New School Economic Review

Profits up, Bonuses up, memory Lost: Banking as Usual

by Benjamin on July 20, 2009

The financial crisis is officially over and forgotten about as banks post a profit for the second quarter of 2009: Goldman Sachs ($2.7bn), J.P. Morgan ($2.7bn), The Bank of America ($3.2bn) and Citigroup ($1.6bn), all pushed their stock prices up and started talking about increasing pay and giving great big bonuses to their very talented bankers.

Some of them are also patting themselves on the back for having the strategic vision and ability to not only weather the storm, but to come out stronger… So what doesn’t kill you, makes you stronger and causes temporary amnesia it seems.

The Federal government spent some $700bn on “shoring up the banking sector“, meaning that the total net profits posted by the big banks is a piddly 1.5% of the money injected to cover their own losses, so lets not get ahead of ourselves just yet. Accounting for all that money, the Inspector of the Troubled Asset Relief Program (TARP) has just released this report: Noting that banks have reportedly spent a large chunk of the money available. More specifically, 43% bolstered their capital cushion, 31% invested elsewhere, 14% repaid debt and 4% made acquisitions – although this is based solely on what the banks told the commissioner, there has been no oversight, of course.

Goldman and J.P. Morgan have repaid on their commitments to TARP, but they wouldn’t be around had it not been for TARP in the first place. Doubts remain how much of the system would. Goldman in particular netted a nice round $125bn in relief, so before they prepare to pay a $900,000 average salary this year, maybe they should try and read last years newspapers.

Then again, what’s the point? It seems the newspapers, media and stockmarkets have also all forgotten what happened and who ended up paying for it. It wasn’t the bankers who paid – even the head of Fannie Mae is in fact the Inspector of TARP by now – so little hope of the government taking much charge. So there you have it. Short memories and the markets are back to their usual short term behavior. Paging Dr. Minsky and Dr. Keynes.

Tip of the Hat to Dave Shukla for pointing me to this FT article on the TARP report in the first place.

The evidence is in….

by Jeanne aka JStor on June 4, 2009

Read this article this morning: How Testosterone Poisoning Wrecked the Economy.

Fell over laughing. Not quite sure what to make of it. But near the end, Andrew Leonard writes:

Neoclassical economics tells us that markets know best and individuals, en masse, will make rational decisions based on the information presented to them. The theory has taken some severe blows lately (and is utterly demolished in Justin Fox’s soon-to-be-published “The Myth of the Rational Market”),

There are a number of books coming out this year on the history of finance (more to come on that next week) but this one might be a good read….

Keeping up with the Jones’

by Jeanne aka JStor on June 1, 2009

It’s a simple fact: the law just can’t keep up with speed of change. Last week, I read a book review on two books that discuss the problems the music industry is having with copyright infringement (i.e. free music downloading, file sharing, CD burning/copying). This obviously has taken a toll on the music industry. (I still like to buy some CDs since I am a huge fan of CD cover art.)

And obviously, the world of finance is facing it’s own problem.

The Levy Institute recently published a policy note by Professor Martin Shubik on The “Unintended Consequences” Game. It’s interesting to say the least. (You know how when someone asks you what you thought of something and you answer “It’s interesting.”? And it’s always a bad sign? Well, yeah this is probably one of those times …) I’m not quite sure what to make of it. Professor Shubik is partially right. When something bad happens (i.e. financial crisis), the public and the politicians look for a scapegoat and a quick-fix solution ASAP. And that quick-fix will end up having loopholes galore since it was obviously just thrown together. But his solution is really puzzling.

His solution: Continue Reading…

The New Yorker knows what caused the crisis

by Benjamin on May 23, 2009

Finally, we have a conclusive answer to where the liquidity-financial-economic crisis came from. The New Yorker provides the answer, via the History of Economics Playground, and here it is, in all it’s glory:

This crisis is the culmination of events and trends reaching back, depending on your perspective, four, seven, seventeen, twenty-two, twenty-seven, thirty-eight, sixty-five, or a hundred and two years. (…) The causes are technological, mathematical, cultural, demographic, financial, economic, behavioral, legal, and political. Among the dozens of contributors and culprits, real or perceived, are the personal computer, the abandonment of the gold standard, the abandonment of Glass-Steagall, the end of fixed commissions, the rating agencies, mortgage-backed securities, securitization in general, credit derivatives, credit-default swaps, Wall Street partnerships going public, the League of Nations, Bretton Woods, Basel II, CNBC, the S.E.C., disintermediation, overcompensation, Barney Frank and Chris Dodd, Phil Gramm and Jim Leach, Alan Greenspan, black swans, red tape, deregulation, outdated regulation, lax enforcement, government pressure to lower lending standards, predatory lending, mark-to-market accounting, hedge funds, private-equity firms, modern finance theory, risk models, “quants,” corporate boards, the baby boomers, flat-screen televisions, and an indulgent, undereducated populace.

I am glad we sorted that out.

Private Bank Debt higher than GDP

by Benjamin on February 2, 2009

Now here’s some statistics which should be cause for concern…The G10 country doing the best in terms of banking liabilities as a percentage of GDP is the U.S….. with only a hundred odd percent of liabilities. That is the best performer, and that is after all the bail-out fun!

Belgium, Ireland, Switzerland, the Netherlands and the UK all have more than 3 times their GDP in private bank liabilities. Unsure where this might lead to, it is at least better than the original figure which put Ireland at a staggering 800% liabilities to GDP – although it turned out that Dresdner Kleinwort – the German consulting company – who had originally composed the chart had fallen prey to a bit of global risk themselves as they corrected the graphs with the comment

“I’m afraid to say, It looks like our outsourcing guys in Manila used the wrong exchange rate in compiling the data for Ireland. I’ve re-checked the figures and the number for Ireland is 368%.” (Financial Times)

Ignoring Manila’s fun at the FT’s expense, this calculation doesn’t start to count the government deficits or trade deficits, so with that is mind the picture is even less cheerful. An interesting question is of course whether the G10 countries have always been this heavily leveraged?

This via Turbulence Ahead and Stephen Kinsella’s blog.