The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

This week’s Barron’s has an interesting set of quotes gathered by asking various people the following question about Bankers: Do the bailed-out banks owe a debt to society for being saved?

Here are a few answers :

“Banks have a terrible image problem..but their main obligation is to shareholders who want them to be strong so they don’t have to suffer this crisis again.”

-Robert Litan
Senior fellow, Brookings Institution

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“They are largely responsible for the crisis and have a moral responsibility to fix it. Not with money, but by addressing ‘too big to fail’ by becoming much smaller. To block reform and change is simply unacceptable.”

-Simon Johnson
Economics and management professor, MIT

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“The banks owe a primary duty to shareholders. But it’s the government’s job to establish the incentives that determine private-sector behavior…Obama and Congress have failed to do this. Banks are an easy target, but TARP was a moronic program.”

-Marshall Auerback
Global portfolio strategist, RAB Capital

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“The banks got a lifeline from the government. That ‘too big to fail’ insurance policy is worth a lot, and they certainly haven’t paid for that yet.”

-Ann Lee
Adjunct economics professor, New York University

_____________

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Source:
They Said What? Bankers’ Behavior
ROBIN GOLDWYN BLUMENTHAL
Barron’s, December 21, 2009

http://online.barrons.com/article/SB126118056355297807.html

Some interesting items that caught my eye today:

• Agencies in a Brawl for Control Over Banks (WSJ)

• Accounting rule impact delayed (The Hill)

• Apparently, I am a Sith Lord (Business Insider)

• Harvard’s Feldstein Says U.S. Economy Still Mired in Recession (Bloomberg)

• Best of the Year:

-BOSTONIAN OF THE YEAR The Watchdog: Elizabeth Warren

-Public intellectual of the Year: Simon Johnson
(See eg Simon Johnson’s Paul Volcker Picks Up A Bat)

• The golden detour: Contrarians still cautious about gold (Marketwatch)

• How the IRS sort-of-saved Citi (FT)

• Not Just Drones: Militants Can Snoop on Most U.S. Warplanes (Wired)

• Miami Herald asks online readers for donations (GMSV)

• Tools for Managing Your Online Life After Death (Time)

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What are you reading?

Edward Harrison here. This is an updated version of a post I wrote about two-and-a-half months ago over at Credit Writedowns.  When I wrote it, I had been looking for bullish data points as counterfactuals to my bearish long-term outlook. I found some, but not nearly enough.

Early this year, I wrote a post “We are in depression”, which called the ongoing downturn a depression with a small ‘d.’ I was optimistic that policymakers could engineer a fake recovery predicated on stimulus and asset price reflation – and this was bullish for financial shares if not the broader stock market. But, we are witnessing temporary salves for a deeper structural problem.

So my goal was to find data which disproved my original thesis. But, I came away more convinced that we are in a tenuous cyclical upturn. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I pull together a number of threads from previous posts, so it is pretty long.  I have shortened it in order to pull all of the ideas into one post. So, please read the linked posts for background as I left out a lot of the detail in order to create this narrative.

Let’s start here then with the crux of the issue: debt.

Deep recession rooted in structural issues

Back in my first post at Credit Writedowns in March 2008, I said that the U.S. was already in a recession, the only question being how deep and how long. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the 1970s lost decade trauma in the U.S. and the U.K.. The 70s was a low growth, high inflation ride that generated poor market returns.  The U.K. became the sick man of Europe and labor strife brought the economy to its knees.  For the U.S., we saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.

In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labeled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).

Read the rest of this entry »

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Source:
Ritholtz Is Still Bullish on Stocks, But Not for the Long-Term
Aaron Task
Dec 18, 2009

http://finance.yahoo.com/tech-ticker/barry-ritholtz-is-still-bullish-on-stocks-but-not-for-the-long-term-395059.html

I braved the frigid NY temperatures to walk over to the Nasdaq this morning to speak with Aaron and Henry.

We chatted about our market view, short and long term perspective, economy, Banks, etc,

The first part of the video is up and can be seen here.

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(Comments enabled at video post)

Andrew Ross Sorkin’s Too Big To Fail is likely to be one of the most talked about books covering the bailouts — at least the period from the Bear Stearns collapse forward.

