatory metrics? Precisely the kind of talk that got the world into believing regulators knew what they were doing. Since you are telling us you are better at controlling risk, and so want to do it, I see no reason not to distrust you and your segmentation as much as I distrust those in the Basel Committee.

    Instead, let me repeat my regulatory philosophy, in exactly the same words I used when in 2003 I addressed some hundred regulators during a risk management workshop at the World Bank.

    “There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

    Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

  37. Woop2012@aol.com

    If you can’t go outside of the jargon-box, imho, you are incapable of communicating.

  38. @oregano “Take pity on me, I’m just a simple engineer with a basic background in engineering statistics, not the esoteric stuff that pervades the social sciences. If this were an engineering problem and I were told that the variation of a process was subject to wild swings, I would first try to find a way to alter the design of products using that process so that they were less sensitive to those swings, then to understand the process more deeply, and if that proved too tedious, replace that process altogether. If that were not possible, I would kill the product.
    You’ll have to familiarize me with the Einstein critique, sorry. But it sounds like you’re describing a non-linear positive feedback system. Small perturbations result in ever wider swings until the system crashes or the stimulus is removed.”

    In order to stay focused, I constantly go back to the day when an engineer I know went on an impromptu rant about the science of “plant a seed….” He HATED that a seed was programmed to grow.

    So the abuse of language in the fog of war needs to be addressed – they are talking about how many different ways can you screw up what is certain to make a PROFIT.

    Suck the oxygen out of a Homeland Insecurity stalker – let’s openly admit to doing a library search of the past 3 decades of social science career guidance from that best-seller – “What Color Is Your Parachute” on to “Which Group of Producers Need to Be Given Parachutes With Holes” and now “Where to Most Cheaply Educate and Train Slave Labor To Manufacture Hole-y Parachutes”.

    Stay Focused – they are talking about controlling the “deconstruction” of what IS ultra-certain about life-maintenance by introducing Nihilism that they *manage*.

    Weird, I know….but think about it – only LOGICAL explanation…

  39. >>In order to stay focused, I constantly go back to the day when an engineer I know went on an impromptu rant about the science of “plant a seed….” He HATED that a seed was programmed to grow.<<

    Now THAT's a strange opinion. Most engineers I know would love to have a mechanism that takes care of its own needs. And isn't the holy grail of many engineering projects the self-assembling … thingie ? One of the reasons not many engineers make the leap to management, I suppose…good management is all about plant a seed, grow a tree. You have to let go the control to free up the possibilities.

  40. >>You have to let go the control to free up the possibilities.<<

    Oops…that's exactly something Jamie Dimon would say to a regulator. EVERY good intention can be co-opted.
    I guess the trick is to know what to let go of. I would vote for excess monetary velocity.

  41. @ Oregano and Kurowski

    @n2keco: You misunderstand my lack of answer to your challenge. I simply don’t know what “legacy OSFA metrics” are or how they are defined. I don’t even know what OSFA stands for.

    N2k response: My apologies. It was late and I am a lousy typist, so I took a shorthand shortcut. OSFA stands for “one-size-fits-all.” Furthermore, it is not a challenge, but simply my perception of what I believe to be market realities.

    Legacy metrics stems from the deterministic metrics that conflate risk and uncertainty. It is a mistake that Mr. Kurowski continues to make. Whether I am correct remains to be seen, but he is wrong in continuing to make the same mistake of ignoring uncertainty. Einstein: repeating the same process and expecting different results is the definition of insanity. Questions for Mr. Kurowski:
    • Are risk and uncertainty different or similar?
    • If different, how are the different? (see Frank Knight, 1921 and, “Beyond Rumsfeld” http://taffywilliams.blogspot.com/2011/04/beyond-rumsfeld-by-stephen-boyko-and.html),
    • One size-fits-all rules results in one-size-blinds-all regulators, is your main argument for better enforcement or better rules?

    I invite you to enlighten me.

    N2k response: let’s establish a dialog and advance together. See: http://readingthemarkets.blogspot.com/2009/10/boyko-were-all-screwed.html . I welcome your comments as to a LaPlace transform for the regulatory Rubik’s cube and your statistical expertise to refine the definitions of risk and uncertainty.

