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

My friend (and Washington State money manager) Carl writes about our three trillion dollar war post:

The biggest reason the U.S. is marching towards receivership—-the U.S. refused to pay for the wars in Iraq and Afghanistan.

Instead of raising taxes like we did to pay for WW 1 —we lowered them. Instead of having a high marginal tax rate for the wealthy, President Bush and the congress lowered taxes.

The following is just about Iraq and does not include the cost of Afghanistan.

Read about steps taken to prepare for and pay for WW 1.

And tax rates during WW 2.

Fascinating stuff — thanks Carl!

By William K. Black

The Financial Crisis Inquiry Commission (FCIC) issued its report today on the causes of the crisis. The Commissioners were chosen along partisan lines and the Republicans, one-upping the Republicans’ dual responses to President Obama’s State of the Union address, have issued three rebuttals. The rebuttals follow a failed preemptive effort by the Republicans to censor the report – they insisted on banning the use of the terms “shadow banking system” (the virtually unregulated financial sector that conducts most financial transactions), “Wall Street,” and “deregulation.” The Republicans then issued their first rebuttal last month, their “primer.” The primer, following the lead of the censorship effort, ignored the contributions that the shadow banking system, Wall Street, and deregulation made to the crisis. The combination of the demand that the report be censored and the primer’s crude apologia critical role that the unmentionable Wall Street, particularly its back alleys (the unmentionable “shadow banking system”), and the unmentionable deregulators played in causing the crisis was derided by neutrals. The failure of their preemptive primer has now led the Republican commissioners to release two additional rebuttals to the Commission report. Again, they issued their rebuttals before the Commission issued its report in an attempt to discredit it.

The primary Republican rebuttal was issued by Bill Thomas, a former congressman from California and the vice chairman of the commission; Keith Hennessey, who was President George W. Bush’s senior economic advisor, and Douglas Holtz-Eakin, who was an economic advisor to President Bush on the regulation of Fannie and Freddie and principal policy advisor to the Republican nominee for the President, Senator McCain.

Republican Commissioner Peter Wallison felt his Republican colleagues’ dissent was insufficient, so he drafted a separate, far longer dissent. Wallison is an attorney who was one of the leaders of the Reagan administration’s efforts to deregulate financial institutions and later became the leader of the American Enterprise Institute’s (AEI) deregulation initiatives. His bio emphasizes his passion for financial deregulation.

From June 1981 to January 1985, he was general counsel of the United States Treasury Department, where he had a significant role in the development of the Reagan administration’s proposals for deregulation in the financial services industry….

[He] is co-director of American Enterprise Institute’s (“AEI”) program on financial market deregulation.

Each of the Republicans commissioners was a proponent of financial deregulation and was appointed to the Commission by the Republican Congressional leadership to champion that view. Three of the Republican commissioners were architects of financial deregulation. For example, the Republican congressional leadership appointed Wallison to the commission because they knew that he was the originator and leading proponent of the claim that Fannie and Freddie were the Great Satans that had caused the current crisis. The fourth member, Representative Thomas, voted for the key deregulatory legislation when he was in Congress and was a strong proponent of deregulation.
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“The F.C.I.C. is the first to take a close look at the missteps at Citigroup, which virtually every book about the financial crisis has overlooked. It is a devastating portrait of negligence at the top — including the once sainted Robert Rubin.”

-Joe Nocera, NYT, Inquiry Is Missing Bottom Line

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Say it ain’t so, Joe!

How did you miss this? Bailout Nation, Chapter 18 is titled “Too Big to Succeed.” It is about the history of Citigroup, its numerous missteps leading up to the crisis, the role of Robert Rubin and Larry Summers in the repeal of Glass-Steagall, and Citi’s role in the collapse. (Bank of America makes a guest appearance in the last third of the chapter).

It is, to say the least, rather critical.

The Glass-Steagall repeal may not have been the cause of the crisis, but it sure as hell made the damage far worse. It allowed banks to own businesses they otherwise could not, and to manufacture and buy junk paper in quantities far greater than would otherwise have been possible.

When Glass-Steagall was in effect, Wall Street collapses were kept on Wall Street and for the most part, away from Main Street.

Do you remember the devastating credit crisis and recession caused by the 1987 crash? No, because it never happened. As Bailout Nation makes clear, Glass-Steagall was a major factor why.

Anyway, Chapter 18 is posted in our Bookshelf. And in light of the FCIC report, the rest of the book should be next in your queue.

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Previously:
Bailout Nation Updated Reviews

Source:
Inquiry Is Missing Bottom Line
JOE NOCERA
NYT, January 28, 2011
http://www.nytimes.com/2011/01/29/business/29nocera.html

Bailout Nation, Chapter 18

The Year of the Bailout, Part II: Too Big to Succeed?

Peter T Treadway, PhD
Historical Analytics LLC
www.thedismaloptimist.com
pttreadway-at-hotmail.com
305 761 4718

January 29, 2011

“We do not believe in Chinese exceptionalism. China’s economy is no different from any other, in spite of the inevitable Chinese characteristics. If there are such things as economic laws, they work just as well in China and for Chinese businesses as they do in other markets.”