It is the next book in my queue after Reinhart and Rogoff’s This Time is Different: Eight Centuries of Financial Folly.

I want to like this book, but  *Sigh* . . . I approach reading Too Big To Fail with a great deal of trepidation.

Why?

First, I know and like Sorkin. Nice guy, good reporter, runs one of the most innovative sections at the NYT. Arguably, he (more than anyone) dragged the Times kicking and screaming into the digital age. His work at the Times has been solid. And I very much enjoyed the excerpts I read in Vanity Fair. (Disclosure: I know Andrew personally, we’ve done numerous panels together, I like him — so I am not unbiased).

As to the reportage, Sorkin and his team of researchers did a masterful job hunting down and interviewing — over 500 hours — all the key players.

My problem is “the non-fiction novel” style adapted for the book. This genre originated with Truman Capote’s book, In Cold Blood. An author using it cannot help but take literary license to tell a narrative based on facts — but in a novelized, somewhat hypothesized manner.

Bob Woodward seems to have married this approach — he used the non-fiction novel for about a dozen of his past 14 books.

What is the problem with non-fiction novels? It represents at best a loosely correlated approximation of reality. No one really knows what Tim Geithner was thinking about when he was jogging. We cannot know for sure what entered Jamie Dimon’s head when he walked into a room full of anxious bankers. Instead of eye witness testimony made at the time of events (itself often inaccurate), we get instead recollections and remembrances. How accurate are these? How self-interested self-aggrandizing are they? Are these parties remotely objective? Are their thoughts, recollections and beliefs after the fact accurate? How likely is it we are getting a highly self promotional version from them?

The counter argument: This was a unique event, and peoples recollections of it are sharp and lastimg. Further, when there are 5 people in a room, you may get biased recollections from some of them, but there will be an objective fact set form a plurality of the witnesses. Plus, all of the people involved knew they were speaking to history, and should have taken it seriously, responding as truthfully as they could have. Last, lots of NYT reporters work was used from published articles, and those stories were reported in real time.

Further, there is lots of factual data, documentary evidence, other specific details that are not quite so subjective.

So despite the format of the non-fiction novel, I have high hopes for the book.

After I read it — probably over the holiday vacation — I’ll report back on the book itself. If the full book lives up to the excerpts, it should be a fun read.

If Congress doesn’t reauthorize the Patriot Act, America’s corporations are ready to step in. (03:49)

The question of what motivates underwater homeowners to either stay put and continue to make their mortgage payments (if they can) or “walk away” from their home (and their financial obligations) has been receiving an increasing amount of attention in recent weeks.

In looking at this matter, a good place to begin is with the abstract below from the recent study Underwater and Not Walking Away(.pdf) by Brent White at the University of Arizona:

Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.

Brent probably has more than enough sample data in Arizona from which to draw and his conclusions are no doubt valid in many other parts of the country as well where the magnitude of the current “underwater homeowner” problem is highly correlated to the size of the mid-decade housing bubble.

But, what is most fascinating about this report is the aspect of “emotional constraints” that are “actively cultivated by the government and other social control agents”. Apparently, this has played a major role in getting underwater homeowners to act (or, in this case, not act) in ways that work against their own financial interests.

Read the rest of this entry »

We know that “Short the US Dollar” has been a crowded trade for soem time now. And, after falling 41% from 2001 to 2008, the fat part of the collapse has already happened.

Will it continue? That’s what today’s chart looks at.

How likely is it that the rest of the world will stand idly by and allow:  a) US manufacturing competitiveness a huge advantage via weak currency?;  2) Massive US debt to be inflated away through dollar weakness?

Quite possibly not, as other currencies engage in a race to the bottom. The chart below suggests a dollar rally is in the offing:
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US Dollar Index Weekly with MACD

Courtesy of Ron Griess of The Chart Store

The Known Universe takes viewers from the Himalayas through our atmosphere and the inky black of space to the afterglow of the Big Bang. Every star, planet, and quasar seen in the film is possible because of the world’s most complete four-dimensional map of the universe, the Digital Universe Atlas that is maintained and updated by astrophysicists at the American Museum of Natural History. The new film, created by the Museum, is part of an exhibition, Visions of the Cosmos: From the Milky Ocean to an Evolving Universe, at the Rubin Museum of Art in Manhattan through May 2010.

hat tip kottke