    I do agree that they have been demonstrated to not take into account structural nonlinearities in our economy that prevent the estimation of risk to the level that would make derivative financial instruments prudent investments.
    N2k response: That is what happens when you conflate risk and uncertainty. Managing risk and managing uncertainty are conceptually different and require different approaches. With risk, one can insure (i.e. buying put options for portfolio insurance) and one can hedge (i.e., Ford and Exxon stocks in a portfolio). With uncertainty, one can insure against natural disasters, but cannot hedge (Ford and commodities). Uncertainty is unbounded. Policymakers need to focus on the concept of randomness that integrates predictability, risk, and uncertainty.
    If this were an engineering problem and I were told that the variation of a process was subject to wild swings, I would first try to find a way to alter the design of products using that process so that they were less sensitive to those swings, then to understand the process more deeply, and if that proved too tedious, replace that process altogether.

    N2k response: Congratulations, that parallels the process by which randomness is segmented into predictable, risky, and uncertain regimes. One-size-fits-all regulation creates non-correlative information resulting in larger and more frequent crashes.

    Are you “describing a non-linear positive feedback system? Small perturbations result in ever wider swings until the system crashes or the stimulus is removed.”

    N2k response: In part via the butterfly effect from chaos theory (see Financial Storm Hunters: http://taffywilliams.blogspot.com/2011/06/financial-storm-hunters-in-search-of.html) and the orthogonal GAAMA Model ( see: Comments on Release No. 34-49695, http://sec.gov/rules/policy/s72204/saboyko060904.pdf )

  42. @oregano – tell me about it – how could anyone HATE the perfection of a seed?

    Maybe because it was certain to grow under certain conditions….?

    Where would the predatory PROFIT (funny how there is no concept of PROFIT having a limit) come from? Where would the unearned wealth come from? You can see why the certainty of a seed throws money lenders into a hizzy fit…

    I stopped reading his posts today. It’s a lie about there being all that uncertainty and risk in life-maintenance. Not to mention that it is an early sign of dementia to never alter a sentence from your own made-up script…

    Death and taxes :-)

  43. Is anyone mentioning the highway robbery now occurring at banks?

    II just lost my free checking which I’ve had for years, and although I have direct deposits from PayPal, they refuse to honor them as meeting their direct deposit requirement.

    Anyone know why?

  44. Suzan said:

    …..Anyone know why?

    Answer: Because they can.

    (That’s what happens when there isn’t enough competition).

  45. @Windmill: “Higher Capital Requirements: Good premise, bad conclusion. Bankers think that money they slosh around creates growth. Not necessarily so. What Dimon is really bitching about is that he will have less money to loan out. And that means he can’t EARN.”

    No, Windmill, it means he can’t EXTORT.

  46. CBS from the West

    I wanted to comment on today’s post “Basel, Tomato, and Mozzarella” but that one doesn’t seem to be open for comments. Any particular reason for that?

  47. Moderators must be in Greece tryin to solve the debt problem. I guess they didn’t want to hear from the peanut gallery.

  48. Let us comment here then:

    Simon Johnson says there “Capital requirements are a restriction on the liability side of the balance sheet — they have nothing to do with the asset side (in what you invest or to whom you lend).”

    Which comes to show he does not know what he is talking about. He should ask the small businesses and entrepreneurs if they have not found their access to bank credit much curtailed and made more expensive by the fact that banks need to hold much more capital when lending to them than when lending to any triple-A rated client or Sovereign which are so arbitrarily favored by the regulators.

  49. Once again i’m not making sense of your statement, how has the credit been made more expensive? You have to be able to raise interest rates on the businesses and entrepreneurs, which can’t be done unless they miss a payment!

  50. Triple-A rated clients need to provide the banks with a return on less capital than what small businesses or entrepreneurs need…. or,

    The banks need less capital to access Triple-A lending risk adjusted margins than what they need to access margins on lending to small businesses or entrepreneurs.

    Any which way will do. It is as simple as that.

  51. @ Owen Owens and Per Kurowski

    Mr. Kurowski is correct and Dr. Johnson is wrong relative to the consequence of regulatory restrictions in raising the cost of capital. Mr. Kurowski is wrong relative to the funding profile being the same for small businesses and entrepreneurs (See: The Engine of Economic Growth, http://t.co/f1bISzK). What differentiates small businesses from entrepreneurs is their product demand. Small businesses have a product demand that is measurable and provides a measurable risk profile that can be financed with bank debt. By comparison, entrepreneurial randomness contends with unmeasurable product demand and uncertainty as to cash flow that requires “slivers of equity” from venture capital financing (See Random Matrix “Parallel Paper Economy” http://taffywilliams.blogspot.com/2011/05/parallel-paper-economy-by-sa-boyko-and.html ).