From Red Capitalism, The Fragile Financial Foundation of China’s Extraordinary Rise, p ix

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“What Chinese parents understand is that nothing is fun until you’re good at it. To get good at anything you have to work.”

From “Why Chinese Mothers Are Superior” by Amy Chua, Wall Street Journal, January 8, 2011

In the long run the laws of economics apply everywhere and there is no escaping the dismal science’s somber logic. But our knowledge about economic laws is incomplete. Economics – believe it or not – is really about people and the decisions they make about work and money. What traditional economic models don’t factor in – perhaps because it can’t be quantified and it’s politically incorrect in academic circles to even talk about it – is the character of a people.

From the viewpoint of a free market economist China is following the wrong economic model. Of course anything would be better than the1949-1978 Chinese “model” of continuing chaos and suppression of private enterprise. But today China is following its own version of the mercantilist East Asian model, which involves predominantly state rather than market-directed investment, over-reliance on exports (largely at the expense of the United States), undervalued exchange rates and excess reliance on investment vs. consumption. The model is deeply flawed and unless modified sooner or later will reach a dead-end as Japan has discovered. But “sooner or later” is not a useful concept for investors for whom timing is everything.

As I have previously argued, East Asia is populated by disciplined, hard working, well educated people obsessed with material improvement and conditioned by the obedience/work-oriented Confucian ethic. This type of people can take even a flawed economic model a long way. Read Amy Chua whose Wall Street Journal article about Chinese tough love and “tiger mothers” has caused an international uproar. Chinese mothers program their children to work and achieve. The bottom line for economic forecasters: from an economic perspective all those tiger mothers turn out hard-working model citizens.

Flawed economic model or not, China actually has three factors going for it. One, its disciplined hard-working population. Two, its almost automatic snap-back from the disasters of the Cultural Revolution and the Great Leap Forward. Third, the massive migration from the countryside. The China bears will argue that points two and three by now have run their course and that hard work with the wrong model only goes so far.

Confucian-influenced post-war Japan was the world’s number one wonder-economy from1945-1990. By 1990 the entire world had concluded with awe (and incorrectly) that there was something exceptional and superhuman about the Japanese. By the late 1980s the warning signs were all there for those who ignored the consensus—the declining birthrate, the bubbles in real estate and stocks, the endless supply side knots in which the Japanese domestic economy is tied. The trouble is the naysayers who shorted Japan in the eighties lost their shirts. Timing is everything.

Now of course Japan has hit a wall and is politically unable to extricate itself from its own East Asian box. Hopefully the Chinese leadership will not fall into this same trap. They have seen the Japanese future of the East Asian model. It doesn’t work.

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This is rom the cover to this week’s Economist, which has the cover story “State of the Union,” looking not so much at the Federal deficit as the individual states debts.

Some of the states names are fairly clever: Califorclosia, DOh! (Idaho), Debtaware, IOU Wa (Iowa), Nada (Neveda), Horrida (Florida) and perhaps my favorite, Brokelahoma! (sounds like a new Broadway musical)

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Surprisingly, I think The Economist whiffs on why Obama lost the House in 2010:

“Mr Obama also said far too little about what most concerns Republicans and what led to his party’s defeat at the mid-terms: the deficit. Cutting hard this year is too risky; but laying out a concrete set of proposals on how to get the budget back into shape from 2012 onwards is essential.”

Um, no. Poll after poll show it was Jobs, not the deficit, that was most on people’s minds. The emphasis by the White House on Health Care reform before FInacial reform and the economy/job creation was the key factor in the political defeat.

Visit msnbc.com for more videos from Dylan Ratigan and news about the economy.

Positives

1) Q4 Real final sales solid
2) Consumer confidence jumps, answers to job market questions improve
3) Pending home sales and new home sales bounce (but we don’t need new ones right now)
4) Germany consumer confidence at best since Oct ’07
5) EFSF sale of 5b euros hugely successful
6) DJIA close above 11,872 would be 9th week in a row of gains, 1st time since ’95

Negatives

1) Real and Nominal GDP below forecasts, low deflator makes Real look better
2) Durable goods orders below expectations (but Nov revised up and core cap ex good)
3) Inflation expectations in UoM hit highest since Oct ’08
4) S&P/CS home price index falls to 8 month low
5) Japan called out by S&P as nation chokes on debt with no plan
6) UK consumer confidence near 2 yr low, Q4 GDP unexpectedly contracts
7) German import prices rise at fastest pace since ’81
8) Egypt erupts
9) Fisher and Plosser roll over for King Dove Bernanke

Bill Black, author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City.

Professor Black has been publishing a lot lately (see the 3 part series on How to regulate mortgages) and recently launched a more active web presence at New Economic Perspectives.

Bill is a white-collar criminologist who has spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

You should bookmark his blog now.

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