    The results is not so much that SMEs miss a payment as they require new financing to grow. What happens is that nearly one in 10 US companies that went public last year did so outside the United States. Besides Australia, they turned to stock markets in Britain, Taiwan, South Korea and Canada, according to data from the consulting firm Grant Thornton and Dealogic.

    Ergo, regulation that is not best practice becomes institutionally toxic. To illustrate, SME core difficulty in the pursuit of financing is not investor indisposition, but a fundamental failure of the one-size-fits-all (OSFA) approach to governance. Regulatory proposals designed for top-tier, risk-management regimes are disproportionate when applied to the SME market. Top-tier regulatory proponents, Paul Volcker and Arthur Levitt, have defended the added cost of Sarbanes-Oxley by stating, “$5 million down and $1.5 million a year is not too much to pay for a multibillion-dollar international company…” But what about the SMEs that cannot afford such added costs. Do you treat SMEs as if they were large corporations? Why do you think job creation, let alone wealth creation, has been anemic?

  52. @n2kecon: “Mr. Kurowski is wrong relative to the funding profile being the same for small businesses and entrepreneurs”

    When have I ever said that?

  53. @Per Kurowski

    “He should ask the small businesses and entrepreneurs if they have not found their access to bank credit ”

    What bank provides credit to entrepreneurs?

  54. @Stephen A. Boyko “What bank provides credit to entrepreneurs?”

    Just google bank credit and entrepreneurs and you will find a lot on the subject.

  55. @ Per Kurowski:

    As in AAA-rated NINJA MBSs or as in the conflation of risk and uncertainty, many businesses call themselves entrepreneurs when in reality they are small businesses (See matrix in: The Engine of Economic Growth, http://t.co/f1bISzK for differentiation). The complexity of today’s commerce demands precision not conflation.

  56. The complexity of today’s commerce demands precision not conflation.

    Precisley, which is why if the little engine that would not quit exists, and GM can not find it, even after the second bailout. How in the world could they compete against it after taking on more debt. A business is after all just a business, only separated by size and the supply and demand equasion. All were entrepreneurs in their infancy, and may or may not have taken on the debt risk factor of the endevor. Todays complexity comes from the regulation and finance side of taxes and money. One size fits all would make the playing field level for everyone no matter size, and a solid flat tax system would ensure that the complexity is reduced. After the great shakeout, people would find their nitch and be more confident and able to determine thier direction in the future. This belief that you pit one worker against another competetively to increase the companys own profits, and then simply replace them once they wear out leads to a silent war of shrinkage and additional risk factors. I can only imagine what would occur if a wal-mart for banking developed and swallowed the big banks ability to attract equity. They obviously would want lower requirements to increase their margins as the pool of qualified applicants diminishes.

  57. @ Owen Owens “One size fits all would make the playing field level for everyone no matter size”

    If there is complexity, there is uncertainty.

    1. How do you regulate uncertainty (unknown cash flow and mark-to-model valuations, see randomness matrix: “Parallel Paper Economy” http://taffywilliams.blogspot.com/2011/05/parallel-paper-economy-by-sa-boyko-and.html ) with deterministic one-size-fits-all metrics? If you treat two different items (risk and uncertainty) as though they were the same, trouble follows (i.e. no-money down, NINJA MBSs rated AAA).

    2. You have one-size-fits-all now, how do you explain TBTF?

  58. @Stephen A. Boyko. “You have one-size-fits-all now, how do you explain TBTF?”

    You do not really have one-size-fits-all, because regulators are discriminating and allowing ultralow capital requirements for lending or investments which are more typical of the big banks, and which thereby serves the big as growth-hormones and leverages them up to be TBTF.

  59. @ Per Kurowski

    The legacy regulatory regime used One-Size-Fits-All deterministic metrics to value no-money down, NINJA MBSs rated AAA and T-bills similarly. In reality, no-money down, NINJA MBSs rated AAA were “vapor” assets that proved to be uncertain and therefore unmeasurable.

    The subprime crash proved Edward Deming’s maxim of not being able to manage (i.e., govern) what you cannot accurately measure. Regulators would have been more effective if they measured the percentage of the vapor component of the asset to be valued rather than the capital ratio to be applied to such asset.

    To determine the percentage of the “Too Big” standard that consisted of vapor assets, you need to segment the underlying economic environment into predictable, risky, and uncertain regimes. Otherwise you enable regulators to discriminate by establishing arbitrary standards.